Financial Regulation Horizon Report 2022
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2022 will be a year of consultations and significant engagement with legislators and regulators across the EU and UK. Both the EU and UK have made certain “quick fix” amendments to their MiFID regimes to improve efficiencies in order to support post-Covid market recovery. In the EU an extensive review of MiFID II/MiFIR is coming to a close, with the European Commission putting forward its proposed legislative changes in November 2021. In the UK, HM Treasury is expected to put forward legislation to make wholesale markets regulation more efficient. On CSDR, significant concern around the introduction of the mandatory buy-in regime remains the key outstanding issue as we reach the end of 2021.
Divergence is not simply a case of the UK moving away from EU standards. It is a dynamic process as both the EU and UK develop their own regimes independently but influenced by each other. In 2022, the UK will effect and propose more changes to the EU framework it inherited while the EU pushes forward its own regulatory agenda, some of which will impact firms outside the EU.
The UK government has launched reviews of several areas of financial regulation. In 2022, the policy outcomes of this work will take shape. In many areas (such as prudential regulation, ESG and crypto-assets) the new lodestar for the UK when creating new rules is international standards rather than EU regulation.
The pace of development is set to continue in 2022 with all financial services sectors needing to keep track. Prevention of greenwashing remains a frontline priority, with product level reporting under the EU’s SFDR and Taxonomy Regulation beginning in 2022, as well as the advancement of other disclosure regimes in the EU and the UK. Whilst the buyside may have been hit first, the banking sector faces a very busy year too.
Stress testing by regulators continues at national and EU level, with the results driving the regulators’ focus and scrutiny for the period ahead. The integration of ESG risk into prudential risk management frameworks remains a work in progress, as institutions work to meet the complex and new data demands.
Although the EU IFR/IFD have applied since June 2021, some Member States are yet to implement the directive, and various technical standards and guidelines are yet to enter into force. In the UK, firms are hurtling towards 1 January 2022, when the new prudential regime for investment firms (IFPR) starts to apply. 2022 will see firms in the EU and UK finalising implementation and, importantly, taking stock and making adjustments in line with emerging market practice and commentary from regulators. Several key regulatory publications are also to come.
The line between tradfi and fintech continues to blur as financial institutions increasingly engage in markets for crypto-assets. This crossover presents novel risks for regulated firms, especially as the regulatory approach is still being developed. Fintech may be caught in a pincer movement as prudential, conduct, AML, competition and data standards tighten.
As cash phases out, more attention will be paid to the payment models which replace it. Although subject to standalone regimes, payments firms find themselves increasingly held to the same standards as FSMA-authorised firms. Meanwhile, central banks will spend 2022 making the case for introducing digital currencies.
The UK Government aspires to exercise greater autonomy in AML regulation post-Brexit. 2022 could still see the first significant divergences between UK and EU AML regulations – increasing compliance burden on multi-jurisdictional firms.
The FCA finalised its guidance on the treatment of vulnerable customers and issued a wide-ranging consultation on the implementation of a new consumer duty, to apply across the industry. It also published details of its three-year strategy to mitigate consumer investor harm.
The FCA continues to develop its thinking around how best to improve conduct and culture within financial services. This is becoming a common feature of supervisory discussions, with the FCA increasingly demanding metrics and evidence from firms that they are meeting the regulators objectives.