Consensus no more? Financial Markets Regulatory Outlook 2020 - Deloitte
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Consensus no more? Financial Markets Regulatory Outlook 2020
“At the heart of our work is the need to address the changes in climate,
technology and demography that are transforming our societies and
way of life.”
Ursula von der Leyen, President of the European Commission
“…the job of a supervisor is to be slightly less optimistic than the
average person.”
Sabine Lautenschläger, former Member of the Executive Board and Governing Council of the ECB
Next 2Global foreword Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
After a decade of global regulatory reforms defined by the financial crisis In our view, the risk of a recession is highest in Europe. Growth in Sector-specific themes
and misconduct issues, the regulatory environment is now changing Germany is expected to be as low as 0.5% in 2019, partly due to its
Banking
profoundly. The international consensus on regulatory reform is fraying. manufacturing sector’s vulnerability to poor export markets, although
Political appetite for globalisation is retreating, and trade tensions some recovery is expected in 2020.3 Italy is facing political uncertainty, Capital Markets
are mounting. Technological change and social concerns, including economic stagnation and resurging financial turbulence, while servicing
Insurance
environmental sustainability, are rising on regulators’ agendas. Financial high public debt.4 And the UK faces an uncertain outlook, in part due to
services firms need to be prepared to respond to these trends. Brexit. Therefore, while growth for the Eurozone in 2020 is projected at Investment Management
1.4%, which is similar to its post-crisis trend rate, significant downside
Glossary
A darkening economic outlook risks remain.5
We are likely to see weak growth in all regions in 2020, with significant Endnotes
downside risks.1 Regulators’ and supervisors’ work programmes are Central bankers are likely to respond with further monetary easing,
Contacts
likely to be heavily influenced by their assessment of the economic with the US Federal Reserve Board and the European Central Bank
conditions under which firms will be operating. having already cut rates further and renewed their asset purchase
programmes. However, with interest rates at an unprecedented low,
Increased trade tensions, especially between the US and China, are and with a record amount of sovereign and even corporate bonds
likely to fragment markets further, dampen growth and create a harsher trading at negative nominal rates, the effectiveness of such measures in
business environment for financial services firms. isolation is debatable.6 Authorities may consider using macroprudential
measures, such as allowing banks to run down countercyclical buffers.
In the US, the yield curve on Treasury bonds was inverted until recently, Governments are also likely to face pressure to increase spending to
which has in the past been a harbinger of recession. Equity valuations are stimulate growth, especially given the backlog of infrastructure spending
high due, in large part, to monetary easing: the US equity market is more in some countries.
overvalued on some measures than at any point since the dotcom bubble.
These macroeconomic trends and conditions will put even more
Meanwhile in China, growth has continued to slow and gross debt pressure on financial services firms’ business models, at a time when
surged from 171% of Gross Domestic Product in 2008 to 299% in 2018.2 competition from new entrants and major digital players is
High debt levels could become unsustainable if growth slows further. also increasing.
Next 3
3Global foreword Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
We expect supervisors to have a heightened focus on business model The increasing scrutiny by investors and regulators of the value Sector-specific themes
resilience, through stress testing, and on the quality of risk governance generated by active management is likely to drive a continued
Banking
and oversight. “search for yield” and encourage investment in more exotic and less
liquid markets. We expect supervisors to focus increasingly on how Capital Markets
Banks may struggle to regain profitability, and even to maintain margins, investment managers and distributors satisfy themselves that funds
Insurance
through their traditional business model in a low, or negative, interest holding higher risk assets meet the needs and risk appetite of their
rate environment. For example, Japan has had a zero or negative target market. Investment Management
interest rate policy for nearly two decades. Japanese banks have
Glossary
struggled with low interest margins and face increasing supervisory The fraying international consensus
scrutiny on business model sustainability.7 A reduction in cross-border With the post-crisis reforms near completion and the political Endnotes
financial flows as risk appetites reduce may also narrow banks’ growth environment becoming less supportive of international cooperation,
Contacts
opportunities. Banks will need to redouble their efforts to control costs global standard-setting bodies – particularly the Basel Committee
and refocus on more profitable business lines. However, they will need on Banking Supervision and the Financial Stability Board - have less
to be mindful of conduct risk. Supervisory focus on credit risk is also ambitious plans to introduce new standards than in previous years.
