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Financial Markets Regulatory Outlook 2019

10 years on from the crisis

Our annual assessment from Deloitte’s EMEA Centre for Regulatory Strategy explores how major regulatory trends will shape the financial services industry in the year ahead and provides solutions to guide leaders in effectively navigating the changes.

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At a glance
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2018 scorecard

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At a glance

We have identified six cross-sector themes of strategic significance for the financial services industry in 2019.

Alongside our six cross-sector themes, we have also identified six supervisory constants – although not new, these will be important areas of supervisory focus in 2019.

We also have a number of sector specific themes, related to Banking, Capital Markets, Insurance, and Investment Management respectively.

A snapshot of each theme is contained in the tabs below, or you can access a full summary of our predictions with the tool further down the page.

Our predictions for 2019

Select issues and themes from the below list to receive a customised summary of our predictions for the year ahead.

Choose cross-sector themes:
Select all Shift from implementing new regulations to ongoing supervision Preparing for Brexit IBOR transition	Climate change and sustainability Building resilience to operational disruptions Value for money

Choose supervisory constants:
Select all Culture and governance Scrutiny of firms' business models Firms' protection and use of data	Access and vulnerable customers Testing for cyber vulnerabilities Model risk management

Choose sector-specific issues:
Select all Banking Prudential Resolvability ICAAP, ILAAP, SREP and stress testing Financial Crime Capital Markets Capital markets landscape Algorithmic and electronic trading Payment for research Transaction reporting Traded risk Margin, clearing and settlement	Insurance Business model challenges Changing role of insurers and insurance Pricing and distribution Solvency II review Investment Management Value for money Payment for research Fund governance Product governance and distribution Fund liquidity and leverage

Cross-sector themes

Shift from implementing new regulations to ongoing supervision
View a summary of our predictions for 2019

The focus of activity for supervisors will shift to examining how key regulatory reforms and associated new requirements have been implemented. Implementation of MiFID II is likely to be at the vanguard of this scrutiny, in particular transaction reporting, payment for research and inducements.
Faced with this scrutiny, boards will need to satisfy themselves that regulations have been adequately embedded within their firms. Firms will need to increase resources dedicated to understanding and responding to supervisory priorities.
Firms should turn their attention to optimising their operational strategy and business model in the new regulatory environment, in order to progress cost reduction targets and enhance customer outcomes.

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Preparing for Brexit
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Firms will have no certainty on the Withdrawal Agreement as we expect it to be ratified at the very last moment in both the UK and EU.
We expect the EU will choose emergency fixes over disorder if there is no implementation period.
EU authorities will maintain pressure on outgoing firms from the UK to demonstrate they nevertheless have taken all steps possible rather than depend on emergency fixes.
Due to EU supervisory expectations, firms may increasingly shift trading and clearing of more EU products to the EU.

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IBOR transition
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The pressure to transition away from LIBOR will grow, with greater supervisory scrutiny of whether firms are reducing their dependencies on, and exposures to, LIBOR.
2019 will see an increase in issuances of RFR-linked products, as banks and other market participants start to drive activity in them.
Firms’ management of conduct risk will move up the agenda as supervisors take greater interest in firms’ accountability and oversight, conflicts of interest controls and disclosure practices to manage these risks.
Early in 2019 firms will “wake up” to the risks of a failure to transition away from EONIA, and possibly Euribor, in time.
Even if authorities offer some flexibility in respect of the 1 January 2020 EU BMR deadline for critical and/or non-critical benchmarks (including third-country benchmarks), EU regulators will become more vocal about firms’ transition plans in 2019.

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Climate change and sustainability
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The prescriptiveness of any EU-wide regulatory actions on a one-two year horizon will depend in part on how well firms engage with voluntary initiatives and demonstrate that they are on top of climate-related financial risks.
Boards will need to review and define the relevant roles and responsibilities for managing financial risks from climate change.
Increasingly banks will integrate climate-related financial risks into their loan origination processes, insurers will introduce more sophisticated modelling of physical risks, and asset managers will treat them as investment risks and influence corporate responses to climate change through board targeting.

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Building resilience to operational disruptions
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Firms will increasingly be challenged by rising regulatory expectations for their resilience to operational failures, including cyber attacks.
The ECB will roll out maturity-based expectations for the cyber resilience of SSM-supervised Eurozone banks.
Recent high-profile IT outages will prompt UK authorities to accelerate the development of their “impact tolerance” framework for firms’ operational resilience.

