Financial Regulation Horizon Report 2021

The expectation was for a year shaped by Brexit preparations, with operational resilience occupying a strong second place given the continued ascent of FinTech and BigTech and some high-profile disruptions. But then Covid-19 came to Europe, with its far-reaching impact on the financial services sector, its markets and the wider economy it serves.

Impact of Covid-19

Nearly every programme of regulatory change has been impacted: the “working from home” model with market conduct, conflicts, SMCR, governance and control implications; forbearance in the usually strict AML/KYC space to get the rescue package quickly to those who needed it; the postponement of new rules on operational resilience, whilst the sector managed its own lived-through disruption; and a succession of “quick fix” changes to other requirements to facilitate market recovery.

Vulnerable Customers

Whilst many areas saw a short-term slowdown in regulatory change, not so for the fair treatment of consumers, and especially vulnerable customers. Access to cash, treatment of arrears and payment holidays in the mortgages, loans and credit space have been prioritised. The “TCF” agenda has been shaped by the needs of this group during the pandemic.

Operational Resilience

Of course, focus on operational resilience has not gone away. Delays to new rules have made way for response to the present disruption. The pandemic’s impact on firms has been and will be evaluated for its lessons learned on readiness and response to be built into the new framework. Whilst the pandemic is a different kind of crisis to that typically envisaged, it has provided its own case study for the effectiveness of business continuity planning and governance frameworks.

The detail

In our Financial Regulation Horizon Report 2021, we cover the broad sweep of regulatory change affecting the financial services, with an eye on what’s coming next and what needs to be done to be ready. For each we reflect on the consequences of UK and EU divergence, and on the consequences of the pandemic.

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Topics covered in our Horizon Scanning report

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UK’s Future Regulatory Framework

UK Future

What should financial regulation look like after Brexit? The UK government’s consultation on the future UK framework triggers a broad review of areas in which the UK may begin to diverge from EU rules. This work will have consequences for all financial institutions doing business in the UK, including those operating on a cross border basis into the UK.

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Prudential regulatory developments and remuneration

Prudential

EU investment firms will have to comply with their new prudential regime from June 2021, with a January 2022 application date for firms subject to the UK’s version. There will be work to be done around K-factor calculations and there may be significant changes to the remuneration of material risk takers.

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MiFID II and other cross sectoral financial services legislation

MiFID

Many EU cross sectoral developments have been postponed in favour of “quick fixes” designed to manage recent market instability. The MiFID II review was stalled and CSDR implementation has been delayed. These delays have shown up the earliest divergences between the EU regime and developing UK approaches. Understanding the consequences of the different regimes will be critical for global firms.

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Sustainable Finance

Sustainable Finance

The integration of climate change risk as a financial risk into prudential risk management is a core expectation of 2021. This has significant data, governance and oversight consequences. For the buyside, disclosure as a tool to prevent greenwashing will be the focus, with compliance obligations arising from multiple sources and at all stages of the investment cycle.

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Financial Crime

Financial Crime

2021 will see regulators taking an increasingly holistic approach to mitigating financial crime risks arising in the wake of Covid-19, including fraud and scams, market abuse and market conduct issues. Rigorous surveillance, AML, CTF and ABC measures plus effective sanctions screening will be more important than ever.

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Fintech

Fintech 

The tension between the need for more regulation in this space and the ambition to make the UK the “leading global destination to start, grow and invest in fintech” will continue to play out. There will be regulation of stablecoins, crypto-assets and crypto-derivatives, as well as steps to encourage fintechs to set up in the UK – and stay as they grow.

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Payments

Payments

The pace of change will accelerate in 2021: feedback on the Treasury’s Payments Landscape Review, consultation on the PSR’s competition and future payment methods strategy, focus on access to cash, the compliance deadline for strong customer authentication requirements and development of the UK’s open banking framework. In the EU, there will be the Retail Payments Strategy and the launch of a comprehensive review of PSD2.

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Operational Resilience

Governance

The Covid-19 response is viewed as a positive example of the sector’s resilience. The 2021 focus will be on what firms should do to withstand other causes of disruption like data breaches and IT systems outages. There are lessons to be learned from the response to the pandemic, for example business continuity planning and governance frameworks, and these should feed into firms’ plans.

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Governance, Culture and Conduct

Governance

Culture is seen by the FCA as the key to good conduct, and is increasingly focused upon in its supervisory and enforcement engagement with firms. A “purposeful” culture is encouraged, whilst there is concern around firms’ skills and capabilities in identifying their specific conduct risks.

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Preventing Consumer Harm

Consumer Harm

The FCA’s focus on fair treatment of consumers, particularly those in vulnerable groups, has increased during the pandemic. Firm’ treatment of customers, especially vulnerable ones, who find themselves in financial difficulties will be scrutinised closely by regulators and the public. The industry is under pressure to avoid a repeat of the customer treatment issues identified post-financial crisis.

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