likely to intensify. For example, the Bank of England estimates that global Work to implement the remaining aspects of the G20 financial regulatory
banks retain exposures to over half of the leveraged loan market, and reforms has slowed, with many jurisdictions behind in implementing
that the global stock of leveraged loans has reached an all-time high.8 Basel III (“Basel IV” to industry).10
Insurers, particularly those providing long-term guarantees, are also Given the current economic conditions, political concerns will grow if
likely to find it harder to be profitable in a persistently low interest rate regulation is seen to impede competition, new lending or investment.
environment. In Asia however, the potential for the insurance market to We are already seeing a deregulatory stance from the US authorities,
grow in China may help insurers to generate more off-setting revenue.9 including a limited relaxation of the Volcker Rule.11 Other countries may
follow, and we might even see competitive deregulation.
Investment managers too will likely struggle to perform well in an
environment characterised by high asset prices and low
growth potential.
Next 4
4Global foreword Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
While deregulation might reduce some compliance costs, global firms Regulating technological innovation Sector-specific themes
will face more complexities and expenditure as regulatory standards Policymakers and regulators will continue to be challenged by the
Banking
across jurisdictions diverge in timing and substance. The G20 need to respond to the pace and scale of technological change. The
highlighted market fragmentation as an area of concern in 2019, and financial services regulatory debate will be characterised by issues Capital Markets
the Financial Stability Board has an ongoing work programme in this such as whether to expand the regulatory perimeter, risks associated
Insurance
area.12 It is unlikely that global standard-setters will be able to reverse with increasing use of artificial intelligence, the impact of innovation
fragmentation that has already happened, but their efforts could reduce on operational resilience and cyber security, and digital ethics. These Investment Management
future divergence. are global issues, but a lack of political will and adequate international
Glossary
bodies in some policy domains will likely hinder efforts to align
More accountability for senior individuals regulatory approaches. Endnotes
In contrast, regulators are increasingly holding senior individuals to
Contacts
account for the compliance, professional standards and culture of Cross-sector policies will increasingly affect financial services firms,
their firms. Following the introduction of the UK’s Senior Managers and although these will differ across regions. For example, in relation to
Certification Regime, similar regimes have emerged, or are emerging, in data protection, the EU is taking a stricter stance on individuals’ right to
several other jurisdictions including Ireland, Australia, Hong Kong Special access and control personal data than the US and China.15 Globally, the
Administrative Region, Singapore and South Africa. Other jurisdictions emergence of tighter data localisation requirements will also introduce
are driving increased accountability through different mechanisms. additional obstacles to cross-border data flows.
The US Federal Reserve Board has proposed guidance which seeks
to delineate the roles, responsibilities and accountabilities of senior The growing evidence that ineffective implementation of technological
management and the board better.13 The Belgian Parliament recently change can increase cyber and operational risk is also attracting
announced the introduction of a “Bankers Oath” similar to that which regulatory scrutiny. International standard-setters will likely try to
the Netherlands introduced in 2015.14 In response to these initiatives, establish baseline common approaches for operational resilience, but
firms will need to foster a culture of accountability through measures we expect progress on cyber resilience to be made mostly at the G7 and
such as balanced incentive plans; strong governance and controls; and European levels.
appropriate monitoring, reporting, escalation and disciplinary action.
Next 5
5Global foreword Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
These trends will affect firms’ ability to use and share data to innovate, Financial inclusion is another area of focus globally. The World Bank Sector-specific themes
enhance their cross-border resilience, and deliver value and security to Group estimates that in 2017 there were still 1.7 billion adults without
Banking
their clients. a basic transaction account, primarily in Asia and Africa.17 It has a goal
for all adults to have access to an account to store money and make Capital Markets
Regulators and supervisors will also need to accelerate their own payments by 2020. In developed countries, regulators are focused on
Insurance
digital transformation. Well-resourced regulatory data science and barriers to financial inclusion such as overly complex processes, lack
analytics capabilities will be essential to understand and supervise a of accessibility for “non-standard” customers, including the elderly Investment Management
financial sector characterised by an increasingly blurred regulatory or people with disabilities. Firms should expect to be challenged by
Glossary
perimeter and greater technological complexity. Part of the solution regulators if their services are unduly hard for certain groups to access.