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Value for money
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2019 will see a growing emphasis by conduct regulators on the economic consequences for consumers of poor value products and services.
There will be continued reliance on information and disclosure to enhance the transparency and comparability of products, particularly in relation to costs, charges and performance.
Where disclosure alone will not improve value for money, regulators in some jurisdictions will be increasingly willing to consider stronger remedies, including pricing interventions.
Providers will need to demonstrate that their charging structures are clear and fair, and that their products and services represent value for money.

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Supervisory constants:

Culture and governance
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In their continued drive to address the root-causes of prudential failure and misconduct, supervisors will focus increasingly on meaningful diversity and inclusion as a way of avoiding groupthink and ensuring adequate challenge within decision-making.
Firms will need to demonstrate that their governance, risk management and control frameworks are sufficiently robust, both to identify emerging risks, and to cope with these and other risks which crystallise.
Boards will be expected to demonstrate that they take culture seriously, that they have defined and communicated their target culture, and that they have incentivised the right behaviours at all levels throughout the firm.
Regulatory appetite for greater board and senior management accountability is growing. Future episodes of misconduct or excessive risk-taking will lead more regulators to pursue measures to achieve this accountability.

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Scrutiny of firms' business models to the changing risk environment
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Vulnerabilities are building in the real economy and financial system. Supervisors exploring how these risks might crystallise will challenge firms on a range of “what-if” assumptions, focusing on idiosyncratic risks.
Firms also face several structural risks, including from technological innovation, cyber and climate change. These risks are not new, but in 2019 we expect to see a step-up in activity as supervisors demand evidence of firms taking concrete steps to assess and address the risks.
In light of these developments, firms should review the effectiveness of their risk management frameworks and the quality of their strategic thinking and management. Supervisors will expect to see continuing evidence of firms proactively managing risks to their balance sheets and business models. As well as posing a threat, technological innovation presents an opportunity for firms to enhance their management and monitoring of risks.

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Firms’ protection and use of data
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Preventing loss of trust over firms’ use customer data is a top priority for supervisors, particularly in the context of technological innovation.
GDPR and PSD2 will give supervisors both the reasons and the tools to take a closer look at firms’ use of consumer data.
Firms should focus on embedding data management fully into their digital and innovation strategies, in line with the letter and the spirit of GDPR and other relevant consumer protection rules.

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Access and vulnerable customers
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As firms’ use of new technologies and digital distribution grows, regulators’ focus on conduct and consumer protection will mean they become increasingly concerned about the potential for these developments to lead to financial exclusion amongst certain consumer groups.
We expect the FCA’s new guidance on vulnerable consumers to provide firms with a steer on how to identify and categorise them based on their different vulnerabilities, and highlight what sort of actions firms can take to ensure they are treated fairly.
A variety of EU supervisors will look to assess firms’ steps to safeguard elderly and vulnerable customers as part of their MIFID II suitability assessments.

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Testing for cyber vulnerabilities
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Cyber “red-team” testing will become more widespread in 2019, with more jurisdictions beginning to adopt the practice.
The rollout of red team testing in the Eurozone will follow the ECB framework, but national authorities will implement it unevenly across geographies and sectors.
UK authorities will extend their existing CBEST red-team testing programme to a broader group of firms, potentially including more insures and asset managers. Pressure will grow for more international coordination in the cyber risk testing of financial firms, potentially prompting the G7 to produce high-level principles.

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Model risk management
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Supervisors continue to want firms to improve their understanding of the strengths and weaknesses of models used for regulatory capital calculations and strategic decision making; and the governance and oversight of such models.
Firms will need to demonstrate continuous improvement in senior management and board understanding of models, and ongoing improvements in the processes and teams conducting oversight and challenge of both the models and their outputs.
Firms will need to apply model risk standards, oversight and governance to a broader range of existing financial models such as IFRS 9 and IFRS 17/reserving models, as well as other model-like algorithms and approaches to managing non-financial risks.

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Sector-specific issues

Prudential (Banking)
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The EU’s CRD5/CRR2 banking package will be finalised in 2019, clarifying the implementation of many prudential initiatives; progress will be made on plans to complete Basel III in the EU, but legislation will not be proposed until 2020.

