Outlook for financial markets regulation

The regulatory top 10 for 2015

Here, we have detailed the top 10 areas for consideration with links to further reading. You can also access the full interactive PDF.

1. Structural reform and resolution in the financial sector
2. New institutions in action
3. Data and regulatory reporting
4. Culture and treatment of customers
5. Competition and innovation
6. Stress testing and risk management
7. Capital Markets Union
8. Business model mix
9. Solvency II and insurance capital
10. The interaction of market structures

1. Structural reform and resolution in the financial sector

Changes in 2015

Although requirements for banks to ring-fence some of their activities have been debated for years, little progress on implementation has been demanded. This will change in 2015, however. 

Further progress on restructuring, to meet authorities’ expectations of resolvability will also be important. And activity will not be limited to initiatives that are already established. Significant uncertainty hangs over new EU requirements for bank structural reform, first proposed in January 2014. In the eurozone, the SRB will begin operation and in the UK, non-EEA banks will also want to understand what the PRA’s approach to these branches in the UK means in practice. 

It’s not only banks facing resolution requirements – Financial Market Infrastructures and some insurers will face similar questions too. 

Further reading:

Structural Reform of EU banking: Re-arranging the pieces
Loss-absorbing capacity for banks: EBA consults on EU requirements – ‘MREL’
PRA puts ring-fencing in industry’s court
Resolvability: breaking down the barriers
Insurance resolution: Under the supervisory spotlight
Single Resolution Mechanism: Great resolve; still some questions

2. New institutions in action

Sharp learning curves

2015 will see banks continue to ride a sharp learning curve as the ECB – the newest supervisor in town – overhauls the culture of supervision and good practice across the eurozone. The SRB will also start to get up and running; the centralised resolution authority is set to have significant influence over the direction of resolution actions for 5 eurozone cross-border banks. 

We will also begin to see where the new guard at the European Commission and Parliament stands on developing financial services legislation. Emphases on promoting growth, as well as “safety and soundness” considerations, are already evident. 

Further reading:

Meeting the challenge of the SSM | How banks should get ready for the new regime
Results of the ECB’s Comprehensive Assessment
Eurozone banks wake up to a new supervisor. What’s next?
A “watershed” moment for financial regulation, and “the next phase of reform”

3. Data and regulatory reporting

Critical in the coming year

Appetite from supervisors for more granular data has been growing since the start of the financial crisis. Several initiatives will combine to make data and reporting once again critical for firms in the coming year. 

Although short term cost and time pressures may force firms to adopt tactical solutions, it could well be more effective to take a more fundamental, strategic approach in the medium term. These challenges apply across all financial services. 

The follow-up to the AQR will be important to banks in the eurozone, but the issues extend much further. Data needs include those need for rewarding a bank in proportion for resolution and the principles for effective risk data aggregation. 

More stringent data and profit requirements for insurers will be driven primarily by Solvency II. 

Further reading:

Risk data and the Supervisor
Going up? The impact of impairment proposals on regulatory capital
Fourth Global IFRS Banking Survey
Results of the ECB’s Comprehensive Assessment

4. Culture and treatment of customers

Implementing change

Culture and the treatment of customers will remain at the fore. Although everyone in financial services can now talk culture, the real challenge is to “do” culture. This is where supervisors expect to see hard evidence of significant further progress in 2015. 

For firms in scope, the UK’s new Senior Managers Regime should concentrate minds. The UK Banking Standards Review Council, which will begin its operations in 2015, has measuring improvements in banks’ cultures and consumer outcomes high on its agenda. The ESAs have also been encouraged to up their game on consumer protection across the EU. 

Wholesale activities will remain in the spotlight, with the FEMR final recommendations expected in June 2015. The review entrenches the idea that regulators should take preventative action in areas susceptible to market abuse, rather than wait for misconduct to materialise. 

Overall, it will be increasingly important for firms to produce reliable and meaningful conduct risk “data”. 

Further reading:

Transition to the Senior Managers and Certification Regimes - Strengthening accountability in banking
Driving change in FICC markets
The FCA Risk Outlook and Business Plan 2014-15

5. Competition and innovation

Implications for strategy and business models

The FCA and CMA will be “concurrent” competition regulators for financial services from April 2015, in the UK. Both have ongoing reviews and the new year will bring clarity around their other areas of focus. 

The treatment of challenger banks and challenger products will bear watching closely. 