may be for financial, security and data protection authorities to share Endnotes
resources, capabilities and insights more effectively. We see efforts in Conclusion
Contacts
this direction, but more work is needed before regulators and firms can Although the post-crisis wave of regulatory change is subsiding, there
reap the benefits. Progress will more likely be achieved at national than is much to attract regulatory and supervisory attention in 2020 and
at international level, mainly because of the absence of cross-sectoral firms should not expect scrutiny to abate. Against a darkening economic
global standard-setting bodies. background, there will be increased focus on firms’ financial and
operational resilience, how they adapt to technological change and
Responding to social concerns innovation, and how they respond to political and social pressures in
Environmental sustainability is a rising social concern, and in Europe areas such as sustainability and financial inclusion. In an environment
and Asia, a major focus for financial services regulators.16 In the US, it is where boards and individual senior managers are increasingly being
not - at least not at federal level. However, even where regulators do not held to account for their actions, financial services firms will need to
introduce specific requirements, firms will need to consider how climate ensure they have the foresight, governance, skills and operational
change and unsustainable business models will affect their asset and capabilities to adapt and respond effectively.
liability exposures, as well as the new opportunities that may arise from
the increasing customer demand for “green” products, including green
investment funds.
Next 6
6Global foreword Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
Sector-specific themes
Banking
Capital Markets
Insurance
Investment Management
Glossary
Endnotes
Contacts
Tony Wood Irena Gecas-McCarthy David Strachan
Centre for Regulatory Strategy Centre for Regulatory Strategy Centre for Regulatory Strategy
APAC Americas EMEA
1. International Monetary Fund, World Economic Outlook, October 2019 12. Financial Stability Board, Report on Market Fragmentation, June 2019
2. International Banker, How Much of a Concern Is China’s Debt Problem?, April 2019 13. Federal Reserve Board, Federal Reserve Board invites public comment on two proposals;
3. International Monetary Fund, World Economic Outlook, October 2019 corporate governance and rating system for large financial institutions, August 2017
4. International Monetary Fund, Italy: Toward Growth, Social Inclusion, and Sustainability, 14. Moniteur Belge N. 96, May 2019; Foundation for Banking Ethics Enforcement (Netherlands),
February 2019 The Banker’s Oath
5. International Monetary Fund, World Economic Outlook, October 2019 15. The EU General Data Protection Regulation introduced rules on the collection and use of
personal data, including, for example, the obligation to limit the amount of data held to that
6. Bank for International Settlements (BIS), BIS Quarterly Review, September 2019
which is necessary for the stated purpose, and the right of individuals to have their personal
7. Japan Financial Services Agency (JFSA), Publication of summary points from JFSA policy data erased in certain circumstances.
assessment and strategic priorities 2019, August 2019
16. In the EU, the European Commission has adopted an action plan on financing sustainable
8. Bank of England, Financial Stability Report, July 2019 growth. In Asia, regulators in several countries (including Australia, Hong Kong Special
9. Deloitte, A demanding future The four trends that define insurance in 2020, 2019 Administrative Region, Japan and Singapore) have also released goals to promote
sustainability in financial services. In Singapore and Hong Kong Special Administrative
10. Financial Stability Board, Implementation and Effects of the G20 Financial Regulatory
Region, this includes developing environmental, social and governance reporting guidelines
Reforms 5th Annual Report, October 2019
11. Financial Times, US regulators unveil final rewrite of Volcker rule, August 2019
for financial services firms. Next 7
17. The World Bank, UFA2020 Overview: Universal Financial Access by 2020, October 2018 7EMEA Financial Markets Regulatory Outlook 2020: at a glance Click the boxes to be taken
to the corresponding chapter
MEDIUM-TERM KEY STRATEGIC
SECTOR-SPECIFIC FIRMS WILL HAVE TO
TRENDS IN CROSS-SECTOR THEMES
THEMES CHALLENGES
EMEA
• Low interest rates, sluggish economic • Adapt their business models to
growth and competition from new ensure they are resilient to low
entrants and major digital players will growth and interest rates, while
continue to put pressure on firms’ continuing to invest in new
Climate
Political trends business models and resilience. technology and digital solutions.
IBOR transition change and Banking
and uncertainty
sustainability
• Global firms will find it increasingly • Build group systems and control
costly and complex to comply with frameworks with sufficient flexibility
diverging national standards, as the to adapt to national divergence from
Culture, international regulatory consensus global regulatory standards.