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Resolvability (Banking)
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The BoE will continue to push banks to be more resolvable, including using public disclosure of resolvability assessments.
Despite finalisation of the BRRD in 2019, firms will lack clarity on the implementation of MREL and TLAC standards.

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ICAAP, ILAAP, SREP and stress testing (Banking)
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The ECB will push Eurozone banks to incorporate their Pillar 2 assessments into internal risk management.

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Financial Crime (Banking)
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The EBA will prepare to take on EU-wide authority to police AML in banks, although formal authority may not come until 2020.
The inclusion of virtual currencies in MLD5 will bring some clarity to the market and help make the EU more competitive as an innovation hub.

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Capital markets landscape (Capital markets)
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The full benefits of the increase in market data post MiFID II have not yet been realised. Despite this, supervisors will focus on how firms use the increased data to achieve best execution.

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Algorithmic and electronic trading (Capital markets)
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We expect algorithmic trading to increase as more trading moves onto venues and firms focus on reducing costs. Given the detailed rules and expected supervisory scrutiny in this area, firms should focus on algorithm governance and controls.

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Payment for research (Capital markets)
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The MiFID II inducement rules for investment research will lead to some research providers reducing their research coverage or exiting the market.

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Transaction reporting (Capital markets)
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Supervisors will require remediation work on MiFID II transaction reporting in 2019. Effective governance and controls are essential so that as businesses evolve they ensure complete and accurate reporting.

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Traded risk (Capital markets)
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It is almost certain that the FRTB will be implemented in the EU as a reporting requirement first and firms will need to consider what a two-phase FRTB introduction means for their implementation plans.

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Margin, clearing and settlement (Capital markets)
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Firms will need to start preparing for the final stage of IM phase-in under EMIR, which will bring far more counterparties into scope.

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Business model challenges (Insurance)
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The low interest rate environment and technological innovation will continue as the main business model challenges and drivers of change in the insurance sector.
Supervisors will scrutinise conduct, prudential and systemic, risks heightened by changing activities and sources of profitability for insurers, including shifts into higher risk, less liquid investments and activities.

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Changing role of insurers and insurance (Insurance)
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Regulators will develop new policy responses to the changing role of the insurance sector in society in areas such as infrastructure investment, pension and care provision, and releasing housing equity for retirement funding.

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Pricing and distribution (Insurance)
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Regulators will scrutinise pricing and distribution, including InsurTech developments, and will materially strengthen their expectations in areas such as price discrimination and cross-subsidy in support of good consumer outcomes.

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Solvency II review (Insurance)
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The Solvency II review will sceptically re-examine the long term guarantees package and the macro-prudential features of Solvency II. In parallel, EIOPA will focus on differences in national implementation and the long-term rationale for maintaining multiple regulatory and valuation bases for insurance.

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Value for money (Investment management)
View a summary of our predictions for 2019

Transparency in fees and charges and value for money will continue to be over-arching regulatory themes.

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Payment for research (Investment management)
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Investment managers will apply strong scrutiny to the value of the research they receive, but will continue to want broad coverage.

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Fund governance (Investment management)
View a summary of our predictions for 2019

EU supervisors will expect UCITS and AIFMD firms to show greater independence in their oversight of investment managers.

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Product governance and distribution (Investment management)
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As the quality of the MiFID II target market data received from distributors matures, investment managers will be able to draw out useful commercial insights.

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Fund liquidity and leverage (Investment management)
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Regulators will increase their scrutiny of fund liquidity management, and impose more restrictions on fund leverage, particularly for open-ended funds investing in illiquid assets.

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Get in touch

Dimitrios Goranitis

Central Europe FSI leader

digoranitis@deloittece.com

+40 21 222 16 61

Dimitrios Goranitis is Financial Services Industry Risk and Regulatory Advisory Partner in Deloitte Romania. Dimitrios is leading Deloitte’s risk service offering in Central Europe focusing on banking... More

Contact us
Financial Services Industry

Explore Content

At a glance
Our predictions for 2019
Register for the webcast
Regulatory timeline tool
2018 scorecard

Looking beyond EMEA
Subscribe to Regulated Radio
About ECRS

Financial Markets Regulatory Outlook 2019

10 years on from the crisis

Explore Content

At a glance

Our predictions for 2019

Cross-sector themes

Shift from implementing new regulations to ongoing supervision View a summary of our predictions for 2019

