The three regulatory headwinds facing financial services in 2022

The three regulatory headwinds facing financial services in 2022

Looking ahead to 2022, the financial services regulatory agenda seems to be dominated by three topics: first, environmental, social and governance themes, reflecting the importance of the financial sector to the transition to net zero; second, fintech and the development of the crypto-assets market; and third, a focus on consumer harm headlined in the UK by the introduction of a new 'consumer duty'.

Alongside these, post-Brexit development of the UK’s new regulatory framework and changes arising through the Wholesale Markets Review, mirrored in the EU by the MiFID II review, mean that keeping a close eye on the horizon remains as critical as ever.

Momentum to continue on ESG

COP26 was the springboard for an avalanche of sustainable finance initiatives, including the UK’s Greening Finance Roadmap. That momentum is set to continue. While new rules are emerging around the world, the EU sustainable finance programme is in the comparatively most advanced state.

More of its ESG legislative package comes into effect next year. Compliance with this represents a complex programme of work for financial institutions with an EU footprint, who also grapple with legislative frameworks emerging in other regions, the complexities of their own (multi-jurisdictional) organisational structures, as well as the possibility of being headquartered somewhere that does not heed the EU’s rules as the prevailing standard.

Lack of harmonisation globally is likely to become a key contributor to ESG-related headaches for global institutions over the next few years.

With the focus on greenwashing, asset managers, who have grappled with new disclosure obligations under the EU’s disclosure framework since March, have a lot more to come in 2022. Although compliance with the most granular product disclosure obligations will not hit until the beginning of 2023, other reports are required in 2022, including the beginning of mandatory UK Task Force on Climate-related Financial Disclosures reporting for large asset managers.

The banking sector faces significant challenges too, with major ESG uplifts to prudential, governance and risk management requirements in train. The Prudential Regulation Authority has signalled that in 2022 it will supervise against its expectations – signposting the legal and enforcement risk coming in this space. For the front office, MiFID II amendments are coming along requiring adaptation of suitability and product governance processes to embed sustainability preferences.

Greater clarity on fintech rules

The line between traditional finance and fintech continues to blur as financial institutions increasingly engage in markets for crypto-assets. This crossover presents risks for regulated companies, especially while the regulatory approach is being developed. Fintechs may be caught in a pincer movement as prudential, conduct, anti-money laundering, competition and data standards tighten.

Further clarity on the UK’s approach to regulating stablecoins and other crypto-assets is anticipated in 2022. Crypto-assets amounting to security tokens or e-money tokens are already regulated, as are derivatives and exchange-traded notes that reference crypto-assets.

Treasury consultations have proposed adding certain types of stablecoin to this list of regulated instruments, as well as restricting crypto-asset promotions.

The Financial Conduct Authority will want to be seen to reclaim its position as one of the proactive, innovative regulators by offering earlier support to new companies, building on suggestions in the Kalifa fintech strategic review for a “scalebox” to complement the existing regulatory sandbox. To assist, the PRA will publish rules for its “strong and simple” prudential framework for challenger banks, with the aim of making those prudential requirements accessible for new entrants.