Basel III is done, what’s next?

Published: 8 February 2018

With the finalisation of Basel III, the regulatory agenda in Asia Pacific will now become firmly focused on the future, according to Deloitte’s Financial Service Regulatory Outlook for 2018. 10 themes for 2018 are identified in the publication, including the potential for divergence in global regulation and continuing pressures to improve industry culture and conduct, with a particular focus on individual accountability, industry codes and embedding customer centricity. Innovation, data management, digital disruption, and cyber resilience will also be top of mind for Asia Pacific supervisors. Looking further ahead, firms should expect growing regulatory interest in the opportunities and risks associated with climate change and ageing populations.

“A sense of ‘policy fatigue’ has been taking hold from a global perspective, following a decade of intense post-crisis rule-making. This was apparent in the difficulties in reaching agreement on final calibrations to Basel III reforms, as well as slipping timelines for local implementation of international regulation,” said Kevin Nixon, Global & Asia-Pacific Leader, Centre for Regulatory Strategy, Deloitte. However, “There is still a long tail of implementation ahead and firms will be under pressure from more intense supervision going forward. What is more, risks within the financial services industry continue to evolve and with this comes a shift and change in regulatory interest. This is very much evident in the intensity of supervisory activity around firm conduct, and also disruption and innovation.”

Similar to their APAC counterparts, Deloitte China Financial Services Risk & Regulatory Leader Tony Wood commented that regulators in Chinese Mainland and Hong Kong are aligning their position by making frameworks and policy settings more conducive to digital innovation in financial services. At the same time, leading technology and e-commerce businesses in China have proactively ventured into the realm of financial services. 

“Such developments imply significant challenges for existing financial institutions, which should acknowledge the need to significantly bolster the technological skillset of their people and to develop a more customer-centric business approach. They should also make it a top priority to derive insights from digital data, as well as to hone their capability in risk data analytics,” he added. 

The Deloitte Asia Pacific Centre for Regulatory Strategy report identifies the top ten themes that will shape financial services regulation in Asia Pacific during 2018. The themes are further grouped into four focus areas: the future of global regulation, culture and conduct, data and digital disruption, and emerging structural risks.

The future of global regulation

1. Dealing with divergence and uncertainty

The political trend in many countries around the world away from a globalist approach to policy making has raised questions about the future of globally agreed standards for financial regulation. While an element of uncertainty will remain, there is likely to be a slowing in the pace of regulatory integration (rather than a full scale reversal) and a focus on supervision (rather than new rule-making).

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 recent refinements to the Basel III framework 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. For example, many firms in Asia Pacific have been struggling to understand how the EU’s MiFID II will apply to them.

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 individual accountability and responsibility for conduct, particularly for senior management.

5. An increasing emphasis on industry codes and professionalism

Reforming culture within FSI has been a priority for regulators across Asia Pacific and will continue to be 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 within 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. Regulators are also beginning to ask firms to play a role in enhancing financial literacy. At the same time, regulators remain vigilant about strong anti-money laundering and counter-terrorism financing (AML/CTF) and customer due diligence.

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 FSI. Regulators also want industry to be far more open and transparent with its 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

Harnessing opportunities and managing risks brought about by innovation in financial services has been a regulatory priority for the past few years; this will not change in 2018. The discussion 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 as 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 in 2018, but resilience in the system as a whole will take on more prominence.

Emerging structural risks

10. Assessing the impacts of ageing populations and changing climates

Regulatory attention has turned to two looming developments: ageing populations and climate change. At first, these would not appear to be concerns with which financial services regulators have traditionally grappled, but they will, increasingly, be considered in supervisory approaches and work plans in 2018 and beyond, as they present risks and opportunities for financial services firms.