Will the third-party funds foundation be abolished?
1. A new method to safeguard funds
On the 7th of July 2022 an additional method of safeguarding funds for investments firms, electronic money institutions, payment institutions and payment processing service providers (the ‘Relevant Financial Institutions’) came into force. On this date several amendments, including a new safeguarding method, introduced by the Dutch Financial Markets Amendment Act 2022 (Wijzigingswet Financiële Markten 2022, the ‘Act’) entered into effect.
With the entering into force of the Act the Relevant Financial Institutions are allowed to use a bank account held with a Dutch bank to safeguard client funds. This bank account is segregated by law from the Relevant Financial Institution’s own funds, a so-called ‘segregated account’.
The Dutch Central Bank (De Nederlandsche Bank, ‘DNB’), the Dutch Authority on Financial Markets (Autoriteit Financiële Markten, ‘AFM’) and the financial sector have often called for the introduction of segregated accounts. The segregated account is an alternative to the third-party funds foundation (stichting derdengelden) which – up to now - is typically used in the Netherlands to safeguard funds. As the third-party funds foundation is an unknown phenomenon outside the Netherlands, the settlement of cross-border transactions is sometimes hindered. It may even result in the refusal of cross-border payments by foreign entities as they fear that a payment to a third-party funds foundation does not discharge them of their obligations towards the Relevant Financial Institution.
2. The segregated account
The segregated account of a Relevant Financial Institution creates a new possibility to protect the rights of clients and third parties for whom funds are administered in the segregated account, for instance in case the Relevant Financial Institution is declared bankrupt. The segregated account can only be held with a bank that (i) has its registered seat in the Netherlands, and (ii) holds a banking licence granted by the ECB or DNB. Payment processing service providers (afwikkelondernemingen) will need to open a segregated bank account with DNB.
The name details of the segregated account must indicate that the account is held by the Relevant Financial Institution in its own name, but for the benefit of the clients or third parties. Furthermore, the Relevant Financial Institution must ensure an adequate administration of the segregated assets at any time, so that they are able to distinguish which funds are held for which client or third party.
In addition, the funds on the segregated account will be segregated from the funds and other assets of the Relevant Financial Institution. The funds on the segregated account may only be used for the claims from:
- the bank where the segregated account is held, in respect of the management of the segregated account; and
- third parties whose funds have been administrated on the segregated account for safeguarding purposes, (together the ‘Parties’).
In the event that there are insufficient funds on the segregated account to repay the claims of the Parties in full, a so-called ‘shortfall’, the Relevant Financial Institution has to remedy the shortfall immediately. However, if the shortfall has not been remedied and a third party requests the repayment of its claim, the Relevant Financial Institution shall only pay out funds on a pro rata basis.
3. Bankruptcy of the Relevant Financial Institution
In the event of bankruptcy of the Relevant Financial Institution, the funds on the segregated account can only be used to pay the claims of the Parties. A trustee in bankruptcy (curator) has to respect the claims of the Parties and these claims are therefore not affected by the bankruptcy of the Relevant Financial Institution.
Other creditors of the bankrupt Relevant Financial Institution have no claim on the segregated account with one exception. Only if (i) all claims of the Parties are paid and (ii) it is ensured that no new claims will arise, other creditors can claim the remaining funds on the segregated account.
In the event there are insufficient funds on the segregated accounts of the bankrupt Relevant Financial Institution to pay the Parties, the claims of the bank shall be settled first. In such event, the Parties will also have recourse on the Relevant Financial Institutions other assets.
4. Funds on the segregated accounts are guaranteed
The funds on a segregated account qualify as deposits. These deposits are guaranteed under the Dutch Deposit Guarantee (Depositogarantiestelsel, ‘DGS’). The clients and third parties on whose behalf the funds are being held shall each be regarded as separate depositor. The DGS guarantees claims up to an amount of EUR 100.000 per depositor per bank if the bank where the segregated account is held, is no longer able to meet its obligations.
5. Outstanding question for investment firms
The Financial Supervision Act (‘FSA’, Wet op het financieel toezicht) prohibits anyone to attract repayable funds (opvorderbare gelden) except if an exemption is applicable. Payment institution and electronic money institutions are exempted from this prohibition to attract repayable funds. However, no such exemption applies to investment firms. The AFM stated that the funds held by an investment firm on behalf of its clients in the segregated accounts qualify as repayable funds and that the FSA has to be amended to exempt segregated accounts, owned by an investment firm, from the prohibition to attract repayable funds, until then it seems that investment firms cannot make use of segregated accounts for safeguarding purposes.
6. Closing remarks
Taking into account our experience with market practice in other EU-countries, we expect the segregated account could replace the third-party funds foundation used by Relevant Financial Institutions in the Netherlands. Should you have any questions in connection therewith, of course we would be happy to get in touch with you and provide more detailed information.
