We start a new year with a raft of expected regulatory activity but renewed uncertainty about the overall direction of travel. The new political context within Europe and in the US is already beginning to show signs of influencing regulatory debates. It is not yet clear, however, what impact the new geo political environment will have on the trend, post-financial crisis, towards the convergence of worldwide regulatory standards. Will the trend slow, or will it even be reversed?
The first indication can, perhaps, be seen in the discussions on 'Basel 4', which is delayed. And in the insurance sector, achieving formal ratification of the recently-announced EU-US agreement on prudential measures (covering reinsurance, group supervision and exchange of information) will be another.
The work programme of the Financial Stability Board (FSB) and IOSCO, and the degree of commitment by national and regional regulators to implement their recommendations and guidelines, will also be an important litmus test. We comment in this edition on the FSB’s work on Internal ‘TLAC’ and continuity of access to financial markets infrastructure. Also, the FSB has issued policy recommendations for open-ended investment funds to address perceived structural vulnerabilities from asset management activities. The majority of the recommendations relate to liquidity management concerns. It will be interesting to see whether they are adopted for US mutual funds, for example.
Within Europe, the new Council Presidency, Malta, has set out its priorities for the first half of the year for financial services regulation. These include:
It will also seek to reach political agreement on amendments to the 4th Anti-Money Laundering Directive.
Meanwhile, work continues by the European Supervisory Authorities (ESAs) on the detailed rules and guidance needed to underpin new Level 1 legislation. As well as finalising the long list of measures to implement MiFID II and MiFIR, they must now work on measures to implement the revised Prospectus Directive, which will require a balance between simplicity of process and sufficient information for prospective investors. The ‘Level 2’ process is not all smooth sailing, as our update on final rules for the PRIIP KID makes clear.
The ESAs are finding the time to look at wider issues, too. We comment this month on their joint reports on ‘Big Data’, on which they seek views on potential benefits and risks, and on the automation of financial advice. Their remit to encourage convergence in approach by national regulators is also on the agenda. EBA is consulting on the supervision of ‘significant-plus’ branches and ESMA has issued its second peer review on the implementation of Best Execution requirements. While there has been progress since the first review in 2015, it is notable that some regulators still have not prioritised work on this issue and a few claim that they are not relevant given the specificities of their national markets – investors regard not achieving best execution as a low risk, apparently.
Amidst this active regulatory agenda, it is important not to miss other proposals that are finalised with relatively little fanfare. The recently agreed revisions to the Directive regulating Institutions for Occupational Retirement Provision (IORPD II) might be an example. It includes amended rules on eligible investments and introduces new requirements on governance, outsourcing and depositary. It does not require EIOPA to produce technical provisions, but it must receive from national regulators information about IORPs they have registered and in which other Member States those IORPs are active.
The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, postponed its planned discussion (originally scheduled for 8 January) of the Basel Committee’s work on credit risk, operational risk, the capital floor and the G-SIB leverage ratio.
The GHOS welcomed the progress made towards completing the Basel Committee's post-crisis regulatory reforms, but considered that more time is needed to finalise some of this work.
No date has been set for when the GHOS will discuss the Basel Committee’s proposals, but March now looks like a strong possibility.
The Financial Stability Board (FSB) has published two consultation papers relating to resolution – on internal total loss absorbing capacity (TLAC) and on firms’ access in resolution to financial market infrastructure (FMI).
The Financial Stability Board (FSB) has issued 14 policy recommendations to address what it describes as structural vulnerabilities from asset management activities. Nine of the recommendations relate to liquidity management, and the others to leverage, securities lending and operational risk management.
Within Europe, many of these recommendations are already in place in EU or national requirements, but a few – such as industry-wide stress testing – are new. Also, the FSB says it will now revisit assessment methodologies for identifying non-bank, non-insurance globally systemically important financial institutions (NBNI G-SIFIs) – a major bone of contention for the industry.
In October we reported on a first in European regulatory process: the European Parliament rejected the Regulatory Technical Standards (RTS) essential to put the flesh on the bones of the ’PRIIP KID’. Subsequently, we informed readers that the rules were being revised by the European Commission and the European Supervisory Authorities (ESAs) and that, after much political speculation, the Commission had formally announced a delay of one year to the implementation deadline. The New Year brings a further twist: the ESAs do not agree on the proposed revisions to the RTS.
Political agreement was reached just before Christmas on a revamp of the EU requirements on prospectuses for issuing securities. This achieves a key goal of the Capital Markets Union (CMU) project, to broaden the fundraising options for business investment and growth. The revised rules aim to simplify the process for SMEs while providing the information investors want.
Under their remit to monitor emerging risks for consumers and financial institutions, the Joint Committee of the European Supervisory Authorities (ESAs) is seeking comments by 17 March on its Discussion Paper on the use of ‘Big Data’ by financial institutions. The ESAs define Big Data as the collection, processing and use of high volumes of different types of data from various sources, using IT tools, in order to generate ideas and solutions or to predict certain events or behaviours. They observe the increase in the use of Big Data – albeit to varying extents across the sectors and across the EU – and seek views on potential benefits and risks.
At the end of 2016, IOSCO issued a further report on the growing use of automated advice tools. Also, the European Supervisory Authorities (ESAs) issued a summary report on responses to their Discussion Paper of December 2015 on the increasing phenomenon of automated tools that help consumers take decisions about different types of financial products. In both reports, the term ‘advice’ is not used with the narrow meaning in European regulation but encompasses also ‘guided sales’ and analytical tools. Neither report proposes immediate changes to existing, nor new, guidance or regulation, but both state that these bodies will continue to monitor closely developments in the market place and, by extension, that national regulators should do the same.
The European Banking Authority (EBA) has issued a consultation paper (PDF, 387KB) on the supervision of ‘significant-plus’ branches.
These proposed guidelines set out how the home (parent) and host (branch) supervisors should cooperate in the intensified supervision of ‘significant-plus’ branches. This does not affect the tasks and responsibilities of home and host supervisors, nor change the regulations applying to the banks concerned.
The requirements on firms to obtain best execution for orders from clients or placed on their behalves is again under scrutiny at global and European levels. Both the International Organization of Securities Commissions (IOSCO) and European Securities and Markets Authority (ESMA) issued papers at the end of last year. The papers focus on an analysis of the current rules in different jurisdictions (noting where new regulation is soon to come into effect) and on the extent to which national regulators actively supervise firms’ compliance with them. In particular, ESMA’s paper covers the current EU rules (MiFID I) and notes the changes expected under MiFID II.
‘IM regulatory insights’ is a monthly update from Julie Patterson, Head of Investment Management, Regulatory Change, Financial Services Regulatory Centre of Excellence, EMA region. The latest edition considers the bumpy road ahead and Critical questions for firms to address. Click here to read more. The full IM regulatory insights series can be accessed here.
In December, KPMG published a report that looks ahead to what we expect will be the completion of what we have long been calling 'Basel 4', when the Basel Committee publishes its a number of papers in 2017. This report is part of an overall series of reports that we will publish covering the Basel Committee's forthcoming papers.
This paper analyses five drivers of bank profitability and their combined impact on banks and the overall economy.