UK: Top 10 For 2016 - Our Outlook For Financial Markets Regulation

Last Updated: 7 January 2016
Article by Deloitte LLP

Most Read Contributor in UK, August 2017

FOREWORD

Last year we1 asked if in 2015 financial services firms would see the authorities shift towards promoting growth and implementing already agreed rules, and away from proposing new ones. As 2015 draws to a close, there is evidence of such a shift, especially within the European Union (EU). However, more generally, it has been post-crisis "business as usual": daunting implementation challenges in respect of multiple regulations that affect financial services firms' (particularly banks') business models and strategies, significant unfinished business, especially in relation to bank capital, and an intensive supervisory and enforcement agenda.

Looking back

In 2015 three broad themes stood out. First, the political mood changed. The emphasis in the EU is now on the jobs and growth agenda; the flagship Capital Markets Union (CMU) initiative is more about deregulation than re-regulation. The shift in sentiment is even clearer in the UK, where the "tone from the top" from HM Treasury (HMT), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) has changed significantly. Some would see concrete evidence of the "new settlement" between authorities and banks in the proposed removal of the "presumption of responsibility" from the accountability arrangements set out in the Senior Managers Regime (SMR), although both regulators are at pains to point out that, in reality, little has changed. And what HMT took away with one hand (the presumption of responsibility), it gave back with the other, by proposing to extend the SMR to all financial services firms.

Moreover, even if the high level messages in the EU and the UK did change, on the ground the scale, scope and pace of regulatory, supervisory and, in some cases, enforcement activity were undiminished. In the meantime firms have had to make progress with complex and inter-linked regulatory implementation projects which affect almost every aspect of their organisation.

Second, progress in completing the extensive set of post-crisis regulatory reforms was slow. In the EU, legislation to deal with bank structural reform and money market funds stalled, while the timetable for some implementing measures of the Directive on Markets in Financial Instruments (MiFID II)2 and benchmark reform slipped. The much-heralded end to the Basel policymaking agenda remained elusive. It remains to be seen if this is a pause, reflecting the challenging nature of the open issues, or a more deep-seated impasse.

Third, there has been more emphasis on taking the system-wide perspective and asking questions about the cumulative impact of regulation. In this context, there are major unanswered questions about the consequences (intended and unintended) for market liquidity of a range of regulatory measures.

Looking forward

These themes will continue into 2016 and provide the backdrop for our predictions for the coming year.

We expect to see the trend of fewer brand new regulatory initiatives in the UK and elsewhere in the EU continue into 2016. Progress in completing "unfinished business" in the EU will be stately, leaving policy makers with a choice between delayed, or rushed, implementation.

There is also a question over the many open items on the agenda of the Basel Committee on Banking Supervision (BCBS). Much of the talk around this relates to comparability and consistency; certainly we do not anticipate much support for measures that raise capital requirements in ways that are viewed as undermining the EU's jobs and growth mandate. Moreover, some senior policymakers have indicated that there should not be a major ratcheting up of capital for banks as a whole from the next set of changes. Until these residual (and significant) uncertainties are resolved, banks will be unable to take final decisions on their post-crisis business models and strategies.

We expect the authorities to continue to press for greater competition in financial services for the benefit of end users, despite what some saw as unambitious findings from the Competition and Markets Authority (CMA) in relation to personal and business banking in the UK. The FCA has reviews to complete in respect of investment and business banking and investment management. In the EU we expect the Commission's plans for retail financial services to be heavily influenced by competition considerations. Moreover, the pace of technological development and innovation in financial services ("FinTech") will continue to keep incumbents on their toes, as will challenger banks seeking to improve scale and operational leverage. That said, we expect further consolidation in banking markets, especially in continental Europe, driven both by overcapacity and vulnerabilities in banks' business models exposed by the low interest rate environment. In this context, for banks new guidelines on the Supervisory Review and Evaluation Process (SREP) in the EU come into force from 2016. Business models and business strategy – in terms of viability and sustainability – are core to the new paradigm of forward-looking supervision.

By now, over eight years after the onset of the financial crisis, we would have expected the policy making agenda to be largely complete. This is far from being the case: despite the enormous progress that regulators have already made, many loose ends remain. Moreover, there are reviews underway, especially in the EU, of aspects of the post crisis regulatory framework before the ink is barely dry.