Preparing for Brexit View a summary of our predictions for 2019

IBOR transitionView a summary of our predictions for 2019

Climate change and sustainabilityView a summary of our predictions for 2019

Building resilience to operational disruptionsView a summary of our predictions for 2019

Value for moneyView a summary of our predictions for 2019

Supervisory constants:

Culture and governanceView a summary of our predictions for 2019

Scrutiny of firms' business models to the changing risk environment View a summary of our predictions for 2019

Firms’ protection and use of dataView a summary of our predictions for 2019

Access and vulnerable customersView a summary of our predictions for 2019

Testing for cyber vulnerabilitiesView a summary of our predictions for 2019

Model risk managementView a summary of our predictions for 2019

Sector-specific issues

Prudential (Banking)View a summary of our predictions for 2019

Resolvability (Banking)View a summary of our predictions for 2019

ICAAP, ILAAP, SREP and stress testing (Banking)View a summary of our predictions for 2019

Financial Crime (Banking)View a summary of our predictions for 2019

Capital markets landscape (Capital markets)View a summary of our predictions for 2019

Algorithmic and electronic trading (Capital markets)View a summary of our predictions for 2019

Payment for research (Capital markets)View a summary of our predictions for 2019

Transaction reporting (Capital markets)View a summary of our predictions for 2019

Traded risk (Capital markets)View a summary of our predictions for 2019

Margin, clearing and settlement (Capital markets)View a summary of our predictions for 2019

Business model challenges (Insurance)View a summary of our predictions for 2019

Changing role of insurers and insurance (Insurance)View a summary of our predictions for 2019

Pricing and distribution (Insurance)View a summary of our predictions for 2019

Solvency II review (Insurance)View a summary of our predictions for 2019

Value for money (Investment management)View a summary of our predictions for 2019

Payment for research (Investment management)View a summary of our predictions for 2019

Fund governance (Investment management)View a summary of our predictions for 2019

Product governance and distribution (Investment management)View a summary of our predictions for 2019

Fund liquidity and leverage (Investment management)View a summary of our predictions for 2019

Get in touch

Central Europe FSI leader

Explore Content

Recommendations

Shift from implementing new regulations to ongoing supervision
View a summary of our predictions for 2019

Preparing for Brexit
View a summary of our predictions for 2019

IBOR transition
View a summary of our predictions for 2019

Climate change and sustainability
View a summary of our predictions for 2019

Building resilience to operational disruptions
View a summary of our predictions for 2019

Value for money
View a summary of our predictions for 2019

Culture and governance
View a summary of our predictions for 2019

Scrutiny of firms' business models to the changing risk environment
View a summary of our predictions for 2019

Firms’ protection and use of data
View a summary of our predictions for 2019

Access and vulnerable customers
View a summary of our predictions for 2019

Testing for cyber vulnerabilities
View a summary of our predictions for 2019

Model risk management
View a summary of our predictions for 2019

Prudential (Banking)
View a summary of our predictions for 2019

Resolvability (Banking)
View a summary of our predictions for 2019

ICAAP, ILAAP, SREP and stress testing (Banking)
View a summary of our predictions for 2019

Financial Crime (Banking)
View a summary of our predictions for 2019

Capital markets landscape (Capital markets)
View a summary of our predictions for 2019

Algorithmic and electronic trading (Capital markets)
View a summary of our predictions for 2019

Payment for research (Capital markets)
View a summary of our predictions for 2019

Transaction reporting (Capital markets)
View a summary of our predictions for 2019

Traded risk (Capital markets)
View a summary of our predictions for 2019

Margin, clearing and settlement (Capital markets)
View a summary of our predictions for 2019

Business model challenges (Insurance)
View a summary of our predictions for 2019

Changing role of insurers and insurance (Insurance)
View a summary of our predictions for 2019

Pricing and distribution (Insurance)
View a summary of our predictions for 2019

Solvency II review (Insurance)
View a summary of our predictions for 2019

Value for money (Investment management)
View a summary of our predictions for 2019

Payment for research (Investment management)
View a summary of our predictions for 2019

Fund governance (Investment management)
View a summary of our predictions for 2019

Product governance and distribution (Investment management)
View a summary of our predictions for 2019

Fund liquidity and leverage (Investment management)
View a summary of our predictions for 2019