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AFM goes all out with data analysis in 2018 to protect investors

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In 2018, the Dutch Authority for the Financial Markets (AFM) is kicking off new data-analysis initiatives to better protect investors against unethical practices and market abuse. Thanks to the revised Markets in Financial Instruments Directive (MiFID II), the AFM is receiving extra tools to do this. Modernising supervision by intensive use of data is an AFM spearhead, also for honest operation of capital markets.

The AFM identifies three major trends that are producing risks for financial markets and consumers alike: increased digitisation, persistently low interest rates, and fading of the boundaries between financial markets. These three trends reinforce each other, thus increasing the complexity, and produce new risks on the financial markets. One example is the gamification of financial products. This concerns high-risk investment products, such as binary options, being sold using aggressive marketing tactics from the online gaming and gambling industries.

Modernising supervision

The AFM describes the risks and the supervisory strategy for combating them in its Agenda 2018. To strengthen its supervision, the AFM continually invests in modernisation. A significant example of this is the deployment of behavioural science to assess whether financial companies design their online environments in the interests of their customers. The AFM will also use risk profiles for the first time in 2018, to enable it to identify providers that fail to give their customers adequate central priority.

“In 2018, we will invest more in data analysis," states AFM Executive Board Chair Merel van Vroonhoven: “This way we want to maximise our use of the extra possibilities MiFID II offers us. It is ever easier for providers to offer their products online and across borders. This means that international cooperation is essential for protecting consumers and other investors against harmful financial products and dishonest providers. That makes an added focus on technology and data in our supervision indispensable. We initiated this modernisation in 2016. It will receive a boost this year from the pointed investment of more resources and people in the process."

New risks in 2018

The use of the financial sector for criminal activities is one of the new risks the AFM has identified for 2018. By utilising modern forms of data analysis, the AFM can gain a better idea of the risks that investment firms, for one, run of being used, possibly unknowingly, in financial-economic crimes. It enables the AFM to be more effective in preventing violations.

Because of the growing attention to sustainability, coupled with the increasing supply and demand for financial products geared to it, the need for reliable information on sustainability goals is increasing. In 2018, the AFM will identify those financial products that rightfully use a sustainability label.

Consumer protection

Owing to the low rates of interest, small investors are putting their money in high-risk investments, and consumers are taking on more debt. In view of this, the AFM is keeping an even closer eye on the market for consumer credit. We will also continue this year to deal with loans with high rates of interest and low repayments, and where consumers are tied to their providers (known as locked-up credit).

Based on the results of behavioural science experiments that began in 2017, the AFM will carry on collaborating with market parties, the main intention being to persuade the vulnerable group of homeowners with interest-only mortgages to start paying off the loans before they mature.

The AFM also announces that in 2018 it will start investigating providers that utilise evil nudges in their digital services. This concerns offers of financial services on line in combination with aggressive marketing methods. Such tactics play into the irrational behaviour of consumers, for example when entering into consumer credit contracts. As a result, they might incur debts that they cannot repay.

Consumers also have to face aggressive sellers of binary options and certain types of contracts for differences (CFDs). Thanks to MiFID II, the AFM can invoke protective measures in 2018 against these kinds of harmful products and their unethical providers. At the European level, Merel van Vroonhoven, the Chair of AFM's Executive Board, sets the direction for this, as Chair of the Investor Protection and Intermediaries Standing Committee.

In 2018, the AFM will continue its close supervision of how the banks involved finalise the standard recovery framework for interest-rate derivatives.

Fair operation of the capital markets

Under new regulations such as MiFID II and the Benchmarks Regulation (BMR), the AFM has large amounts of data from parties on the capital markets at its disposal. The use of data analysis provides the AFM with a clearer picture, enabling it to track down and punish market abuse, push for fair pricing, and more effectively monitor market parties in their fulfilment of obligations. This use also contributes to supply and demand on the capital markets meeting fairly and efficiently.

Quality of statutory audits

In 2018 for the first time, the AFM will be assessing the suitability of executive and supervisory directors of all public interest entities (PIEs). The AFM will also give special attention to the statutory audits and the progress with the improvement measures of the other PIEs.

Jointly with supervisors for other countries and market parties, the AFM will further develop its vision for the auditing sector. It will also consider whether changes of a more fundamental nature are necessary for this sector. The objective is to raise the standard of statutory audits to a higher level, and anchor it there.

Members of the press can contact Marieke Ziedses des Plantes, AFM spokesperson, on 020 - 797 2039 or at marieke.ziedses.des.plantes@afm.nl.
The AFM is committed to promoting fair and transparent financial markets.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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