Europe

Significant macroeconomic headwinds including a Covid-19-induced recession, mounting debt and the end of the Brexit transition period will impact all areas of financial services in 2021, meaning plenty more work for compliance departments over the course of 2021. By Frank Brown, risk and transformation practice lead at Bovill.

The macroeconomic factors looming over the UK in January 2021 will have a particularly significant impact on consumer demand and behaviour. They are also shaping the regulators’ thinking and will be reflected in their areas of focus. Firms must put in the work early to ensure they are prepared for the changes this will necessitate.

Governance

The administrative rollout of the Financial Conduct Authority’s (FCA’s) senior managers and certification regime (SM&CR) will be completed for solo-regulated firms in March 2021, but the application of the regime remains a work in progress. 

Bovill recently analysed FCA data and found that almost five years since the regime was introduced, and one year since it was extended to solo-regulated firms, the SM&CR had only one enforcement action to its name. This does not inspire confidence in its efficacy.

However, we expect that this will change in 2021. In the latter half of 2020, Bovill was already seeing a significantly greater focus on governance in section 166 (s116) requirement notices. 

We also expect regulators will seek to close some of the obvious gaps in the market and accelerate activity to bring those few sectors still operating outside of SM&CR, such as financial market infrastructure (FMI) firms, into the fold.

Culture, strategy & purpose

This will continue to be a core focus of the FCA in 2021. As with governance, we are already seeing assessments of potential culture failings appearing in s166 requirement notices. Culture is what happens in organisations when compliance and senior management is not in the room — and thanks to Covid lockdowns there has been an awful lot of rooms in which senior management have not been.

Even before coronavirus, most firms were struggling to articulate and disseminate a positive culture throughout their organisations. Ensuring a good culture can be maintained across a diverse and distributed workforce will require a significant reallocation of resource and focus.

Operational resilience

Before the pandemic, regulators recognised that weaknesses in operational resilience was a major threat to market stability and good customer outcomes. Covid-19 has brought this into sharper focus, and it is likely that when they arrive later this year, the final rules will see a widening and deepening of the requirements. All firms should be looking at the proposed rules now and considering how they will impact their businesses. The scope and scale of the changes required will be significant. In combination with SM&CR, this will mean individuals could find themselves personally exposed.

Lending

Consumer credit was in the FCA’s spotlight throughout 2020 and will continue to be so in 2021. The focus will be on affordability, collections and points in-between — for example the correct application of Covid-19 rules and fair treatment of vulnerable customers.

There are still too many firms in the consumer credit sector which have not fully embraced the FCA’s principles. As we move into more challenging economic conditions, any inherent failings in the collections process will increase risk and create potential future liabilities. All firms should consider whether their back books stand up to scrutiny. We see in the s166 work and more generally that 2014/2015 practices were poor, and many firms have not proactively reviewed and assessed these back books, and thus have been exposed when the FCA comes knocking. 

Brexit

Post-Brexit regulation will be shaped, in part, by the challenges of reconciling the ‘Singapore-on-Thames’ aspirations of some with the equivalence requirements of the majority of firms.

The FCA has made efforts to provide operational continuity for UK firms by, for example, building Markets in Financial Instruments Directive (MiFID) systems equivalent to that of the European regulator. The continued functioning of these systems requires ongoing alignment with EU rules — something that is likely to be challenged both politically and from within the sector itself.

Similarly, the imminent Sustainable Finance Disclosure Regulation will apply to all products marketed into Europe, therefore affecting many UK fund managers even though the UK has left the EU. It will be challenging for asset management firms to navigate, yet many we have engaged with are still not familiar with the rules. Getting up to speed with the reality of this post-Brexit regulation will be vital.

The FCA is proposing to take a hard line with its Investment Firm Prudential Regime, which will replace the EU’s equivalent regulation. Organisations currently exempt from the EU’s Internal Capital Adequacy Assessment will have to undergo an Internal Capital Adequacy and Risk Assessment for the first time. Many will require extra resources, people and systems to meet these requirements — the burden of which will be significant.

The requirements also mean that groups of UK firms may have to hold capital in the UK, even if their parent company is located elsewhere. This could put UK firms at a disadvantage on the global stage at a time when it is vital for the sector to demonstrate its resilience.

The immediate threat of a no-deal has receded, but the UK is now taking its first steps on a long journey to decouple from an almost 50-year trading relationship. It is clear there will be many regulatory bumps on the road ahead.

A Speaker’s Corner: A Speakers' Corner is an area where open-air public speaking, debate and discussion are allowed. The original and most noted is in the north-east of Hyde Park in London

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