Operational continues to fray.
The role of governance,
and cyber Capital Markets
central banks and
resilience • Political, technological, • Ensure their boards and senior
accountability
environmental and demographic managers have the necessary
forces will have a profound impact on knowledge and skills, and diversity
the medium-term regulatory outlook of thought, to manage new and
AI governance and firms’ strategies. emerging changes in their firm’s
Technological Good customer external environment.
and model risk Insurance
change outcomes
management
• Regulators and society will • Demonstrate that good outcomes
increasingly expect firms to integrate for customers and society are a
fairness, ethics, sustainability, core priority. Areas of focus include
protection of vulnerable individuals, providing value for money, supporting
Regulating
Socio-economic Investment as well as their “purpose”, into the financial inclusion, and the fair
firms’ use of Crypto-assets core of their business. treatment of vulnerable customers
transformation Management
consumer data and those with non-typical needs.
• The quality and effectiveness of • Enhance their governance and risk
boards’ challenge will be further management frameworks to manage
tested against a broadening set of new risks and regulatory obligations,
Financial crime Stress testing critically important risks and strategic especially as the interaction between
issues. Regulators will increasingly different risk classes (e.g. conduct,
hold individual senior managers to data protection, and model risk)
account for their firm’s conduct. increases.Medium-term trends in EMEA Global foreword
Executive summary
Medium-term trends in EMEA
Political trends and uncertainty
The role of central banks
As set out in the global foreword, the We have identified the following forces that we
“A number of forces are at
Technological change
Socio economic transformation
regulatory agenda of the past ten years believe could reshape FS regulation over the
was shaped by the financial crisis and a coming years: work, including politics, Cross‑sector themes
variety of conduct of business issues that
emerged subsequently, including benchmark economics, technological Sector-specific themes
manipulation and product mis-selling scandals.
Political trends and uncertainty innovation and changes Banking
If the crisis and its aftermath have propelled in society’s expectations. Capital Markets
regulatory reform for the last decade, the Insurance
environment in which regulation will be made All are likely to have a
Investment Management
and applied in 2020 and beyond could turn The role of central banks profound effect on
out to be quite different, especially in the EU Glossary
and UK. That said, the precise direction in the medium-term Endnotes
which regulation will head is not yet clear. A
number of forces are at work, including politics, regulatory outlook.” Contacts
economics, technological innovation and Technological change
changes in society’s expectations. All are likely
to have a profound impact on the medium-
term regulatory outlook. While we do not
expect these forces to play out fully in 2020 Socio-economic transformation
(and, where we do, this is already reflected
in the predictions we make), we think they
nevertheless provide important context for
what follows in this Outlook.
Next 9Medium-term trends in EMEA Global foreword
Executive summary
Medium-term trends in EMEA
Political trends and uncertainty
The role of central banks
UK will effectively be obliged to implement unlikely that it could be included in any FTA Technological change
Socio economic transformation
Political trends and uncertainty EU regulations and directives “line-by-line” agreed between the UK and the EU by the end
in order to receive a positive equivalence of 2020. However, equivalence – which the UK Cross‑sector themes
assessment from the EU. The CEO of the PRA and EU have declared that they should each
Sector-specific themes
In the UK the recently elected Conservative has noted that it would be “undesirable” for endeavour to complete for their respective
government has made it clear that the UK the UK to become a rule-taker from the EU.1 markets before the end of June 2020 – Banking
will ratify the UK-EU Withdrawal Agreement And the CEO of the FCA has made the case could be a step towards a more ambitious
Capital Markets
and leave the EU by 31 January 2020. The for outcomes-based equivalence and looking agreement on FS market access.
