Financial Markets Regulatory Outlook 2018
Bringing it all together
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.
The European financial services industry faces considerable strategic challenges in 2018. There is a large volume of implementation work being carried out, alongside uncertainties around the future shape of regulation. And though many initiatives have their roots in the financial crisis (now ten years past), others – such as work to address cyber resilience, Brexit, and Open Banking – reflect more recent concerns. Click the headings below to read the full executive summary or scroll down to explore the issues in detail.
The Outlook at a glance
Looking at the breadth of topics covered in this year’s Regulatory Outlook, we are struck by a number of common threads that emerge from the detail.
- The industry faces many resource constraints and numerous competing priorities. With business models already under pressure, it can be difficult for regulated firms to do the bare minimum, let alone invest to become best in class.
- There is considerable uncertainty across the board: the outcome of Brexit remains unknown, there are important regulatory technical standards outstanding in several areas, and the impact of new rules on markets will take time to play out.
- The ecosystem of financial services is changing. MiFID II will intentionally overhaul the trading landscape, but old and new players will forge different types of connection, particularly through technological innovation and third party service providers. The shape of markets is changing, and with this the nature of risk in the system.
- Technology provides opportunities to do old things better and to introduce new products, services and ways of working. But it also creates risks for firms whose business models will be challenged, and risks for consumers where its use is not well understood or controlled.
- Customers’ relationships with firms are changing. Firms are looking to use customer data in novel ways, but customers are also set to gain stronger rights over how their data is used, while new technologies are enabling new types of interactions between customers, firms and third parties.
How individual firms respond to these issues will dictate who will succeed and who will struggle in the years ahead.
Regulatory strategy in 2018
We have identified seven thematic issues of strategic significance for all sectors of the European financial services industry in 2018, alongside a number of additional sector-specific issues.
Our cross-sector themes span a wide range of issues. 2018 is a year of multiple regulatory deadlines, including MiFID II, PSD II and GDPR, and our first theme examines industry’s efforts to “get over the line” in terms of compliance. Our second theme is Brexit, and we set out what industry will need to do against a backdrop of political and regulatory uncertainty. Third, we look at the business model challenges posed by the macro-economic environment, competition initiatives, and regulatory change. Fourth, we examine whether and how industry efforts to utilise customer data in novel ways can be reconciled with new data protection rules and supervisory expectations of the fair treatment of customers. Fifth, we observe significantly higher supervisory expectations and approaches regarding the treatment of vulnerable customers. Sixth, we consider the ever-present threat posed by cyber attacks, and the increasing supervisory emphasis on cyber resilience. Last, but not least, we assess the evolving landscape for model risk management in an environment in which a large proportion of assets in the financial system, and the level of capital supporting them, are managed using approved internal models.
Beyond our cross-sector chapters, we also highlight a number of issues we consider to be “supervisory constants”. These remain the core priorities and activities of supervisors. Although we do not see major new formal policy initiatives emerging in 2018, these issues should nevertheless be given the attention they deserve by firms owing to the high importance placed on them by supervisors.
Supplementing these, we present our views of a number of strategically significant sector-specific issues:
- Banks must contend with slow progress on the prudential framework, the intersection of IFRS 9, stress testing and other requirements, evolving resolvability expectations, and the instigation of the “open banking” era.
- Capital markets will respond to and be shaped by the introduction of MiFID II, particularly in terms of the trading landscape, data and reporting, and best execution.
- Insurers are grappling with continuing regulatory change in the context of technological disruption, a persistent soft market and a continued low yield environment that is necessitating changes in asset strategies, business models and risk appetite. They also face challenges in delivering the product innovation needed to meet changing customer needs.
- Investment managers’ business models are being scrutinised, with the margin between passive and active fund fees set to be squeezed. They also face the prospect of continuing supervisory review and potential intervention to address systemic risk concerns.
Explore the findings
Select issues and sectors of interest to receive a customised output of our analysis.
Meeting multiple regulatory deadlines: getting over the lineThe focus on meeting multiple regulatory deadlines in 2018 will come with a significant opportunity cost – firms will not have been able to exploit synergies to the full, will have diverted resources from other strategic priorities and will likely have to undertake significant remediation work post-deadline to make compliance efficient and effective. Read more...
Preparing for business post-BrexitFirms and supervisors will continue preparing for Brexit in a world of uncertainty, where the detail of both political and regulatory developments will be unveiled during the course of the negotiation period.Read more...
Business models under the supervisory spotlightThe macro-economic environment, competitive forces and regulatory change continue to put pressure on traditional business models across the financial services industry, and in some cases are driving changes to business models and risk appetite. Read more...
Data protection and innovation
Data protection and innovation: ensuring good customer outcomesAgainst a backdrop of increasing concerns about the use of personal data and data privacy, firms can expect greater supervisor scrutiny of their approaches to their use of, and controls over, personal data. Read more...
