Brexit is the biggest cause of political uncertainty for the financial sector in Europe. At present, a no-deal Brexit is still conceivable. As this would lead to a series of acute and possibly very significant transition risks, the Dutch Authority for the Financial Markets (AFM) calls on companies to prepare for this. In the meantime, a silent but high impact transformation is occurring on the European capital markets. Many trading platforms, in particular, are applying for a licence from the AFM. Thus, the Netherlands will become the centre for financial trading infrastructure of the European Union (EU).
The developments and risks in connection with Brexit are described in the AFM Trend Monitor 2019, which was published today. In Trend Monitor, the AFM identifies important trends and related risks in the financial sector. Other trends covered in Trend Monitor are the continuing digitalisation of financial services and the role of the financial sector in the transition to a sustainable society and economy.
Acute transition risks in the event of a no-deal Brexit
A hard Brexit on 29 March 2019 will have a disruptive effect on the financial sector. The capital markets in the EU and the United Kingdom (UK) are closely interrelated, and many European businesses and consumers rely on the financial sector in the UK for their financial services. In the event of a hard Brexit, UK service providers will abruptly lose their access to the EU market and vice versa. This will lead to a severe disruption of securities trading and the limitation of cross-border services. Therefore, the AFM calls on parties to prepare for this eventuality.
Dutch companies must prepare for a no-deal Brexit
The AFM observes that, at present, not all Dutch financial companies are sufficiently prepared for a no-deal Brexit. The supervisor calls on parties, who are not preparing for this yet or not sufficiently, to take action urgently. For example, it is possible that Dutch financial companies no longer comply with the licence requirements when they have outsourced services to service providers in the UK, as these services may only be outsourced to a ‘recognised equivalent supervision regime’. In the event of a hard Brexit, this does not apply to the UK. This can have major consequences, in particular for Dutch portfolio managers.
Brexit is leading to a transformation on the European capital markets
While border and customs issues are the most manifest issues in the Brexit negotiations, at present a rather imperceptible transformation is taking place on the European capital markets. The financial trading infrastructure, in particular equity and bond platforms, is relocating to the Netherlands. Banks generally opt for Frankfurt and Paris for their offices on the European continent. Portfolio managers are relocating their European activities to Luxembourg and Dublin.
The Netherlands to become the centre for financial trading infrastructure of the EU27
The AFM conducted more than 150 interviews with companies that are interested in applying for a licence. ‘We assume that between thirty to forty percent of the European trade in financial instruments will opt for the Netherlands as a location. Thus, the Netherlands will become the financial trading centre within the EU27’, according to Merel van Vroonhoven, Chair of the AFM. ‘The arrival of these parties will also attract other service providers. Moreover, it strengthens the access of Dutch pension funds and other portfolio managers to the capital market’.
Consequences for supervision
The migration of an important part of the trading infrastructure to the Netherlands also offers good safeguards for uniform and effective supervision and high standards for governance and the protection of investors. However, this does mean an expansion of the tasks of the AFM. Investments in extra capacity, knowledge and support services, such as the processing of transaction data, are necessary.
Spear points in the supervision for 2019
Brexit as part of the trend ‘political uncertainty’ is identified as the most urgent risk in Trend Monitor 2019. Other trends covered in Trend Monitor are the continuing digitalisation of the financial sector and the role of the financial sector in the transition to a sustainable economy and society. The AFM will translate these trends and risks into its supervision activities in 2019. The supervisor presents its Agenda 2019 in January.
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.