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


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.



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.


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.


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.

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