Will the Netherlands become Europe’s new financial centre after Brexit?

Edition 29 November 2018, by Sagar Harinarayan

At the moment, Brexit is the biggest source of uncertainty in the European financial sector. In case of a no-deal Brexit, in which Britain leaves without a 21-month transition period until December 2020, there is an acute risk of severe financial disruption. Markets in the UK and EU are closely intertwined, so that European consumers and businesses could be adversely affected by limitations in cross-border relations. Consequently, the Dutch Authority for Financial Markets (AFM) has requested companies to be prepared to avert losses and to face an increased workload. Sander van Leijenhorst, project manager of Brexit tasks at AFM, commented on the need for new staff: “The vacancies are there and we are now mainly working on permit applications. We expect to be ready on time.”

Over 150 parties are in negotiations with the AFM for a Dutch license. According to the chair of AFM, Martin van Vroonhoven, about 30-40 % of European traders in financial instruments will choose Netherlands as a location. He added: “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.” Experts believe that while banks will prefer Paris, Frankfurt or Dublin as centres for European activities, large trading platforms, including those for bonds and securities, will pick Amsterdam. Regulators have predicted the proportion of European bond trading centres present in Amsterdam to be as high as 95 %. The trading volume of shares will possibly rise to over 10 billion euros, compared to 3 billion at present. Van Vroonhoven also highlighted the possibility of more trade interruptions by the AFM in response to suspicious price changes: “It may be three to four per day, while now we do this once a month on average.”

European rules state that a financial institution must be physically established in one of the member states of the Union in order to do business there. According to British business newspaper The Financial Times, the Commonwealth Bank of Australia (CBA), the largest commercial bank in Australia and popularly known as ‘Commbank’, has applied for a banking license to the Dutch central bank De Nederlandsche Bank (DNB), and to AFM. The bank’s activities in the EU will provide up to 50 jobs. Japan’s largest bank MUFG has also initiated procedures to set up shop in Amsterdam, while Chicago’s Cboe Global Markets and the London Stock Exchange Group will also be opening trading centres in the city. Several other stock exchange companies are in line to open a trading department here and each of these comes with at least a dozen jobs. The European Health Organization announced plans to move to Amsterdam earlier this year, while tech giant Panasonic will move its HQ here from London. These ripple effects are gaining momentum and Netherlands already seems to be reaping the rewards of Brexit. Investor Tony Ressler firmly believes Amsterdam can take over the mantle from London as Europe’s financial centre. He said: “If you ask me to choose a city to replace London, then I choose Amsterdam. People like to live there, the location is good and it has a friendly business climate.” The city surely benefits from a long history as financial centre in Europe since the 16th century and remains competitive in the modern age through investments in fintech sector. It is in close proximity to London and Paris, serving as a perfect gateway to EU. Lastly, according to the English Proficiency Index, Netherlands tops the list amongst nations where English is not the first language. This will definitely be a significant weapon for the Netherlands. However, every coin has two sides. The authorities have capped banker’s bonuses at 20 % of their annual salaries, which may deter some businessmen from coming here. Moreover, the tax structure is not very favourable to high-earning bankers. The Netherlands being a small country, it does not garner as much economic and political clout as France and Germany.

These factors may work against Netherlands and are creating a lot of anticipation regarding events in upcoming months. Realistically speaking, there will never be just one beneficiary of Brexit. Activities will be distributed across a number of countries, as there is no runaway winner, given London’s superlative banking, financial, insurance and legal infrastructure. The Netherlands will surely gain a lot of business, primarily in sectors like fintech, financial clearing and high-frequency trading. But how things pan out remains to be seen.