With the COVID-19 pandemic putting the brakes on various preparations for regulatory go-live dates, industry experts are still working hard to remain in the driver’s seat
Regulation in financial services has become more complex and more stringent in the years gone by since the financial crisis in 2008, and if history teaches us anything it is that regulation only becomes tighter.
This year has seen a number of regulations in the financial services industry either pushed back or experience additional delays as participants have shifted their focus on the immediate challenges associated with COVID-19, pushing new regulatory deadlines down the priority list.
While many financial institutions are still working at home, they are still striving towards being prepared for upcoming regulations. But the pandemic is having a significant impact on this and is causing increased cost pressures, a heightened focus on resiliency, and addressing digital acceleration has become a top priority — all of which are impacting the ability to address regulatory change.
Experts say this is forcing banks and financial institutions to fundamentally reappraise how they can adapt, mitigate risk and plan for change.
“For many, adopting a mutualised, shared services approach is the answer, enabling firms to capitalise on a best-in-class market solution, scale economies and a deep knowledge and resource pool, instead of approaching each regulation as a stand-alone in-house exercise,” says Broadridge’s Mike Thrower, vice president of international account management.
Meanwhile, some experts believe the impact of market participants working remotely could mean increased regulatory scrutiny.
“Don’t be surprised to see more financial institutions introducing new systems which ensure the accuracy of all counterparty data across all locations at any one time. When people are more dispersed it’s essential that they work with centrally managed data, to avoid breakdowns in control and governance,” warns Volker Lainer, vice president of product management and regulatory affairs at GoldenSource.
The main concerns
One regulation to have been delayed this year is the Securities Financing Transactions Regulation (SFTR), which was delayed from April to 13 July.
When it went live in July, it created a comprehensive new transaction reporting framework for investment firms, credit institutions, central counterparties and central securities depositories. The third phase went live on 12 October.
The Uncleared Margin Rules (UMR) and Central Securities Depository Regulation (CSDR) are still yet to be implemented. The second Shareholders Rights Directive (SRD II) also went live this year but experienced no delays, despite efforts from the industry to push the date back.
Some of the main concerns are around preparing for upcoming regulations while working from home and continuing to ensure compliance. Additionally, there is a worry about a lack of powerful technology in place to deal with the regulations; making cost another concern.
Many firms still have legacy systems that don’t allow browser-based interaction, running any type of regulatory reporting that requires contributions, reviews and sign-offs from multiple systems and people is a near impossibility.
According to experts, this means that some firms will fall foul of regulation even if they’re doing no wrong in terms of their investment or distribution activity.
“The industry is dealing with navigating a financial market impacted by a global pandemic and increasing geopolitical tensions. The need for additional portfolio valuation, more detailed credit risk checks, increased reconciliation capabilities and detailed insights into exposures have never been greater,” says Lainer.
Ticking clocks
The added time for an extension on regulatory go-live dates is allowing the industry to tackle some of these concerns and challenges, and so they are not taking their foot off the gas, experts say. As an example, the extra time for SFTR allowed for a smooth implementation date.
“The SFTR pushback was appreciated within the industry and the additional time well used by participants in their preparation for the new regulation. Even in areas such as Singapore where the Monetary Authority of Singapore provided much longer delays in implementation of new phases of reporting regulation we are seeing firms remain engaged with their preparation,” says Ron Finberg, regulatory reporting product specialist, Cappitech.
Meanwhile, delays on the CSDR regulation would have been welcomed by the industry even without COVID-19.
“There are too many uncertainties in its implementation and it’s important to achieve a better understanding across the industry. I do not believe this will make anyone relax, but rather it gives us more time to prepare,” affirms Ann Magnusson, head of investor services, SEB.
After already being delayed from September this year until February 2021, the CSDR settlement discipline regime (SDR) has now been pushed back to 1 February 2022.
