Risk-based supervision

The spectrum between influence and enforcement

The AFM pursues a risk-based approach. This means that we focus on cases where the most damage to consumers, investors and market parties can arise. This is how we aim to contribute to the mission of ensuring fair and transparent markets and long-term financial well-being in the Netherlands. Formal enforcement, such as imposing administrative fines, is just one of a wide range of options available to us to make companies and sectors permanently change their behaviour in meaningful ways.

We select the most suitable instruments to bring about behavioural change, at the earliest possible stage, based on what we have learned about the effectiveness of those instruments. Over the years, experience has taught us that a mixture of preventive and repressive supervision is most effective. Preventive supervision means that we enter into a dialogue with market players and provide information, for instance in the form of seminars and guidance material, FAQs and interpretation. In repressive supervision there is an emphasis on enforcement measures, for example when we impose a fine or withdraw a licence. As a supervisor we sometimes need to act firmly.

An escalation line runs from left to right in the figure above. If informal influencing and enforcement do not lead to the desired result, we may decide to take formal steps. What makes informal influencing different from informal enforcement is that in the case of the former we usually have not seen any violation of the rules, although we did observe harmful behaviour, while informal or formal enforcement is meant to stop or punish violations.

In most cases, informal instruments lead to the desired effect. The advantage of informal measures is that they can be taken fast and are often effective, especially on an individual level, while formal enforcement often involves a lot of time and high costs.

However, this does not mean that the first step is always informal enforcement. We may decide to use a formal instrument straightaway, for example in the case of a serious offence or when urgent and mandatory measures are called for. There are situations in which formal enforcement is the only effective or the most suitable instrument. It is indispensable as a potential final step in our supervision. A properly functioning market requires a certain degree of repressive supervision.

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