Financial Services Litigation Update

Casper Rooijakkers & Simone Peek
06 Dec 2019

In our latest Financial Services Litigation Update we discuss recent judgments regarding the contracting obligation for banks when there is a risk of money laundering, the use of enforcement requests against foreign competitors and the impact of foreign regulatory enforcement measures on a fit and proper test for financial sector directors.

If you would like to discuss these or other financial law related topics, please feel free to contact us: bureau Brandeis – Financial Services Litigation.

Special duty of care of financial services providers and the risk of money laundering

Banks struggle with controlling the risk of money laundering. In this case, the court emphasizes that it is in itself perfectly justified that a bank imposes strict requirements on new clients within the framework of (the integrity requirements of) the Financial Supervision Act (Wft).

Nevertheless, the court finds that in this case the fight against money laundering should not preclude a special purpose entity that will be involved in (the legal production of) cannabis to apply for a bank account.

Although the bank claims that it has freedom of contract, the court considers that for commercial banks this does not exist to its fullest extent. After all, having a bank account is necessary to be able to participate in social and economic life.

According to the court, when it comes to being able to participate in payment transactions one should not make a distinction between private individuals and business customers. Both are in principle entitled to a bank account and, as a result, banks in principle have an obligation to contract all.

In addition, this special duty of care that banks have from their social function applies both to existing clients and to third parties, whereby the scope of the duty of care depends on the circumstances of the case.

The special feature of this case is that the claimant is a special purpose entity that is preparing to be admitted as a grower in the context of the “Experiment of the closed cannabis chain” on which a legislative proposal is pending.

Now that the aim of this project is precisely to reduce the illegal trade in cannabis by legally producing this substance and thus (indirectly) to prevent illegal activities and the risk of money laundering, the court allows the claim. The bank may, however, impose conditions on the use of the business account.

Court of Amsterdam 04-11-2019


Prosecuting director as fellow perpetrator or as de facto manager of alleged violation?

 The Netherlands Authority for the Financial Markets (AFM) has imposed an order subject to a penalty to a director of a group of entities that was offering securities for participation in its bond funds. The director allegedly acted as fellow perpetrator of alleged unfair commercial practices.

On the basis of the investment brochure, which is in the possession of the AFM, it is believed that essential information to make an informed decision about the investment is withheld from potential investors.

The AFM’s claim that the director acted as a fellow perpetrator is based on the fact that, among other things, the director set up and arranged the entities of the group, initiated the issue of the securities and is (indirectly) the director under the articles of association and sole depositary receipt holder /shareholder and thus cooperates closely and consciously with the group.

It is argued however that the director cannot be regarded as a fellow perpetrator of the alleged violation. The judge in preliminary relief proceedings agrees with this.

According to the preliminary relief judge, the AFM wrongly classified the director as fellow perpetrator of the alleged violation. On this ground, it is not allowed to impose an order subject to a penalty on him and to publish that penalty.

It follows from settled case law that it must be demonstrated beyond reasonable doubt that the cooperation between (legal) persons who cannot be equated has been so conscious and close, that they may be considered as fellow perpetrators.

In this case however, the behavior occurs within the framework of the normal business conduct of the entities and can be attributed to those entities. The AFM wrongfully equates the entities and the director. The court considers that the director may have had actual control of the alleged violation but cannot be referred to as a fellow perpetrator.

Now that the number of cases in which financial regulators are holding individual officers accountable for company violations, it is essential to always carefully examine the precise relationships and their qualifications, as this case shows.

Court of Rotterdam 12-07-2019


Integrity screening of policymakers includes measures imposed by foreign regulatory authorities

 This case concerns a rejection of an application for a license to manage an investment institution, because the license requirements are not met. According to AFM, among other things, the integrity of the proposed policymakers is not beyond doubt.

The integrity of a policymaker is determined by the AFM on the basis of the policymaker’s intentions, actions and antecedents. The AFM will at any rate take into account supervisory antecedents and other facts and circumstances that indicate involvement in conduct in respect of which rules have been laid down in Dutch or foreign financial supervision legislation, if such  conduct may be relevant for the integrity screening.

A number of measures were imposed on the intended policymakers by the Luxembourg financial regulator in their capacity as policymakers of a Luxembourg investment manager. The measures were imposed because of the late submission of annual reports of this Luxembourg manager, belonging to the group and supervised there, and of funds managed by it. In addition, a measure was imposed on the manager for launching a new sub-fund without depositing its assets and not informing the Luxembourg regulator.

According to the Trade and Industry Appeals Tribunal (the “CBb”), the AFM correctly classified these measures as supervisory antecedents, because they were imposed for non-compliance with financial legislation similar to that in the Netherlands. The CBb ignores the argument that considering the Luxembourg measures as antecedents would unreasonably stretch the envisaged effects of the Luxembourg measures.

The CBb is particularly concerned about the fact that the intended policymakers did not report the antecedents. The Luxembourg measures were not reported on the relevant part of the integrity screening form, nor as ‘other relevant circumstances’. Also after questions from the AFM, the Luxembourg measures  were not reported as antecedents. The failure to report was in itself also rightly classified as a supervisory antecedent, according to the CBb.

This case demonstrates the importance of conduct prior to the fit and proper test as well as the transparency that targeted policymakers exercise during the review process. The financial regulator is allowed to consider both aspects in its assessment.

Trade and Industry Appeals Tribunal 15-10-2019


Can a market party request regulatory enforcement against a competitor?

An Irish investment firm asked the AFM to take enforcement action against a Dutch investment firm for alleged violation of the statutory bonus cap rules.

The AFM did not respond to the enforcement request. According to the regulator, the investment firm has insufficiently demonstrated the impact on its competitive position and therefore there is an insufficient interest in a decision on its enforcement request.

In line with established case law, the Rotterdam Court considers that the Irish investment firm can only be considered as an interested party in the enforcement request, if enforcement action against the other investment firm can actually have an impact on its competitive position.

Both investment firms operate within the same market segment and coverage area. They trade for their own account, and are both market makers in largely the same exchange traded funds (ETFs) on the same stock markets and can therefore in principle be regarded as competitors.

Unlike the AFM, the court finds that it has become sufficiently plausible that if the AFM does not enforcement action, the Dutch investment firm will be in a more competitive position.

This is because in terms of remuneration policy the Dutch firm can be considered more attractive for (current and future) staff and it can also manage its costs more flexible through more variable remuneration. In addition, the Irish investment firm states that there are only minimal differences between its bid and offer prices and those of the Dutch investment firm, resulting in the deal going to the Dutch firm with the Irish investment firm having the second best price – but not getting the deal. The AFM has not rebutted this claim.

According to the court, the AFM cannot require the Irish investment firm to submit extensive economic analyses of the impact of regulatory  enforcement on its turnover in relation to that of the other investment firm. The AFM wrongly rejected the Irish investment firm’s request and is ordered by the court to decide on the firm’s objection to rejection of the request for enforcement.

This case shows that, with the correct justification, parties in a cross-border market can submit enforcement requests in other countries.

Court of Rotterdam 19-09-2019