Withdrawal Agreement allows for a Transition for opportunities to improve onshored Insurance
Period which will run to 31 December 2020. EU legislation on a “same outcome, lower Another outcome is that the UK chooses to
Investment Management
The UK Prime Minister Boris Johnson and the burden” basis.2 Pursuing either of these two pursue an approach focused on deregulation
government have committed not to extend (outcomes-based and line-by-line) approaches post-Brexit, including reining back or de- Glossary
the Transition Period and to negotiate a UK- to equivalence would see the UK continue emphasising those post-crisis reforms
Endnotes
EU FTA by the end of 2020. to follow the substance of both current and that are seen to reduce the international
future EU FS legislation. competitiveness of the UK‘s FS markets and Contacts
A key question is how FS regulation evolves giving the PRA and FCA a statutory objective
after the UK has left the EU. The previous However, other regulatory outcomes are to promote such competitiveness. This could
Conservative government under Theresa possible. One is that the UK and the EU also see the UK prioritise future financial
May made clear that it would continue to reach agreement on an approach to mutual relationships and partnerships with the US,
adhere to global regulatory standards and market access which improves on the current Asia and Switzerland over those with the EU.
we expect the UK to remain an active and equivalence framework. Such an agreement
committed member of the global standard- would recognise the very close integration Increasing regulatory divergence between the
setting bodies. However, it is less clear how of the UK’s and EU27’s financial markets and UK and EU may prompt the latter to review,
closely the UK will continue to track EU services. However, as none of the EU’s existing and possibly withdraw, any initial equivalence
regulation. This issue is directly linked to the FTAs includes such a framework for FS, and decisions.
debate about equivalence, and whether the given the complexity of negotiating one, it is
Next 10Medium-term trends in EMEA Global foreword
Executive summary
Medium-term trends in EMEA
Political trends and uncertainty
The role of central banks
At the EU level the new European • Developments in innovation and technology • This will be the first EU administration which Technological change
Socio economic transformation
Commission has announced a very ambitious continue to raise questions about the has had to make FS legislation without
work programme in relation to FS, particularly regulatory perimeter and which activities the UK as a member. The UK has typically Cross‑sector themes
in relation to ESG, FinTech, digital technologies should fall within it. The ongoing debate promoted adherence to global standards
Sector-specific themes
and the CMU. However, while the ambition is around GSCs is a prime example of this. (e.g. those produced by the BCBS in relation
clear, a number of factors make the new EU The boundary between FS and non-FS is in to bank capital), principles and outcomes- Banking
administration less predictable than it was: some areas increasingly blurred and, as a based regulation, and the need for EU
Capital Markets
result, we expect the Competition and the financial markets to be integrated into global
• This is the first European Parliament since Internal Market Directorates to have a much wholesale markets. It remains to be seen Insurance
direct elections began in 1979 in which the stronger influence on the development of FS what approach the EU will take to new FS
Investment Management
two main political groups from the centre- legislation than in the past. In many respects regulation. But greater divergence from
right and centre-left have not, between the injection of cross-sector perspectives global standards, increasingly detailed rule Glossary
them, formed a majority. The Green group, into sector-specific FS regulation is welcome making and higher barriers for firms based
Endnotes
holding one tenth of the Parliament’s seats, in that it reflects the reality of a market outside the EU seeking to access EU financial
will be able to exert considerable influence in which participants from outside the markets are all increasingly likely outcomes. Contacts
on FS regulatory policy, should it choose regulatory perimeter are involved with or How the European Commission proposes to
to do so. Our central scenario is that the provide services to “traditional” FS. However, implement the final stages of Basel III will be
Greens will want to inject much more of this may well complicate and slow down a leading indicator of its future direction.
an environmental perspective into new the legislative process, given the interest of
FS legislation, albeit from an already high a larger number of very senior European
base given the large number of ESG-related Commission stakeholders. At a time when
measures that were agreed at the end of the the pace of innovation is increasing, any
last Parliament. such slowing down of the legislative process
would not be in the interests of either FS
providers or consumers.
Next 11Medium-term trends in EMEA Global foreword
Executive summary
Medium-term trends in EMEA
Political trends and uncertainty
The role of central banks
Both sides of the debate implicitly, and Technological change
Socio economic transformation
The role of central banks sometimes explicitly, challenge the Technological change
independence of central banks in setting Cross‑sector themes
monetary policy.
