Regulatory developments and priorities

John Liver, Ernst & Young LLP

“Given the complexity of administration for regulation covering multiple global jurisdictions, there is a shift in prioritisation in favour of local resolution”

Regulatory developments

For roughly a decade the financial services industry has been dominated by regulatory and supervisory responses to the systemic weaknesses exposed during the financial crisis. Post-crisis reforms have significantly raised standards across four key themes – financial condition, structural reform, conduct, and governance and controls.

Following the significant efforts expended globally to finalise and complete the implementation of these reforms, many vulnerabilities have been addressed.

Regulators have recognised that implementation of these reforms and jurisdictions’ responses to the crisis have led to fragmentation across the industry. Focus is now shifting to a finalisation of implementation as a desired outcome and consistency across multiple jurisdictions.

Regulatory and supervisory bodies are now assessing the effectiveness of the response and contemplating potential changes and reflecting the priorities of the industry.

The largest banks in the world have significantly improved their capital position in the years since the crisis

Naturally market transparency is seen to continue to remain a major priority, with the Markets in Financial Instruments Directive II (MiFID II) having recently gone live. In addition there are huge implications for institutions regarding focus on compliance, conduct and anti-money laundering, with a renewed focus on these themes in Europe and the UK. There is a sense that institutions need to be seen as clean as possible.

UK conduct priorities seek to ensure that the market works well for the participants and that where there are issues, dysfunction or an inability to meet consumer’s need occurring, that steps are taken to remedy the situation.

Given the complexity of administration for regulation covering multiple global jurisdictions, there is a shift in prioritisation in favour of local resolution.

When assessing the fundamental nature of regulation in markets, priorities will increasingly reflect the risks associated with drivers of business transformation. This understandably has a broad scope and could include thematic topics such as:

  • Responses to rapid technologically-driven change in risk and compliance processes
  • Increasing focus on new balance sheet risks
  • New standards for ‘new’ risks
  • New licensing, regulatory requirements and ‘indirect’ regulation of new entrants
  • Fragmentation or integration in response to customer priorities and digitisation

No discussion on regulatory priorities would be complete without at least addressing the UK’s withdrawal from the European Union (EU), commonly known as ‘Brexit’. Leading up to the withdrawal, the UK has rationalised a significant number of EU rules, as well as setting up a temporary regime for European banks participating in the UK. However there are still many concerns regarding the impact and functioning of the withdrawal, unsurprisingly with most concerns arising from the UK side. The European Commission feels in a comfortable position, with most of the key points sorted and therefore it is time for the politicians to resolve the matter and finalise the withdrawal.

The PRA’s priorities for the near term include the supervision of ring-fenced banks and the effectiveness of ring-fences in practice. Quite a lot of focus is directed towards financial resilience and ensuring firms have adequate capital and liquidity resources for the environment. Stress testing forms an integral component to this requirement and the impact of climate change on assets will need to be considered.

Adaptation to market changes and horizon scanning remain key. A recent example is the monitoring of crypto-assets, and whilst they are not a systemic risk at the moment, the regulator is still paying attention to ongoing developments.

The capability for firms to address recovery and resolution is being assessed. Ensuring firms develop capabilities to wind down trading and derivative businesses, implementing a Risk Assessment Framework and ensuring the new lens of focus is public with firms being capable of being self-assessed. The regulator will publish their assessment of major institutions in 2 years’ time. At present the area is relatively underplayed, and will receive increasing focus.