EMEA Centre for Regulatory Strategy in Financial Services UK
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Financial services continue to go through major disruptive changes that are redefining their role and structure.
Recognising this, the Bank of England (BoE) launched an initiative on the “Future of finance”1. The themes tackled include: infrastructure, ageing population, technology, low carbon economy and emerging markets. This initiative will set out a vision for the future of the financial system and inform the BoE’s thinking on future policies and capabilities.
These themes already pervade the strategic challenges Deloitte helps financial services firms to solve. Ahead of the publication of the conclusions of the BoE’s initiative, we brought together experts2 from across our UK firm to help us consider the current focus in financial services and what the future will look like. For the purposes of this note, we have only presented the most important focus against each theme.
The traditional employer-employee relationship is being replaced by the emergence of an alternative workforce – temporary, on-call contract workers, freelancers, independent contractors and gig workers – that leaves no generation untouched. The alternative workforce is expected (according to governments and organisations such as the World Economic Forum) to increase dramatically over the coming years due to a combination of factors, including firms’ cost pressures, technological adoption, and changing workplace cultures.
Recent high profile IT failures have focused regulatory and supervisory attention on the risks that technology change can pose to the operational resilience of the financial services sector. The volume, velocity and complexity of change are presenting a significant challenge to many financial institutions, and it is during change programmes that disruptions sometimes crystallise.
On Wednesday, 5 June 2019, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) published their eagerly awaited feedback on the Dear CEO (DCEO) letter on the discontinuation of LIBOR that was sent to the major banks and insurance companies in September 2018. The aim of the DCEO letter was to seek assurance on whether firms’ senior management and boards understood the risks associated with transitioning from LIBOR to alternative risk-free rates (RFRs) ahead of the end of 2021 and were taking appropriate and timely action.
In recent years, the effects of climate change have become more apparent, attracting attention from financial regulators globally. In a recent speech Sabine Lautenschläger, Member of the Executive Board of the ECB, stated “climate change is not an issue for next century. It’s an issue for now, and it’s a topic not only for other sectors but also for the financial sector and for central bankers and supervisors”.1
The regulatory response to a transition to a greener economy is currently accelerating rapidly. A number of EU initiatives put climate change at the forefont of the financial regulatory agenda, and it is clear that the UK regulators will take an active lead.
Against a backdrop of institutional investor pressure and industry actions, central banks and regulators are placing a greater focus on the financial risks that arise from climate change. Banks and insurers incresingly need to think about how to adapt their business models and how the transition to a low-carbon economy may affect the business models and creditworthiness of the companies to which they are exposed.
The timeline below shows this regulatory response and the expected developments. We foresee regulators will continue to clarify their approach over the course of 2019.
In April, the Joint Committee of the European Supervisory Authorities (ESAs) published their advice to the European Commission on the strengthening of EU cyber and IT security regulation in the financial sector.
These recommendations are an early signal of what we believe will be increased activity by EU financial authorities on cyber risk from 2020 onwards. Going beyond cyber risk, they show an interesting convergence of thinking with UK authorities in recognising that all forms of IT operational disruptions increasingly threaten the stability of the financial sector. The recommendations also note that the emergence of various approaches to cyber and technology risk across countries in the EU could benefit from added facilitation, harmonisation and cooperation. While a number of regulatory challenges could arise from a strengthened EU approach to cyber risk in the financial sector, greater alignment between countries in addressing this risk area should be welcome news for cross-border financial services firms.
EMIR Refit, also referred to as EMIR 2.1, was signed off in the European Parliament plenary on 18 April, paving the way for it to enter into force, potentially as soon as this month.
Refit makes some targeted revisions to the clearing, risk mitigation, reporting and trade repository rules in the European Market Infrastructure Regulation (EMIR). It should not be confused with EMIR 2.2, which makes revisions to EMIR CCP supervision rules and was also signed off at the European Parliament plenary. While some of the Refit revisions aim to make rules simpler and more proportionate, others in effect are likely to increase the regulatory burden already faced by firms. How significant the impact of these modifications is likely to be will depend on a firm’s derivatives trading model, as well as other factors, such as whether it transacts with non-financial counterparties (NFCs), is a clearing member, or has EU-established Alternative Investment Funds (AIFs) in the group.
This blog provides an overview of some of the key requirements in Refit and the potential impact they will have on firms. Please see here for a more comprehensive look at the EMIR Refit changes.
Despite the uncertainty that still surrounds the final date and terms on which the UK will leave the EU, many firms are already looking ahead to how they might optimise their post-Brexit business. Future EU market access, and the associated equivalence regimes, will be a fundamental consideration in this.
The FCA highlights the importance of firm culture and customer vulnerability as part of its debt management thematic review
The first review found that the quality of debt advice received by consumers was often “very poor” and that “firms were treating customers unfairly.” These poor practices led the FCA to include the debt management sector as a priority area as part of its 2017/18 Business Plan.
This blog explores the main findings from the most recent review and sets out the wider lessons that can be drawn both for debt management firms and the consumer credit sector more generally.