Sector-specific themes
Central banks are currently in the public Technological change creates twin pressures
and political spotlight in a way that is In other countries in the region not subject to on the FS industry. First, there is a notable Banking
unprecedented since the case for central bank low or negative rates, such as South Africa and difference in the speed of technological
Capital Markets
independence in relation to monetary policy Turkey, steps have been taken, or suggested, innovation relative to the speed of legislative
was generally accepted during the 1990s. This to increase political influence on the central and regulatory change. Regulators may have Insurance
is in large part because of the low and in some bank.3, 4 to respond to this by making greater use,
Investment Management
cases negative nominal interest rates that temporarily if not permanently, of industry
have persisted for a number of years, across The spotlight so far has been on central bank codes and other voluntary standards if they Glossary
a number of European countries, in the face independence in relation to monetary policy. wish to avoid stifling innovation or - at the Endnotes
of weak economic growth. This has generated However, in the event that any changes were other extreme - being bypassed altogether.
a heated debate between those who argue made to central banks’ mandates, these could Second, technological change looks set to alter Contacts
for ever more accommodating monetary well spill over to their role and autonomy in the regulatory perimeter, as new products and
policy including QE and even unconventional relation to FS regulation and supervision, non-FS firms push up against it. Over the next
monetary measures to stimulate growth or implying greater political influence on them. few years legislators and regulators are likely
avoid tipping countries into recession; and This could well be the case where FS regulation to have to make some pivotal decisions, such
those who are concerned about the impact of might otherwise inhibit new lending and as whether to bring systemically important
this stance on the profitability and viability of investment, or where governments choose to services providers (such as CSPs) into the
certain types of FS firms, particularly banks and use regulatory policy as a means to achieve regulatory perimeter.
insurers, as well as the wider economic and wider economic or social goals, e.g. in relation
social effects of the high asset prices that loose to climate change.
monetary policy is seen to drive.
Next 12Medium-term trends in EMEA Global foreword
Executive summary
Medium-term trends in EMEA
Political trends and uncertainty
The role of central banks
Broader political and social concerns around Two competing objectives, which extend Technological change
Socio economic transformation
the deployment of technology will increasingly beyond FS, will shape EU policy in this area Socio-economic transformation
influence FS regulatory policy. This will be in the coming years. The first is to make the Cross‑sector themes
evident, for example, in relation to the use of EU a leading global, digitally autonomous,
The last decade has seen an increasing blurring Sector-specific themes
consumer data to fuel technological and technological player. This includes the creation
digital innovation. of a dynamic and competitive data-based of the boundaries between regulatory and Banking
ecosystem and economy through initiatives social policy. Shifts in society’s expectations
Capital Markets
such as Open Finance, CMU, and the broader have influenced and in some cases redefined
“Technological change set of initiatives under the Digital Single Market what are considered acceptable regulatory Insurance
looks set to alter the umbrella. The second objective is to set best- interventions. In recent years, for example, the
European Commission has included diversity
Investment Management
in-class standards for data privacy, ethics,
regulatory perimeter, as and consumer protection, with a number of requirements in legislation such as CRD 4 Glossary
and MiFID 2. This represents a departure
new products and non-FS flagship initiatives to promote a coordinated
EU approach on the human and ethical from traditional regulatory scrutiny of board
Endnotes
firms push up against it. implications of AI expected in composition, which typically focused on Contacts
early 2020. competency and propriety.
Over the next few years
Legislators’ and regulators’ work in relation to
legislators and regulators This poses data-driven FS businesses both
a challenge and an opportunity. Those FS ESG issues, and within this, climate change,
are likely to have to make businesses that can establish themselves as illustrate this trend even more clearly. The
a trusted guardian of their customers’ data adverse impact of climate change increasingly
some pivotal decisions.” stand to gain a competitive advantage. But the forms the backdrop to public debates around
consequences of any unlawful, or unethical, sustainable economic development. The EU has
use of consumer data on a firm’s standing in already signalled through a series of measures
the market and with its customers could and proposals that the financial sector has a role
be profound. to play, both as a source of financing, and as a
crucial part of society’s risk management efforts.