Will the third-party funds foundation be abolished?
1. A new method to safeguard funds
On the 7th of July 2022 an additional method of safeguarding funds for investments firms, electronic money institutions, payment institutions and payment processing service providers (the ‘Relevant Financial Institutions’) came into force. On this date several amendments, including a new safeguarding method, introduced by the Dutch Financial Markets Amendment Act 2022 (Wijzigingswet Financiële Markten 2022, the ‘Act’) entered into effect.
With the entering into force of the Act the Relevant Financial Institutions are allowed to use a bank account held with a Dutch bank to safeguard client funds. This bank account is segregated by law from the Relevant Financial Institution’s own funds, a so-called ‘segregated account’.
The Dutch Central Bank (De Nederlandsche Bank, ‘DNB’), the Dutch Authority on Financial Markets (Autoriteit Financiële Markten, ‘AFM’) and the financial sector have often called for the introduction of segregated accounts. The segregated account is an alternative to the third-party funds foundation (stichting derdengelden) which – up to now - is typically used in the Netherlands to safeguard funds. As the third-party funds foundation is an unknown phenomenon outside the Netherlands, the settlement of cross-border transactions is sometimes hindered. It may even result in the refusal of cross-border payments by foreign entities as they fear that a payment to a third-party funds foundation does not discharge them of their obligations towards the Relevant Financial Institution.
2. The segregated account
The segregated account of a Relevant Financial Institution creates a new possibility to protect the rights of clients and third parties for whom funds are administered in the segregated account, for instance in case the Relevant Financial Institution is declared bankrupt. The segregated account can only be held with a bank that (i) has its registered seat in the Netherlands, and (ii) holds a banking licence granted by the ECB or DNB. Payment processing service providers (afwikkelondernemingen) will need to open a segregated bank account with DNB.
The name details of the segregated account must indicate that the account is held by the Relevant Financial Institution in its own name, but for the benefit of the clients or third parties. Furthermore, the Relevant Financial Institution must ensure an adequate administration of the segregated assets at any time, so that they are able to distinguish which funds are held for which client or third party.
In addition, the funds on the segregated account will be segregated from the funds and other assets of the Relevant Financial Institution. The funds on the segregated account may only be used for the claims from:
- the bank where the segregated account is held, in respect of the management of the segregated account; and
- third parties whose funds have been administrated on the segregated account for safeguarding purposes, (together the ‘Parties’).
In the event that there are insufficient funds on the segregated account to repay the claims of the Parties in full, a so-called ‘shortfall’, the Relevant Financial Institution has to remedy the shortfall immediately. However, if the shortfall has not been remedied and a third party requests the repayment of its claim, the Relevant Financial Institution shall only pay out funds on a pro rata basis.
3. Bankruptcy of the Relevant Financial Institution
In the event of bankruptcy of the Relevant Financial Institution, the funds on the segregated account can only be used to pay the claims of the Parties. A trustee in bankruptcy (curator) has to respect the claims of the Parties and these claims are therefore not affected by the bankruptcy of the Relevant Financial Institution.
Other creditors of the bankrupt Relevant Financial Institution have no claim on the segregated account with one exception. Only if (i) all claims of the Parties are paid and (ii) it is ensured that no new claims will arise, other creditors can claim the remaining funds on the segregated account.
In the event there are insufficient funds on the segregated accounts of the bankrupt Relevant Financial Institution to pay the Parties, the claims of the bank shall be settled first. In such event, the Parties will also have recourse on the Relevant Financial Institutions other assets.
4. Funds on the segregated accounts are guaranteed
The funds on a segregated account qualify as deposits. These deposits are guaranteed under the Dutch Deposit Guarantee (Depositogarantiestelsel, ‘DGS’). The clients and third parties on whose behalf the funds are being held shall each be regarded as separate depositor. The DGS guarantees claims up to an amount of EUR 100.000 per depositor per bank if the bank where the segregated account is held, is no longer able to meet its obligations.
5. Outstanding question for investment firms
The Financial Supervision Act (‘FSA’, Wet op het financieel toezicht) prohibits anyone to attract repayable funds (opvorderbare gelden) except if an exemption is applicable. Payment institution and electronic money institutions are exempted from this prohibition to attract repayable funds. However, no such exemption applies to investment firms. The AFM stated that the funds held by an investment firm on behalf of its clients in the segregated accounts qualify as repayable funds and that the FSA has to be amended to exempt segregated accounts, owned by an investment firm, from the prohibition to attract repayable funds, until then it seems that investment firms cannot make use of segregated accounts for safeguarding purposes.
6. Closing remarks
Taking into account our experience with market practice in other EU-countries, we expect the segregated account could replace the third-party funds foundation used by Relevant Financial Institutions in the Netherlands. Should you have any questions in connection therewith, of course we would be happy to get in touch with you and provide more detailed information.