The new PSR, which will have a competition objective, will take on its full responsibilities from the same date. With payments services at the forefront of the digital innovation in banking, the work of the PSR will be even more important. The PRA now also has a secondary objective to facilitate competition. 

Initiatives, motivated by competition considerations, are also prominent at the EU level. Much of the regulators’ competition-related work is likely to have implications for strategy and business models.

Further reading:

Banking Disrupted – How technology is threatening the traditional European retail banking model

6. Stress testing and risk management

Continuing to develop 

The ECB’s Comprehensive Assessment may be over, but it doesn’t end there. Stress testing will continue to develop in the UK, eurozone and US, becoming an increasingly important supervisory tool. 

Murmurings about cross-border coordination will get louder too – once authorities become more comfortable with the rôle the tests play in their respective jurisdictions. 

Firms will need think about how to join up their risk management and stress testing responses, providing ‘one firm’ capability across all countries. G-SIBs also face a significant challenge in meeting the BCBS’ deadline of January 2016 to achieve the risk data aggregation capabilities set out in its international principles.

Further reading:

Bank of England UK stress testing exercise | And now for 2015
Results of the ECB’s Comprehensive Assessment
EU banking stress test | EBA fires the starting gun

7. Capital Markets Union

A new agenda?

CMU is a flagship initiative of the new European Commission. The primary motivations of the initiative are to increase jobs and economic growth, and to develop a more resilient financial system. In contrast to the Banking Union, the CMU will apply to the whole of the EU and seeks to facilitate the growth of new markets.

That will be achieved by increasing market-based funding:

• Lowering the costs of raising capital
• Eliminating barriers to the cross-border provision of financing, particularly for SMEs and infrastructure projects. 

Transparent and simple securitisation markets, and the development of EU private placements markets are seen as key. Important questions remain:

• What CMU will entail?
• How it will interact with existing initiatives?
• How ambitious the plans will be? 

This new and important agenda will be particularly well debated as different stakeholders vie to influence the emerging agenda.

8. Business model mix

A world of multiple constraints

As banks roll out changes to meet the requirements of Basel III, the main strategic challenge will be what business model – and mix of activities – a bank will pursue once the following constraints are taken into account: 

• Capital
• Liquidity 
• Leverage 
• Stress testing 
• Loss-absorbing capacity requirements. 

Although uncertainties remain, there is no reason for banks to delay in building the capabilities, which are needed to manage their balance sheets in this much more complicated regulatory environment.

Further reading:

UK leverage ratio requirement: a cornucopia of capital complexity?

9. Solvency II and insurance capital

A bigger impact? 

Preparations for Solvency II implementation will enter their final year in 2015, with the long term guarantee package having been agreed in 2014. The main developments for 2015 will be the approval of the Delegated Acts which will be transposed into national law by all EU Member States.

Guidelines for supervisors have been issued on systems of:

• Governance
• Own Risk and Solvency Assessments
• Reporting
• Pre-applications for internal model approval to prepare firms for the implementation of the regime

Solvency II will raise questions for insurers in terms of business mix and of optimal asset allocation. Meanwhile, at the international level work is gaining steam to develop a global Insurance Capital Standard for G-SIIs and Internationally Active Insurance Groups. 

It remains to be seen though how much impact the global capital standards will have. The bigger impact may come from the increased intensity of supervision insurers attract. 

Further reading:

Solvency II: preparing for EIOPA’s interim guidelines
European Trialogue agreement provides green light for Solvency II implementation

10. The interaction of market structures

Effects in different countries

Financial market structures are being radically altered by multiple regulatory requirements. As a result, the way in which users of those markets interact with them is set to change too. Old issues of extraterritoriality have not yet gone away, and appear unlikely to any time soon. 

2015 will likely see a key equivalence decision in relation to the US derivatives rules, with implications for the geography of derivatives trading. MiFID II/MiFIR will affect all stages of the life cycle of a trade: venue access, through to execution, and ultimately reporting and other post-trade requirements. We can expect wrangling over the all-important technical details of the MiFID framework in the next two years. 

The politics of the Transatlantic Trade and Investment Pact are tricky, hence TTIP remains one to watch.

Further reading:

OTC Derivatives - The new cost of trading
CFTC and EU OTC Derivatives Regulation- An Outcomes-based Comparison
Countdown to MiFID II go-live date begins
Political agreement reached on MiFID II / MiFIR | A new landscape for EU capital markets