EMEA Centre for Regulatory Strategy in Financial Services UK
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The FCA issued a loud wake-up call to the market in its recent thematic review of firms’ oversight and controls in relation to financial benchmarks.1 Although the FCA identified some positive changes, it found that none of the firms it had reviewed between August 2014 and June 2015 (12 in total) had “fully implemented changes across all benchmark activities” and that all firms still have work to do.
In September 2015 the EU Commission is expected to bring forward a legislative proposal in on ‘high-quality’ securitisation as part of the Capital Markets Union. The Commission suggests it may be possible to incentivise the issuance of high quality securitisation through a differentiated capital charge relative to standard securitisation. This in turn could re-invigorate the European securitisation market.
HM Treasury, the Bank of England and the Financial Conduct Authority have delivered the final report on the Fair and Effective Markets Review (FEMR), a broad and comprehensive analysis of the fixed income, currency and commodities (FICC) markets. The review seeks to identify the root causes of the recent misconduct and other sources of perceived unfairness in FICC markets, evaluate the impact of regulatory reforms, and make recommendations to fill the remaining gaps.
When it comes to talking about the new Senior Managers Regime (SMR) for banks, both Andrew Bailey and Martin Wheatley have taken to referring to Agatha Christie’s “Murder on the Orient Express”, characterising the SMR as putting an end to the “safety in numbers” defence. Fans of the novel and film will recall that 12 people enter the victim’s darkened train compartment and take it in turns to stab him. As Poirot observes “They themselves would never know which blow actually killed him”. This may strike readers as rather an extreme example. More prosaically, however, the regulators want to remove ambiguity - for perfectly understandable reasons - and to be able to hold individual Senior Managers to account when things go wrong on their watch. It should always be clear “whodunnit”.
The start of May marked six months of operation for the Single Supervisory Mechanism (SSM), the new framework for banking supervision in the Eurozone. The largest banks in the SSM have had their first taste of ECB-led supervision. The learning curve for them - and for supervisors at the ECB and national authorities - has been steep. And just as banks grapple with the task of responding to the new regime, the ECB has started tackling its supervisory priorities for 2015.
Regulators are placing increasing emphasis on the management of conduct risk within financial services firms. Central to this is the right management information (MI). The importance of MI is also set to increase in the UK under the Senior Managers Regime (SMR) and Senior Insurance Managers Regime (SIMR), where strong conduct risk MI will help Senior Managers to demonstrate that they have taken reasonable steps to understand conduct risks and that they have put in place appropriate controls.
The Bank of England has published details of its 2015 stress testing exercise for the largest UK banks and building societies, its second concurrent exercise (the first was in 2014).
There has been a fundamental shift in regulatory expectation and good market practice for delegated authority control and oversight frameworks.
This shift may increase cost in key control functions reinforcing the importance of a robust conduct risk assessment (as discussed in our previous blog) to achieve a proportionate and risk-based control and oversight framework. The risk assessment shows you the higher gross risk areas of your business and why they are high risk, enabling you to direct your resource – whether it be delegated underwriting management, compliance, claims or underwriting resource - so that you get more bang for your buck.
The Bank Recovery and Resolution Directive (BRRD), a core piece of post-crisis regulation aimed at ending ‘too big to fail’, is being implemented across the EU. As part of the journey towards full and consistent implementation, the European Banking Authority (EBA) recently published a comparative analysis of the recovery plans of 27 (unnamed) European cross-border banking groups which collectively account for around half of the banking assets in the EU.
On 19th March the European Banking Authority (EBA) issued a consultation paper which sets out its approach to limiting exposures from banks to the shadow banking sector, proposing that the large exposures regime be used to restrict exposures, in addition to existing Pillar II requirements.