The drive for an additional delay followed persistent lobbying efforts by industry groups that have repeatedly voiced concerns that the mandatory buy-in regime, which comes as part of the regime’s framework, would significantly damage market liquidity as well as the participants it is meant to protect.
The spotlight further intensified on the flaws within the regime in June when the UK confirmed it would not on-shore CSDR after the Brexit transition period, which ends on 31 December.
Brexit could also potentially disrupt other regulations too, according to Clement Miglietti, chief product officer, NeoXam, who explains that while there is still time for a deal to be struck, it is looking possible that no agreement on equivalence will be reached.
This means that reporting requirements to UK and EU regulatory authorities could begin to diverge from January 2021.
“Financial institutions have to accelerate their planning now to get ahead of any changes and maximise their reporting efficiency,” Miglietti comments.
“I take the view that there is work still to be done in order for the regulators to reach a firm commitment on equivalence, while still creating the autonomy that was promised during the Brexit vote,” says Broadridge’s Thrower.
Thrower cautions that there will need to be a careful balance between the potential loosening of regulations and the underlying long-term goal of remaining equivalent, and therein lies the challenge.
Weighing in on this, Cappitech’s Finberg adds: “All signs point to the Financial Conduct Authority (FCA) aiming to apply general equivalence between what exists under the European Securities and Markets Authority (ESMA) and the UK version that will exist under Brexit. Nonetheless, where we expect challenges are firms keeping up with both the initial small differences between the regulation and the ongoing changes that will take place in the future.”
The regulatory evolution
Despite the current climate and challenges, the show must go on. Irrespective of market conditions, regulation will continue to be a priority for firms all over the globe. The regulatory space will evolve differently depending on the different parts of the world that financial institutions operate in.
Thrower highlights the regulations and mandatory market changes taking effect over the next 12 months are largely known, and firms cannot afford to lessen their focus on being ready.
From a European perspective, it will be a busy year ahead with CSDR looming. As well as this there is still progress to be made on SRD II, MiFID, anti-money laundering and European Banking Authority (EBA) guidelines.
Experts also predict the regulatory landscape will evolve based on what the outcome of the Brexit trade talks ultimately means for financial markets.
“In a situation where an agreement on equivalence is not reached, no new UK-related trade or transaction data would be received by ESMA, while the FCA would stop sending data to ESMA,” Miglietti outlines.
Regulatory divergence is “likely to follow as while there are areas in which the FCA and ESMA agree on, differences between the two regulatory bodies have been very high profile, such as the FCA’s criticism of ESMA’s fund rules last year,” says Migletti.
Also in this part of the world, the European Union’s new Sustainable Finance Disclosure Regulation (SFDR) – also known as the disclosure regulation – is set to come into effect in March 2021.
SFDR imposes new transparency obligations and periodic reporting requirements on investment management firms at both a product and manager level.
Lainer suggests that while SFDR and the Taxonomy Regulation feel as if they are the start, they are by no means the end of sustainable finance regulations. He says: “We should expect further ambitions to be voiced and shaped during the coming year.”
As for the US, Lainer predicts banks and credit institutions will need to continue adding credit loss standards to regulatory reports under Current Expected Credit Losses, and smaller funds will need to be fully up to speed with N-PORT reporting demands.
“We might even see the US Qualified Financial Contract (QFC) Stay Rules used in earnest by the Federal Deposit Insurance Corporation in the event of the impending failure of a large institution,” he adds.
Looking Eastwards, the regulatory environment becomes even more complex. There are no central regulating bodies in Asia and, as such, Asian countries are still catching up with equivalent standards and regulations.
“If you think it’s tricky to cope with the US and EU regulations, there are over 40 regulatory schemes in Asia Pacific that internationally operating firms have to take into account,” Lainer outlines.
“Ultimately, I’m a firm believer that firms will benefit by taking a strategic approach to their operations and technology through the deployment of mutualised services and adaptable multi-jurisdiction solutions,” Thrower concludes.
