EMEA Centre for Regulatory Strategy in Financial Services UK
Implementing the FRTB in the European Union
Data from the European Banking Authority (EBA) published this Autumn, assessing the potential impact of Basel III reforms on EU banks, underlined the importance of the EU’s forthcoming implementation of global regulatory standards on the capital banks must hold for certain activities. One of the most immediate issues, from the EU’s perspective, is addressing capital requirements for market risk through the implementation of the Fundamental Review of the Trading Book (FRTB). The impact of the FRTB is widely expected to be substantial, with the EBA’s assessment finding that it would require a 52% increase in Tier 1 capital held against market risks for the group of 38 large EU banks that were assessed.
How to avoid the common pitfalls on MiFID II transaction reporting
Transaction reporting was a key focus in MiFID I. Twelve firms were fined a total of £33m by the Financial Conduct Authority (FCA) and further fines were levied across the EU.1 With the greatly expanded rules under MiFID II, there are even more pitfalls. Our survey of ten EU regulators revealed that six of these are currently undertaking or planning supervisory activities on MiFID II transaction reporting, the FCA among them.2
Open Banking around the world: towards a cross-industry data sharing ecosystem
Europe might reasonably claim to be the 'cradle of Open Banking'[1] - after all, PSD2[2] and the UK's Open Banking Standard pioneered it. But, look around now, and open banking initiatives are popping up everywhere. It is not just a matter of replicating the European approach elsewhere. Jurisdictions are adopting their own approaches to Open Banking, reflecting their markets and policy objectives, and in some cases developing cross-industry approaches beyond financial services.
IRB Downturn Specification: An opportunity to enhance PIT models and reduce MoC?
EBA RTS on the specification of the nature, severity and duration of an economic downturn, and the business case for credit cycle modelling
The EBA’s consultation postbag appears to have been heavier than usual, perhaps evidenced by the second public consultation on economic downturn EBA/CP/2018/07, the consultation on guidelines for downturn LGD CP/2018/08, the quantity and nature of feedback referenced in the feedback to the public consultation, and perhaps most importantly the significant change in methodology since the original consultation CP/2017/02. We summarise the changes in each draft below:
The FCA takes aim at price discrimination in the general insurance market
The FCA has become increasingly concerned that firms’ use of cross-subsidies or price discrimination (also known as differential or dual pricing) may lead to unfair outcomes for certain groups of consumers who, as a result of these pricing practices, end up paying higher prices. The FCA’s scrutiny of these practices was explored in our recent paper, “Cross-subsidies in the crosshairs.”
FCA Dear CEO letter on affordability on 15 Oct 2018 – what you need to know
Since taking on responsibility for the regulation of consumer credit in April 2014, the FCA has been addressing issues in this sector. It has always been one of its priorities to tackle risks in the high-cost credit market including payday lending, overdrafts, home-collected credit and catalogue credit.
In response to the increased number of complaints on unaffordable lending, the FCA published a Dear CEO letter on affordability in high-cost short-term credit on 15 October 2018. Assessing the extent to which creditworthiness assessments are compliant is a particularly topical subject in the wake of the latest changes to CONC (PS18/10) on 1 November 2018. As such, whilst this letter is addressed to high-cost short-term credit firms, other retail lending firms should also consider its content and sentiments.
FCA sets out its approach to competition
As part of its commitment to providing more transparency around its activities and decision-making processes, the FCA has released its final Approach to Competition (the Approach) document.
Cyber risk red-team testing in the EU: the path towards international collaboration?
The European Central Bank (ECB) earlier this year launched the first cross-border framework for the standardisation and coordination of cyber defence testing for financial institutions. This could well provide a blueprint for the global standard that has hitherto been absent, benefiting cross-border firms and more generally improving the sector’s cyber resilience. In this blog, we explore the latest European developments and consider what they could mean in this regard. Different regimes are already emerging around the world, but establishing certain commonalities could form the basis of an international approach.
Climate-related financial risks: the next regulatory frontier
Opening a new chapter of the regulatory response to a transition to a low carbon economy, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have set out their emerging approaches to supervising financial services firms’ management of risks arising from climate change. Many of the regulatory focus areas around governance, risk management, scenario analysis and disclosure align to, and have already been set out in the UK Green Finance Taskforce report, the European Commission’s in-flight legislative package on Sustainable Finance and the voluntary Taskforce on Climate-related Financial Disclosure (TCFD) guidelines. All that said, however, the publications represent a significant step towards requiring banks, insurers and investment managers to integrate climate change into their enterprise-wide risk management practices. We can now expect the regulators to clarify and finalise their approaches over the course of 2019.
Digital transformation meets regulation 4.0 in 2030 (1/3): Coping with disruptive innovation
There is widespread consensus that incumbent retail and commercial banks will need to redefine their business models over the next five to ten years to remain viable. Two forces will play a fundamental role in determining the speed of change and the end-point toward which incumbents will move. The first force concerns incumbents’ vision of the future and their capacity for achieving digital transformation alongside the success of new digital native competitors. The second force concerns the role of financial regulators and supervisors as drivers of, or brakes on, digital transformation. Whilst digital transformation typically factors in regulatory compliance based on the current regulatory state of play, it does not tend to factor in regulatory risk. In this series “Digital transformation meets regulation 4.0: Playing and winning in 2030”, we present a way of thinking about how incumbents could play and win to hedge the value of their digital transformation against regulatory change.