Capital Markets in Financial Services UK
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MiFID II took seven years from consultation to implementation and generated 30,000 pages of rules.1 Nine months have passed since the go-live date on 3 January. Firms could be forgiven for finally wanting to tick it off their “To Do” lists. However, they can’t take that red pen out yet – we haven’t yet reached our destination on the MiFID journey. As with all things regulation, there is always more to do. And where there are rules, more often follow.
Solvency II seeks to value assets and liabilities at the amounts for which they could be exchanged or settled between knowledgeable, willing parties in an arm’s length transaction. However, when it comes to capturing equity release mortgages (“ERMs”) in regulatory capital calculations, applying that broad principle is undoubtedly “easier said than done”. That no doubt explains why, in its latest consultation in this area, the PRA has adopted a notably cautious approach. In sum, this represents a sharp tightening of the PRA’s policy position on ERMs, and one that extends, rather unusually, to specifying the quantum of particular assumptions that the PRA expects should underlie ERMs’ effective regulatory value.
“The prices of many cryptocurrencies have exhibited the classic hallmarks of bubbles including new paradigm justifications, broadening retail enthusiasm and extrapolative price expectations reliant in part on finding the greater fool.” Mark Carney, March 2018.
New technologies and evolving business models have required regulators to review their capabilities and respond to new risks posed. And the UK Information Commissioner’s Office (ICO) is no exception. The new General Data Protection Regulation (GDPR) has vested considerable powers to the ICO to regulate and supervise data privacy risks. Increasing concerns about the wholesale use and processing of personal data by firms are reflected in the ICO's recently published Technology Strategy, which outlines its objectives and focus areas through eight technology goals.
The ICO strategy’s leitmotif is that technological advances “need not come at the expense of data protection and privacy rights” and that “privacy and innovation are not mutually exclusive”. Through the development of its technology strategy, the ICO’s overall aim is to remain relevant by ensuring that the monitoring and understanding of technological change, and its impact on information rights, are a core component of its work going forward.
It is no secret that technology and its impact on companies’ business models is shaking up the general market. Technology disruption isn’t limited to media, retail, or transport (to name a few industries), but this disruption is widespread, also impacting financial services. The general theme is that technology enabled companies can execute quicker, cheaper and with greater precision.
This blog provides an overview of the FCA’s 2018/19 Business Plan. It discusses the key cross-sector priorities the FCA identifies and compares them to those in the previous year’s business plan, noting dropped, changing and new priorities. It also outlines the FCA’s sector priorities for 2018/19.
Alongside the business plan, the FCA also published its 2018 Sector Views – the FCA’s annual analysis of how each sector is performing – covering retail banking, retail lending, general insurance and protection, pensions and retirement income, retail investments, investment management and wholesale financial markets.
Notably, the UK’s withdrawal from the EU is called out as a top priority, over and above any cross-sector or sector priorities. The FCA notes that they will have to dedicate extra resources to this programme of work, and that this will mean reduced activity in other areas as a result.
Technology and innovation (“FinTech”) again featured prominently in this year’s Financial Conduct Authority (FCA) business plan. Andrew Bailey, Chief Executive of the FCA, remarked that “technology is supporting competition, transforming markets and changing the way consumers engage with them. […] creating a conveyor belt of risks and opportunity”. Given this, and despite the need for the FCA to dedicate a significant proportion of its resources to the UK’s withdrawal from the EU, FinTech was confirmed as a key priority for the FCA over the coming year. The two specific FinTech priorities highlighted in the business plan are: Innovation, big data, technology and competition and Data security, resilience and outsourcing.
The Prudential Regulation Authority (PRA)'s emphasis on technological innovation in its business plan is relatively less pronounced. Nevertheless, it too is exploring ways to innovate as a regulator, by continuously monitoring FinTech developments, and supporting the authorisation and supervision of new banks and insurers.
Deloitte and UBS hosted a roundtable on Artificial Intelligence (AI) at the recent Innovate Finance Global Summit 2018 (IFGS18). We had representatives from across the FinTech ecosystem covering incumbents, start-ups, scale–ups, consultants and other service providers.
AI is clearly a hot topic and there are a number of challenges and opportunities to explore. We chose four key themes, crowdsourced from experts in the area:
- Navigating the hype
- Bias and transparency
- Role of the regulator
After a lively discussion, we used a voting system to identify the top messages by theme. The messages that earned the highest number of votes are summarised below.
The Government’s recently published response to the House of Lords European Union Committee Report “Brexit: The Future of Financial Regulation and Supervision”1 gives us part of the answer to this question. Much of it confirms what was already known or widely expected. The UK will remain a strong proponent of, and adherent to, global regulatory standards, including those set by the Financial Stability Board and the Basel Committee on Banking Supervision. The UK regulators will continue to adopt a proportionate approach to the application of regulation, with the Government welcoming the PRA’s “proportionate application of Basel rules”. And the Government and regulators will ensure that regulation supports innovation, including through fintech.