Financial Markets Regulatory Outlook 2017

Navigating the year ahead

Deloitte's EMEA Centre for Regulatory Strategy has published ‘Financial Markets Regulatory Outlook 2017’ – their annual assessment of how major regulatory developments will shape the financial services industry next year, and how firms can respond to these trends.

"Firms need to refresh their strategies for how they respond to regulation and how they do business in a regulatory, economic and political environment that could be fundamentally more constraining. Not all firms will succeed in doing this in the year ahead. Those that do will find ways of making this new environment work for them, capitalising on their inherent resilience, agility and efficiency."

Significant challenges

2017 will bring significant challenges to financial services firms across EMEA, in the form of heightened macro-policy uncertainty, the implementation of a demanding and still evolving regulatory agenda, and other market developments putting pressure on the industry.

Key issues

The report 'Financial Markets Regulatory Outlook 2017' delves into the challenges and opportunities arising from the following key issues:

  • Brexit

The picture for EU market access remains unclear for firms assessing the impact of Brexit on their business model and strategy. While supervisors in the UK and EU will be watching firms' preparations and actions closely, we do not expect regulatory changes while the UK remains a member of the EU. In the light of continuing uncertainty, firms may decide to start implementing their contingency plans during 2017.

  • Resolvability

In 2017, resolvability will become the driving force behind structural reform in the EU. The SRB will push Eurozone banks to demonstrate their practical preparedness for resolution as EU and international regulators step up their work on CCP resolution. Resolution regimes for insurers, however, will be less of a priority.

  • Financial resilience

Following the BCBS's conclusion of most of its work on the risk framework early in 2017, the EU will deliberate how to adopt the new capital standards, while protecting the region's economic priorities. Banks will have to deal with uncertainty over the final shape of the rules as well as enhance balance sheet management capabilities for TLAC, MREL and IFRS9 implementation.

  • Conduct and culture

A whole array of frameworks will be introduced to manage conduct risk, instil cultural change and improve product governance standards in 2017. Firms will also work to embed conduct risk appetite into their processes at all levels of their organisation. In addition, conduct risk will be increasingly monitored by prudential regulators as part of ICAAP assessments and stress tests.

  • Regulation of new technologies

FinTech will continue to change the industry, along with Artificial Intelligence and data analytics. Innovative entrants will find more support from European and national regulators, who will also investigate the potential risks associated with them. While PSD II presents many business opportunities, both FinTech firms and retail banks will find its implementation challenging, in part because of the lack of specificity in some of its provisions.

  • Cyber and IT resilience

Spurred by a number of high-profile attacks on firms, supervisors will increase their focus on cyber resilience. Supervisory expectations will include more detailed planning for responses to scenarios such as cyber breaches and technological failures. Firms will increasingly use testing, war-gaming and red-team exercises to demonstrate the robustness of their resilience plans.

  • Opening up markets

Increased competition and the higher degree of transparency and disclosure on products and pricing under MiFID II and PRIIPs will shift the ground for all firms providing investment products. In the UK, the introduction of pension freedoms will intensify competition between life insurers and investment managers in the retirement market. Banks will need to determine their strategic positioning following strengthened competition in the payments market.

  • Evolution of the trading landscape

The introduction of new trading venues and the entry into force of the clearing and margining requirements will reshape how firms develop and execute their trading strategies. The authorisations and registrations for trading venues in preparation for the implementation of MiFID II will further play a crucial role. Firms will also choose to clear an increasing volume of OTC derivatives centrally.

  • Controls efficiency

RegTech promises to enable firms to push down costs, rein in compliance risk and improve controls. However, the effective implementation of RegTech solutions will require up-front investment that may be hard to justify in the difficult commercial conditions that will prevail in 2017. For this reason we expect the adoption of RegTech to be gradual as firms seek to demonstrate how such investment will add value to the business.

  • Governance strategy

Boards and senior management teams will come under increasing pressure to show supervisors that they can effectively manage groups comprising a multitude of legal entities and activities spanning numerous countries. Questions related to organisational complexity will be raised, whether on the functioning of intra-group relationships or the ability of subsidiaries to operate independently of their parent company if the need arises. This, however, will be an opportunity for firms to reduce their complexity and, in so doing, become more manageable organisations. 

  • Business model sustainability

In re-shaping their business models, firms hold the key to managing costs and restoring returns. As firms respond to the need to address new regulations and tackle increased macro-policy uncertainty, they will need to re-shape their financial resources to allow for strategic ?exibility and efficiency. Supervisory and resolution authority discussions will add further pressure to integrate regulatory compliance, stress testing and resolution planning more comprehensively into business strategy and strategic planning.

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