The Financial Markets Regulatory Outlook for 2018, published today by the EMEA Centre for Regulatory Strategy at Deloitte, looks ahead to a year in which the financial services industry faces another formidable set of regulatory challenges, both operational and strategic.
The report sets out some major strategic questions that the European financial services industry will face in 2018. With deadlines looming for MiFID II, PSD II, GDPR and more, the report finds that some firms will have to adopt tactical approaches to compliance, and may even struggle to ‘get over the line’. This concentration of major regulatory implementation deadlines in the first half of the year may divert resources from other priorities, leading to significant opportunity costs.
David Strachan, partner and head of Deloitte’s EMEA Centre for Regulatory Strategy, says: “Despite these operational pressures and continuing uncertainties on a broad number of fronts, financial services firms need to find the right answers to a number of regulatory-driven strategic questions and position themselves accordingly. Regulation will change the shape of financial markets and services, as well as customers’ relationships and expectations of firms. New technologies will continue to provide opportunities. But the same technologies also pose risks for firms whose business models will be challenged, and for consumers where the use of technology or their personal data is not well understood or controlled.”
Cross-sector issues for the year ahead
The report identifies several cross-sector issues of strategic significance for financial services firms operating in Europe. For example, making best use of customer data is increasingly seen as a strategic imperative for financial services firms, offering significant opportunities to serve customers better. Nevertheless, with the implementation of PSD II and GDPR amid increasing concerns about the use and protection of personal data, firms can expect much greater supervisory scrutiny of their systems and controls in these areas. This will potentially lead to substantial penalties if data privacy is compromised. Rising concerns about cyber threats add to the complexity in this area.
The report suggests firms operating in the UK that need to ensure continued EU market access post-Brexit, will build their presence in 27 EU countries on a sliding scale of intensity as 2018 progresses.
Business models challenged
Deloitte anticipates business models will be challenged in all sectors of financial services. Supervisors are taking a much closer interest in their sustainability and viability. The macroeconomic environment, competitive forces and regulatory change will continue to put pressure on traditional ways of doing business. Prudential supervisors are concerned about firms’ abilities to make decent returns, while conduct supervisors are increasingly probing the ways in which firms make their profits, and will apply pressure to costs and charges.
On the bank prudential agenda, Strachan adds: “It seems that final agreement on the open issues within the Basel III package is within reach. When it comes, this will be a huge achievement, marking the culmination of many years of intense work on the new global bank capital and liquidity standards. But the agreement will not provide European banks and their investors with the certainty over the final shape of the rules. This will depend on national and regional implementation. We do not expect the EU to propose new legislation to reflect whatever the Basel Committee agrees until 2019 at the very earliest, with implementation then extending well into the 2020s.”
For insurers, the report foresees the soft cycle, like regulatory change, is here to stay.
Andrew Bulley, insurance partner in Deloitte’s EMEA Centre for Regulatory Strategy, says: “The insurance industry is grappling with continuing regulatory change, technological disruption, a persistent soft market, and a continuing low yield environment. Profitability is squeezed, and regulators will be concerned that underwriting standards and policy term limitations could deteriorate. Insurers will be moving further into alternative asset classes and products, but can expect regulators to scrutinise their decisions, particularly boards’ understanding of their risk profiles.”