Broadening the perspective on customer vulnerabilityRegulators are increasingly recognising that legislation, products and services are often built for the “average” consumer, and that while these work satisfactorily for many, supervisors nonetheless need to focus on certain consumer groups whose situational vulnerability may leave them less able to secure their own interests and hence at greater risk of suffering poor outcomes. Read more...
Intensifying supervisory focus on cyber risk and resilienceThe regulatory focus on the heightened cyber risks created by technological change and increasingly digital business models is not new. In 2018, however, we will start to see regulators flex their muscles and begin to articulate clearer priorities for what firms need do to prepare for cyber threats. Read more...
Oversight of internal models
Internal models: complexity, supervision and oversight2018 will see a concerted push from national and supranational regulators on the risks posed by capital and other models to firms and the financial system. Read more...
Regulatory and supervisory constants
At the heart of supervisionThere are innumerably more regulatory and supervisory issues for financial services firms and their Boards and senior management teams than we have space to do justice to in this document. This is, emphatically, not to diminish their importance, either for regulators or for firms. In this section we draw out core supervisory issues that will continue to form a crucial part of “business as usual” supervision. Read more...
Bank prudential agenda - Banking
The prudential framework: slow progressFurther progress will be made in finalising the post-crisis prudential framework, but the slow speed of negotiations and variable implementation around the world will mean that uncertainty over its long-term impact on banks’ business models and product lines will persist. Read more...
IFRS 9, stress tests, NPLs and disclosure – Banking
The intersection of IFRS 9, stress tests, NPLs and disclosureBanks are having to deal with the simultaneous introduction of new accounting rules, an intensifying focus on asset quality and NPLs, an evolving stress testing framework, and a possible hardening of supervisory attitudes towards the use of internal models. Read more...
Resolvability – Banking
Resolvability: yet to be resolved2018 will be a test of whether regulatory and political authorities are fully subscribed to the aims of the resolution agenda. Read more...
Open Banking – Banking
The Open Banking era beginsOpen Banking is intended to shake up the payments market by requiring banks to provide TTPs with customers’ transactional data and access to customer accounts to make payments on the customers’ behalf. But the Open Banking revolution will get off to a slow start while several regulatory questions remain to be answered. Read more...
Trading landscape – Capital Markets
The changing trading landscape and market structureMiFID II goes live on 3 January 2018, and will transform the way in which numerous products are traded in the EU’s capital markets. Read more...
Data and reporting – Capital Markets
Getting the data rightA variety of factors will cause firms to consider how they collate, hold, report, and use data in 2018, with MiFID II set to provide particular challenges. Read more...
Best execution – Capital Markets
A more demanding best execution regimeFirms will need to test, monitor and make adjustments to their strategies for overseeing best execution, and continue to evidence that they are taking steps to deliver better client outcomes. Read more...
Regulatory capital change – Insurance
Continuing regulatory and capital change for insurersTwo years on from the landmark regulatory changes brought about by Solvency II, reform to aspects of the prudential insurance regime is still being debated. However, 2018 will be dominated by discussions about future changes rather than implementation. Read more...
Low interest rates – Insurance
Insurance profitability and low interest ratesThe low interest rate environment will continue to be the defining influence on supervisory activity in the insurance sector. Read more...
Soft market squeeze – Insurance
General insurance profitability and the soft market squeezeThe persistent soft market will continue to challenge insurers and supervisors in 2018, creating a double-edged risk for supervisors as profitability remains squeezed and underwriting standards and policy term limitations potentially deteriorate. Read more...
Disruption and innovation – Insurance
Meeting customers’ changing needs through innovationThe rate of product innovation and disruption in general insurance will accelerate in 2018, as firms further explore the potential of data to develop underwriting, pricing and product delivery. Read more...
Business model and new regulation – Investment Management
Asset management business models and new regulationCompetitive pressures coupled with heightened regulatory scrutiny will lead to a steady compression of the margin between active and passive fund management costs, particularly for retail funds, and to increased momentum towards consolidation. Read more...
Systemic risk – Investment Management
Regulatory responses to systemic risk concernsCalls for more intensive regulation of asset managers due to residual systemic risk concerns will not go away, but we do not expect individual firms to be designated as globally systemically important in the same manner as is the case in banking and insurance. Read more...
Webcast: Exploring the Outlook 2018
To discuss the Outlook’s predictions and their potential impact on the financial services industry in 2018, Deloitte partners David Strachan, Andrew Bulley, Cindy Chan and Tom Spellman were joined by Alastair Barbour of RSA Insurance, Mark Wharton of Morgan Stanley and Stephen Sanders of JP Morgan.
About the EMEA Centre for Regulatory Strategy
The Deloitte Centre for Regulatory Strategy is a powerful
With regional hubs in the Americas, Asia Pacific and EMEA, the Centre combines the strength of Deloitte’s regional and international network of experienced risk, regulatory, and industry professionals – including a deep roster of former regulators, industry specialists, and business advisers – with a rich understanding of the impact of regulations on business models and strategy.