AFM: Digitalisation is changing the financial sector; the housing market is not taking sufficient account of climate risks

In the Trend Monitor 2024 report published today, the Dutch Authority for the Financial Markets (AFM) analyses these developments and highlights the risks, problems and control measures within the four supervisory areas.

Laura van Geest, chair of the Executive Board of the AFM: “Persistent core inflation and rising interest rates are negatively impacting economic growth. People in vulnerable positions are the first to suffer from a downturn in the labour market and that is cause for concern. Climate risks and their financial impact are becoming increasingly apparent. Progress towards sustainability is too slow and the Paris goals risk slipping away. More speed is required.”

Financially vulnerable households are still a major concern

Economic growth is falling due to persistent core inflation and rising interest rates. The vulnerability of the economy is reflected in the financial position of households. The government is taking measures to mitigate the impact, particularly on poorer households. The financially vulnerable nevertheless remain a major concern and are therefore a focus of our attention. As economic conditions continue to deteriorate or government support is scaled back, more businesses and households will get into financial difficulty. The affordability of financial products such as mortgages, loans and insurance may then become an issue.

Digitalisation is changing the financial sector

Capital markets are highly connected and in a digitalised world information can be transferred and processed at lightning speed. Digitalisation of the financial sector may lead to greater efficiency and innovation in services. In addition to the positive effects of increased supply and greater diversity of providers, digitalisation of financial markets poses new risks, for example in the uncontrolled use of artificial intelligence (AI) in advice and distribution of financial products and services. Cyber risks are also becoming increasingly important.

The publication entitled ‘Algorithmic collusion in capital markets’ takes a close look at the risk of tacit algorithmic collusion and how self-learning trading algorithms could have undesirable outcomes in the capital markets.

Progress towards sustainability is too slow, climate risks are not being priced into the housing market

There is a growing social and political desire for financial markets to accelerate the sustainability transition. Climate change will increase the frequency of extreme weather events, such as heavy rainfall and long periods of drought. This will lead to growing risks of flooding and damage to home foundations. These risks potentially have major financial consequences for homebuyers and homeowners in the form of damage costs and falls in home values.

In the publication entitled ‘Factoring climate risks into housing prices’ we highlight the consequences of insufficient pricing of climate risks for existing and potential homeowners and offer a number of possible solutions.

Internationalisation and financial crime

The Dutch financial markets are attractive to international operators. We are seeing an increase in financial services across national borders, driven by digitalisation. In addition to the positive effects of increased supply and greater diversity of providers, this poses new risks in financial markets, such as rogue foreign providers of risky investment products, an increase in market abuse in capital markets and the creation of an uneven playing field between domestic and foreign providers of financial products and services. These risks are less adequately addressed at national level and require an international approach. Hence there are many new regulations on the way, including at European level.

More information

Trend Monitor (pdf, 1,4 MB)
Algorithmic collusion in capital markets (pdf, 1.2 MB
Factoring climate risks into housing prices (pdf, 1.6MB)