Regulatory Relations

The financial services regulatory agenda for the year ahead is packed. Work is afoot on multiple large-scale issues including sustainability, operational resilience, technological (especially digital) innovation, the prudential framework and more. This article explores some of the key initiatives that will drive regulation and supervision in 2022. By David Strachan and Suchitra Nair of Deloitte’s EMEA Centre for Regulatory Strategy

ESG challenges

First up – for nearly a quarter of the executives and non-executives we surveyed about the year ahead – is sustainable finance. In 2022 we will see a further intensification of efforts to transition to a more sustainable economy, accelerating and broadening opportunities for financial services firms in terms of products, services and clients. Firms will need to turn their net zero pledges into credible plans and disclose aspects of them to the market under rules we expect to come from the EU and UK. The industry will also need to enhance climate-related risk management capabilities, shifting from building toolkits to using them. Regulatory work will continue across the capital treatment of climate risk and ESG-related disclosure. Global firms will need to remain attuned to variations in local interpretations of sustainability initiatives, and flexibility will be crucial in the face of this rapidly evolving set of issues and expectations.

Crypto boom

Elsewhere, digital and business model innovation are sweeping through the sector, creating challenges for existing regulatory frameworks which may in turn slow industry responses. Perhaps the most visible manifestation of these challenges is the ongoing crypto asset boom, where there is a distinct sense that regulators are struggling to control some of the emerging risks. Industry needs to be prepared for a more intrusive supervisory approach looking at business models, risk and control frameworks, with the regulatory perimeter also under review. 

Tech and interconnectedness 

Technological change has also increased interconnectedness between finance and technology firms. Regulators are worried not only about specific ‘enabling technologies’ such as cloud, but also about the broader risks posed by the ever-growing complexity of the financial services ecosystem. This is particularly true of the payments sector, where both the EU and UK are conducting extensive reviews which will likely lead to a strengthened framework and expanded regulatory perimeter.

Concerns about operational resilience tie together many of these issues, and indeed 92% of industry respondents to our survey ranked it as a top three priority issue for the year ahead. UK-based firms face a March implementation deadline for new operational resilience frameworks, as well as an exploratory stress test from the UK’s Financial Policy Committee which will incorporate data corruption scenarios. 

EU firms will in turn need to focus on the Digital Operational Resilience Act, which should be finalised by year-end. The industry will also need to comply with new guidelines on cloud outsourcing. 

EU-UK divergence 

While sustainability and the impacts of technological innovation are relatively novel features of the regulatory landscape, many stalwart regulatory issues remain firmly on the agenda. Regulators will take important decisions this year about the prudential framework for banks and insurers, with progress expected on Basel 3.1 policy debates in the UK and EU, as well as on the continuing divergence of the UK and EU insurance regimes. 

Within capital markets, the UK and EU have set out their divergent visions for revising MiFID II/MiFIR. The UK has signalled its intention to adopt a global, open approach to trading, while the EU has focused its recent package of reforms on the promotion of a consolidated tape, with more to come on retail investment issues later in 2022. Jockeying on CCP equivalence will continue, with the temporary equivalence regime for central counterparties set to be extended beyond June. 

Value for money

There has also been a resurgent interest in value for money, with much work on pricing underway across investment management, insurance and banking. Financial crime will also be a priority, and we expect an uptick in enforcement, with regulatory patience wearing even thinner following 2021 reviews that identified many failings across the industry. 

In short, there are numerous regulatory and supervisory initiatives coming down the track, including many more than we have been able to cover here. Several will be transformational in their impacts on firms, most obviously around sustainability, technological innovation and operational resilience. Some of them will go with the grain of existing industry work to transform business models, but firms will need to keep their work under continuous review in those areas where regulators have not yet derived stable solutions, such as crypto assets.

Supervisory scrutiny 

What is more, much of this is taking place against the backdrop of market conditions that have remained buoyant. While industry may take some comfort in that, some supervisors will be nervous about the potential for complacency. Firms would be well advised to anticipate supervisory interest in their governance and risk management frameworks and practices, particularly in relation to their preparedness for another potential downturn or major market correction.

Faced with such persistent regulatory change, firms – particularly global players – need to remain on the front foot. Perhaps now more than ever, the importance of linking general business strategy with regulatory strategy is clear.

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