Last year was a particularly busy year, with companies preparing for the European Union (EU) regulatory reforms – Mifid II, Mifir, Benchmarks Regulation, packaged retail and insurance-based investment products (Priips) regulation, Payment Services Directive II– that come into effect this month.
As firms move into the final stages of their preparations, thoughts are now turning as to when the Financial Conduct Authority (FCA) will start reviewing the changes that firms have made, and what enforcement action will be taken for non-compliance. From a Mifid II perspective, the FCA has already given us some insight into its enforcement approach following the speech by Mark Steward, director of enforcement and market oversight, in September 2017.
Brexit is casting a shadow over everything in the financial services industry. At the time of writing, there has been some movement with the European Commission announcing that sufficient progress has been made so that the negotiations can move on to phase two covering the UK’s future relationship with the EU.
Perhaps unsurprisingly, the topic of financial services was not covered in the Commission’s announcement, with the focus instead being on the priority areas of the European Council Guidelines of 29 April 2017 – citizens’ rights, the dialogue on Ireland/Northern Ireland and the financial settlement. However, in its press release the Commission mentioned that it stands ready to begin work immediately on possible transitional arrangements. Subject to the negotiations, it seems likely that the length of the transitional arrangements will be two years, which is what the UK government has put forward.
Firms will have a busy time this year preparing for Brexit. The Prudential Regulation Authority (PRA) is expected to publish a paper on its approach to authorisations to UK branches of European Economic Area banks by the end of this year so the first quarter of 2018 may see significant activity.
Royal approval
The EU (Withdrawal) Bill is expected to receive royal assent during the first half of this year, but there are a number of important questions still unanswered, including the status of soft EU law such as the questions and answers that the European Supervisory Authorities (ESAs) produce.
We also saw in 2017 opinions from both the European Securities and Markets Authority (Esma) and the European Banking Authority on firm relocations. It is probably safe to say that we can expect more on this topic from both ESAs during the course of 2018. There is also the contentious issue of euro clearing to consider.
At an international level, in December 2017 the Basel Committee members finally agreed on the latest changes to the Basel framework, which includes the output floor that provides a minimum level of capital banks must hold, despite what their internal models say. Further commentary on these new measures, including EU implementation proposals, will surely follow this year.
Recovery and resolution will also continue to be an important theme in 2018. The Financial Stability Board will follow up on its December 2017 consultations covering principles on bail-in execution and funding strategy elements of a resolution plan.
A number of important EU regulatory reforms that the European Commission introduced in 2017 will go through a trilogue during 2018. For example, there are the European Market Infrastructure Regulation review proposals and the suggested changes to the structure of the European System of Financial Supervision. The latter proposals significantly extend Esma’s powers and have been criticised by many in the market.
EU’s legislative proposals
There are also the legislative proposals that amend the Capital Requirements Regulation, the Capital Requirements Directive IV and the Bank Recovery and Resolution Directive. These proposals introduce a number of changes, including those that align the EU’s minimum requirement for own funds and eligible liabilities requirements with the Basel Committee’s total loss absorbency capacity standard (intended to come into force on 1 January 2019).
Key points
- Firms will have a busy time in 2018 preparing for Brexit
- The risks of being unprepared for GDPR could be costly
- UK banks will be putting the final touches on their ring-fencing projects
Keeping with the prudential agenda, this year we are expecting legislative proposals from the Commission for a new prudential framework for investment firms.
In terms of Esma’s work for 2018, it is worth noting that its chairman gave a speech on the ESAs’ priorities in November 2017. Among other things Esma is currently analysing the impact of costs, including explicit and implicit fees and charges levied by the funds industry, but also the implicit effect of inflation on the returns to investors in EU Ucits.
Esma expects to complete its analysis on Ucits funds by late 2018. In the longer run, the organisation will extend its analysis to EU alternative investment funds and structured products, such as structured deposits and notes. Closer to home, the UK asset management industry will also have to contend with the fallout from the FCA’s asset management market study.
On the technology front, EU member states are expected to have transposed the Cyber-security Directive by 9 May 2018. A couple of weeks later, the EU General Data Protection Regulation (GDPR) comes into effect on 25 May 2018, the risks of being unprepared could be costly (fines could be up to 4 per cent of worldwide turnover).
In the UK, conduct and culture in both the retail and wholesale space will continue to be a key theme this year. Institutions need to grapple with what the regulator expects, both in the areas subject to thematic reviews and more generally, how to connect conduct risk into their existing policies and procedures and how to define and measure success.
The theme of individual accountability moves to another level, with the FCA expected to finalise its rules for extending the senior managers’ regime to asset managers and other parts of the industry.
Financial crime and cybersecurity will continue to be priority areas for the FCA. During the summer of 2018, the FCA is expected to have completed its financial crime thematic review of e-money.
Ring-fencing projects
On the banking side, UK banks will be putting the final touches on their ring-fencing projects ready for the new regime coming into force on 1 January 2019. The FCA will also continue with its strategic review of retail banking business models, which it announced in April 2017.
From a PRA perspective, the regulator will continue with its work in the ‘geofinance’ space, publishing the policy statements to consultation papers 19/17 and 20/17.
Interestingly, in his October 2017 Mansion House speech, PRA chief executive Sam Woods said that the association believes that ‘geofinance’ – the impact of geography on the geometry of finance – is likely to be the defining challenge of the next few years and groups operating across borders will need to be resilient according to their global foot print.
Simon Lovegrove is head of financial services knowledge at Norton Rose Fulbright