This residual uncertainty has at least two consequences. First, it complicates and postpones some aspects of critical decisions that need to be taken about strategy, business models and legal entity structure, especially by banks. Second, it pushes out the point at which financial services firms are able to focus more on how to extract business benefits from the significant investments they have made, often in haste, to comply with the plethora of regulatory requirements. However, as soon as the dust begins to settle, those firms which are best able to translate regulatory spend into either competitive advantage or lower cost structures will prosper. Last, but by no means least, we expect resilience – the ability of firms to prepare for, withstand and, if need be, recover from shocks – to be high among supervisory priorities in 2016. The list of such possible event risks is long – cyber- attack, geo-political instability, rising interest rates, the UK's referendum on EU membership ("Brexit"), the bond market's ability to absorb sustained selling – and growing. This will in turn put the spotlight on IT infrastructure, contingency planning, stress testing and on market-wide exercises to assess the resilience of individual firms and the system as a whole. "Be prepared."

So much for background. The top ten regulatory issues which we predict for 2016 are set out on the following pages, together with our views on how each will affect the retail banking, capital markets, insurance and investment management sectors. We have also suggested song titles that, for us, capture the spirit of the issue.

1. CULTURE

Respect

Larger firms will continue to grapple with defining and embedding a common culture, specifically one that resonates from the board and the top of the firm across all business areas and jurisdictions. Two key challenges will be to determine the levers that will encourage the right behaviours and to measure their effectiveness in facilitating cultural change.

Following the financial crisis regulators have unleashed a number of initiatives to improve standards of conduct across the financial services industry. Changing culture is seen as key to this. We predicted last year that firms would struggle with the "how" of implementing culture – this looks set to continue well into 2016.

In the meantime, supervisors will continue to search for indicators of "good" culture – in particular the role of boards will be scrutinised, including their decision-making process, their focus on customer outcomes and managing conflicts of interest and the quality of Management Information (MI). Remuneration will continue to be a key component to drive cultural and behavioural change as regulators continue their efforts to better align reward with risk and conduct.

The De Nederlandsche Bank (DNB) currently leads the way in assessing culture through a three-tiered framework of behaviours (leadership, decision- making and communication), group dynamics (cohesion and interaction between individuals) and mind-sets (values, convictions and attitudes that are regarded as important either individually or collectively). Other supervisors might well follow their lead.

The European Central Bank (ECB) is likely to push for more regulation to help drive harmonisation in areas such as fit and proper assessments of board members where diverse national transpositions of the amended Capital Requirements Directive IV (CRD IV) make it impossible to achieve consistency across the Single Supervisory Mechanism (SSM).

Retail banking and capital markets

Banking and capital markets are being pushed hardest and fastest to strengthen their cultures, driven in the UK by the SMR, the new FICC (Fixed Income, Currencies and Commodities) Market Standards Board (FMSB) and the Banking Standards Board (BSB). The BSB will undertake a market assessment exercise and issue further standards in an effort to improve practices. Supervisors in the major financial centres are focussing on culture, specifically the tone from the top and the board's role in identifying and managing risk as a measure of a strong culture. The board's role in determining and monitoring the culture of the organisation will be examined as both firms and supervisors continue their search for what good looks like.

Insurance

The Senior Insurance Managers Regime (SIMR) will reinforce individual accountability and through that a focus on culture. The UK Government's recent announcement about extending the SMR to all regulated financial services firms by 2018, will result in insurers being subject to the Certification Regime. The SMR must also be on the radar of insurance brokers as a result of the same extension. Solvency II remuneration requirements will apply from 1 January 2016, and include requirements for insurers to establish and maintain remuneration policies that promote a strong risk culture. We expect the PRA to release a supervisory statement early in 2016 to set out its expectations on remuneration for insurers. The International Association of Insurance Supervisors (IAIS) work on conduct of business risk emphasises the importance of insurers having appropriate remuneration and incentive policies, and the board and senior management being involved in promoting good culture.

Investment management

The UK Government announcement on SMR will also affect investment managers (from 2018). This will require a senior manager in each firm to take responsibility for determining the firm's culture and, separately, for implementing it. Although the deadline is some way off, it nevertheless will increase the focus on these issues.

Experience suggests that making an early start to the culture agenda stands firms in good stead. The latest Directive for Undertakings for Collective Investment in Transferable Securities (UCITS V) also introduces new remuneration requirements for investment managers and aims to encourage sound risk culture. CRD IV may further foster a risk aware culture in in-scope investment managers if the proportionality criterion for remuneration requirements is removed as proposed by the European Banking Authority (EBA).

To read this Report in full, please click here.

Footnotes

1. Deloitte LLP

2. At the time of finalisation of this document (2 December 2015) it looked as if there would be a delay in the "go live "date for MiFID II. At present there is no clarity as to the scope or extent of any delay. While we have prepared the document on the basis of a January 2017 "go live", even if this date is pushed back, our view is that firms should, given the complexity of their implementation projects, press ahead where they are able to do so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.