The year of the dog
Basel III is done, what’s next?
With the finalisation of Basel III, attention can shift from the rear-view mirror and the GFC, and become firmly focused on the future and the rapidly evolving nature of financial services.
That is not to say that there isn’t still a long tail of implementation to be completed, with no doubt many challenges on the way. But for supervisors and policy makers we can already see the shift in focus away from point-in-time ratios and rules to far more dynamic supervision and scenario testing, understanding emerging risks, and responding with new policy initiatives.
The intense energy for a global rulebook following the GFC has certainly waned, coincident with political challenges to globalism across many arenas right now. A focus on national interest and a growing concern around one-size-fits-all regulation appears likely to lead to a period of policy divergence.
Compliance - rules and community
Another paradigm shift underway for some time, and only set to intensify, is going beyond strict compliance with the rules, to how you comply with the rules; and not just rules but community expectations. This is often termed culture and conduct, but ultimately it is about behaviours and response functions, both for individuals and entities. This brings with it a focus on personal accountability, and policy is already being enhanced in this regard most notably through BEAR in Australia.
Balancing innovation and risk
And then there is the rapidly changing world in which we live. We all look forward to the benefits innovation brings, but with change comes risk, and in the past 12 months there has been a noticeable increase in both regulatory activity, and expectations that regulators will be proactively addressing issues. Topics like data, privacy, transparency, AI, cryptocurrencies, cyber are now firmly in play, and are not always complementary in their impacts or policy development.
Finally, attention is also starting to turn to other more non-traditional elements of risk management, such as climate change, or changing demographics.
All-in-all the landscape is shifting rapidly. Keeping pace with this change, whether from a risk-management or regulatory perspective, is critical, and will involve continual horizon-scanning and sensing across an expanding domain of risks, with diverging policy intent and development.
10 topics to dominate 2018
As we look to the year ahead we have identified ten topics that we expect to dominate the regulatory agenda:
I. The future of global regulation:
1. Dealing with divergence and uncertainty
The combination of regulatory fatigue and the political trend away from a globalist approach to policy making, have raised questions regarding the future of globally agreed standards for financial regulation. Difficulties in reaching agreement on Basel III and slipping timelines for implementation of international regulation, suggest a diminishing appetite for harmonised regulation and global co-ordination, and a trend toward regulatory fragmentation and home-biased rulemaking.
2. Managing the long tail of implementation
Although most of the large pieces of global regulatory reform have been finalised, and there will likely be a slowdown in new international rulemaking, there is still a long tail of implementation work ahead for Asia Pacific firms. Recovery and resolution planning, IFRS 9, and the fundamental review of the trading book (FRTB) reforms will be particularly challenging.
3. Understanding the reach of foreign regulation
Even if global standard making and regulatory harmonisation slow, the internationally integrated nature of the financial system means that rules made in significant economies have an impact beyond national borders. Many firms in Asia Pacific struggle to understand how rules made in other markets will apply to them.
II. Culture and conduct:
4. Strengthening individual accountability
Some significant steps have been taken to enhance individual accountability in Asia Pacific and these will need to be embedded within firm governance frameworks. This is part of a global trend to increase accountability and responsibility of conduct to individuals, particularly senior management, as a means to improve conduct and culture within firms.
5. An increasing emphasis on industry codes and professionalism
Reforming culture within the financial services industry has been a priority for regulators across Asia Pacific and will continue to be so in 2018. Alongside regulatory initiatives, “soft law” techniques are being enlisted, such as “naming and shaming”, promoting compliance with “voluntary” industry codes and encouraging greater professionalism with-in industry.
6. Building a customer attuned business
Many regulators have expressed the view that prioritising customer outcomes is at the heart of improving culture and conduct within financial services firms. There is a focus on providing customers with suitable products and services, appropriate to their circumstances.
III. Data and digital disruption:
7. Knowing your data
In 2018, knowing your data will be as important as knowing your customer. Regulators continue to be disappointed with risk data capabilities within the financial services industry. Regulators are also wanting industry to be far more open and transparent with their data. At the same time, regulators are putting pressure on firms to have robust data protection and privacy programs in place.
8. Responding to the influence of TechFins
In 2018, the discussion around harnessing opportunities and managing risks brought about by innovation is moving to the impact of the technology and e-commerce giants that provide financial services (“TechFins”). Timing considerations on bringing TechFins within the regulatory remit, understanding and managing prudential and consumer risks, as well preventing market abuse, will be on the minds of regulators.
9. Constructing a cyber resilient system
Regulators have expressed concerns about a cyber crisis in the system. Cyber resilience within individual firms will continue to be important for regulators across the world in 2018, but resilience in the system as whole will take on more prominence.
IV. Emerging structural risks:
10. Assessing the impacts of ageing populations and changing climates
Regulatory attention has been turning to two large looming developments: ageing populations and climate change. They will increasingly be considered in regulatory approaches and work plans in 2018 and beyond, as they present risks and opportunities for financial services firms.
This article was first published in Asia-Pacific Banking & Finance.
Published: February 2018