Financial Regulation Horizon Report 2021
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.