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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.
On 16 April, the European Parliament adopted in Plenary a Regulation on the prudential requirements for investment firms (IFR) and a Directive on the prudential supervision of investment firms (IFD). IFR/IFD introduces prudential requirements for investment firms, tailored to their activities and asset size. IFR/IFD also revises the MiFID II/MiFIR third-country regime for investment services.
Important strides in cyber security are being made this year as financial authorities around the world are beginning to run increasingly sophisticated cyber attack simulations. The aim is to help them better understand how the financial sector might cope with a large and systemic disruption to its activities and what they can do to respond.
Accurately simulating how financial markets would react to a major cyber attack is enormously difficult. Regulators not only have to consider the complex interconnections between firms in the sector, but also how coordination with other public authorities such as central banks, finance ministries, the military and security agencies would practically function in such a scenario. On top of this, it is clear that cyber attacks are not confined to national borders or to the financial sector and can spread rapidly around the world both within and between affected firms. This gives the cyber resilience efforts of financial regulators an urgent international and cross-sectoral dimension that demands a high-level of cross-border and cross‑agency collaboration in countering the cyber threat.
Growing the public-private dimension of cross-border cyber exercises will also be an important way to ensure authorities and firms can act in concert when responding to a cyber disruption. As these exercises increasingly begin to include them, firms with cross-border business models will have an important opportunity to help shape the global regulatory environment they face for cyber risk into one that works more effectively in practice.
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.