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

AFM published its Trend monitor for 2024 addressing various topics, from which we summarise due to relevance the follwing key trends and associated risks in the financial sector across four supervisory areas.
The report covers general economic developments, sustainability challenges, digitalization impacts, internationalization, and risks related to financial services, capital markets, asset management, and financial reporting and audit firms.
1. General Developments:
The economic growth is slowing down globally, influenced by persistent inflation and rising interest rates. Inflation is expected to exceed the European Central Bank’s target in 2023 and 2024. Moreover, the Dutch economy faces a slight recession, influenced by global economic conditions and geopolitical tensions. Government interventions have temporarily mitigated the financial consequences of inflation and interest rate rises for households.
2. Sustainability:
Climate change poses increasing risks, such as extreme weather events, sea level rise, and biodiversity loss. Financial damage from climate-related events can lead to significant risks for households and businesses and the sustainability transition is progressing slowly, with concerns about the speed and challenges in areas like asset management and reporting regulations. The publication titled „Factoring Climate Risks into Housing Prices“ illustrates the consequences of inadequate pricing of climate risks for existing and potential homeowners, and offers a number of possible solutions.
3. Digitalization:
Rapid developments in artificial intelligence (AI) present both opportunities and risks for the financial sector. The use of AI in financial services can enhance efficiency but also introduces risks, such as algorithmic bias and unclear decision-making processes. Furthermore, digitalization and platformization in the financial sector continue, with increased integration with major tech companies and ongoing developments in the crypto market. The publication titled „Algorithmic Collusion in Capital Markets“ examines the risk of tacit algorithmic collusion and the potential negative consequences of self-learning trading algorithms in capital markets.
4. Internationalization:
Financial services are becoming more international, attracting foreign parties to the Dutch financial markets. However, cross-border risks include rogue foreign providers, market abuse, and an uneven playing field between domestic and foreign financial entities. Geopolitical tensions and the push for European strategic autonomy impact financial markets, emphasizing the importance of a sound banking system and diversified capital markets.
5. Integrity and Criminal Behavior:
Criminal behavior, including money laundering and fraud, threatens the integrity of the financial system. Consequently, trust in the financial sector can be eroded if companies are involved in criminal activities. Delays in the transition to a sustainable economy may result from passive investing and a lack of focus on polluting companies.
6. Supervision Area Risks:
Each supervisory area (financial services, capital markets, asset management, and financial reporting/audit firms) faces specific risks related to the discussed trends, including cybersecurity concerns, liquidity risks, and challenges in adapting to digitalization and sustainability.
The report emphasizes the need for vigilant supervision, proactive risk management, and international collaboration to address the evolving landscape in the financial sector.
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Please note, as the publication is very comprehensive and, due to the nature of the document, we have only provided a brief summary of the topics. Therefore, please refer to the original document for further details.