The volume of activity along the current regulatory pipeline remains high, but it is now concentrated in two distinct parts of the pipeline. Firms need to keep an eye on and seek to influence the evolving regulatory horizon, even though resources are stretched in implementing swathes of new rules.
One very large bulge in the pipeline is detailed rule-making and issuing of guidelines by the European Supervisory Authorities (ESAs), which underpin the many new Level 1 Directives and Regulations. MiFID II is giving rise to a substantial proportion of that work. Coupled with national regulators' domestic implementation programmes, this alone is requiring major resource spend for banks, investment managers and other investment firms, including - for the first time - commodity firms.
Not only is this bulge in the pipeline close and very large, it is not all flowing smoothly. After much political speculation, the Commission has formally announced a delay of one year to the implementation deadline of the "PRIIP KID", which brings it into line with the revised deadline for MiFID II of January 2018. This is welcome, but unfortunately some of the preparatory work already undertaken may need to be re-done. It remains unclear whether the resulting disclosures in the KID will be meaningful for retail investors.
The second bulge of regulatory activity sits further out on the regulatory horizon. The Financial Stability Board and international regulatory bodies continue to debate the question of systemic risk in the insurance and investment management sectors and what additional rules or supervisory focus might be justified. Read more about systemic risk below.
Under the banner of Capital Markets Union, the Commission is indicating that it means business and is working on a number of initiatives. This month we report on the latest discussions between officials and industry on the proposal for a pan-EU Personal Pension Product. Read more about Capital Markets Union below.
It is not only new rules and policy proposals that firms need to monitor closely. The Commission, the ESAs and national regulators are setting out their monitoring, investigative and supervisory priorities for the coming year. The ESAs share some common themes: supervisory convergence, data collation and analysis, and consumer protection. Also, the internal governance of firms and a focus on costs and charges remains high. Read more about the ESAs below.
I hope you find the articles below interesting. If you would like further information on any topic or have any questions, please do not hesitate to contact me or your usual KPMG contact.
Head of FS Markets
The European Commission, the three European Supervisory Authorities (ESAs) and the Joint Committee of the ESAs have all published their work programmes for 2017. Regulation remains work in progress. There are several common themes emerging across the different work programmes, including: promoting supervisory convergence; improvements around data collection, analysis and dissemination; and consumer protection.
Two significant papers were issued on governance at the end of October. The European Banking Authority (EBA) published a consultation paper (PDF, 490KB) on a new version of its Guidelines on Internal Governance (last published in 2011). The EBA and ESMA issued jointly for consultation (PDF, 914KB) a set of draft guidelines on how a firm should itself assess the suitability of Board members and senior management, under the requirements of CRD4 and MiFID 2.
A cornerstone of the European Commission's plans for Capital Markets Union (CMU) is to boost the level of savings going into investments. The principle being if you link long term savers to long term investments you get the double benefit of better retirement provision and deepening capital markets options for business finance. The challenges to progress are significant but given the right level of engagement by industry and genuine political support the size of the prize is substantial.
The Basel Committee has published its final standard (PDF, 202KB) on the regulatory treatment of banks' investments in TLAC (total loss absorbing capacity). The essence of the standard is to extend the current rules to holdings of TLAC that do not otherwise qualify as regulatory capital. Such holdings would be deducted from the holding bank's own Tier 2 capital (note: not from the holding bank's non-regulatory capital TLAC). The detail is rather more complicated.
The Basel Committee has published both a consultative paper (PDF, 318KB) and a discussion paper (PDF, 311KB) on the regulatory treatment of accounting provisions. There are two dynamics in play here. First, the move to expected credit loss (ECL) accounting is likely to increase the overall amount of loan loss provisions in many banks, and to reduce significantly the capital ratios of some banks. Second, the current regulatory treatment of accounting provisions is based on a distinction between specific and general provisions, at least for the standardised approach, whereas ECL accounting does not generate separate calculations of general and specific provisions.
The IMF's latest Global Financial Stability Report argues that life insurers' portfolios may have become more similar in their exposures to market risk. In particular, interest rate sensitivity may have increased as a result of more pronounced negative duration gaps (maturity of liabilities longer than that of assets), an increase in products with minimum guarantees and higher cross-asset correlations. As a result, life insurers' investment behaviour may have become more procyclical and they may reinforce shocks rather than absorb them. A common negative shock affecting life insurers (for example, a downward shift in government bond yields) could be compounded by insurers selling corporate bonds.
On 6 October 2016, the European Banking Authority (EBA) launched a Consultation Paper on the Guidelines on Information and Communication Technology (ICT) Risk Management under the Supervisory Review and Evaluation process (SREP). The draft Guidelines are addressed to competent authorities and aim at promoting common procedures and methodologies for the assessment of ICT risk.
Many European banks have struggled with low profitability since the financial crisis. This report uses analyses from KPMG Peer Bank to try and answer the questions of "Why is bank profitability so low in Europe?" and "How can banks increase their profitability?" Some EU banks may boost their profitability through hard work. For others this is likely to be a lost cause.
"IM regulatory insights" is a monthly update from Julie Patterson, Head of Investment Management, Regulatory Change, Financial Services Regulatory Centre of Excellence, EMA region. This latest edition focuses on socially responsible investment (SRI) and how it is beginning to move up the regulatory agenda. The full IM regulatory insights series can be accessed here.
With the backdrop of requirements for greater controls and disclosures, insurance companies face increasing challenges in managing their global tax risks and reporting requirements. Furthermore, with increased regulatory requirements, insurance companies need to accurately model their taxes under a variety of scenarios.
On October 25, 2016 the European Commission published legislative proposals to relaunch its Common Consolidated Corporate Tax Base initiative, as well as new measures to combat hybrid mismatches, including those involving non-EU countries, and to improve the existing procedures to resolve disputes involving double taxation within the EU.