Next 13Medium-term trends in EMEA Global foreword
Executive summary
Medium-term trends in EMEA
Political trends and uncertainty
The role of central banks
“Shifts in society’s Demographic change is already having • they may face access problems due to Technological change
Socio economic transformation
economic consequences that need to be increasing digitalisation and use of new
expectations have factored into strategic plans across multiple technologies to deliver FS products in new Cross‑sector themes
sectors. Supervisors will be particularly ways.
influenced and in some attentive to the risk that some demographic
Sector-specific themes
At the same time, millennials are set to become
cases redefined what are groups will be “left behind” by a FS sector that
fails to adapt to meet their needs.
the largest segment of the global workforce
Banking
over the next decade, with the median
considered acceptable age of Africa’s population being only 19.4.6
Capital Markets
Europe’s population is ageing rapidly, with Insurance
regulatory interventions.” the number of FS consumers older than
Millennials also form the greatest share of
the emerging alternative workforce, which Investment Management
65 growing ever larger. In the UK alone, the
The over-arching question from a regulatory comprises temporary, on-call contract workers,
number of over 65s has grown from 9.1m in Glossary
perspective is how far legislators (and freelancers, independent contractors and
1991 to 11.8m in 2016; this is expected to grow
potentially regulators as well) will use FS gig-workers and is the fastest growing labour Endnotes
further, to 20.4m, by 2041.5
regulation, including prudential capital group in the EU. The FS industry needs to
Contacts
regimes, to achieve broader public policy adjust to the emergence of this labour group
Elderly consumers face a number of challenges
goals in relation to climate and the wider in terms of how it treats them as customers.
when it comes to interacting with FS:
environment. An important early test of this The income volatility of this ever-growing
will be whether the European Commission (or group leaves its members at risk of financial
• they are more likely to have fixed incomes,
the European Parliament) seeks to introduce exclusion, with banks in particular struggling to
giving them a stable but less flexible pool of
“brown penalising factors” or ”green supporting offer appropriate products.
resources to draw on;
factors” into the CRD 6/CRR 3 proposals and/or
into the review of Solvency 2. • they are also more likely to suffer from
ageing-related illnesses which mean they are
particularly at risk of financial detriment; and
Next 14Medium-term trends in EMEA Global foreword
Executive summary
Medium-term trends in EMEA
Political trends and uncertainty
The role of central banks
Some regulators (particularly the FCA in the Technological change
Socio economic transformation
UK) are very alert to the implications of these
demographic shifts and what they mean for Cross‑sector themes
financial exclusion and the fair treatment
Sector-specific themes
of customers.7 Other regulators are less
directly engaged, despite similar demographic Banking
trends in their countries. But even where FS
Capital Markets
regulators are not making the consequences of
demographic change a priority, FS firms would Insurance
be unwise to ignore its effects. This links to
Investment Management
the wider debate about FS firms’ purpose and
whether they are meeting the needs of all their Glossary
stakeholders, rather than focussing primarily
Endnotes
on shareholder value. Even in the absence of
regulatory pressure to do so, firms that fail to Contacts
engage with the changing composition and
needs of their customer base could seriously
reduce customer loyalty and erode their
reputation and business franchise.
Next 15Cross‑sector themes Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
In the year ahead we see ten issues of strategic significance for all
IBOR transition
Climate change and sustainability
sectors of the EMEA FS industry: Operational and cyber resilience
Culture, governance, and accountability
Good customer outcomes
1 IBOR transition AI governance and model risk management
Regulating firms’ use of consumer data
2 Climate change and sustainability
Crypto-assets
Financial crime
Stress testing
3 Operational and cyber resilience
Sector-specific themes
4 Culture, governance, and accountability Banking
5 Good customer outcomes Capital Markets
6 AI governance and model risk management Insurance
Investment Management
7 Regulating firms’ use of consumer data
Glossary
8 Crypto-assets
Endnotes
9 Financial crime Contacts
10 Stress testing
Next 16
16IBOR transition IBOR
Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
IBOR transition
Even though the transition away from IBORs
In focus the information asymmetry will be
is ostensibly market-driven, there is intense
Climate change and sustainability
Operational and cyber resilience
greatest. Firms need to be able to
supervisory interest in this topic across Culture, governance, and accountability
Supervisory scrutiny will increase evidence that they have identified the
the region, especially in the UK, with some Good customer outcomes
further in 2020 as the clock runs down relevant risks, reviewed their existing AI governance and model risk management
supervisors already requesting detailed
to end-2021. Firms will be required to conduct risk framework and, where Regulating firms’ use of consumer data
information on firms’ transition plans. Firms Crypto-assets
provide quantitative and qualitative needed, followed an appropriate
will have to provide quantitative and qualitative Financial crime
data to evidence their progress on remediation plan.
data on a regular basis to evidence Stress testing
transition. Those which continue to their progress.
espite the best efforts of the
D Sector-specific themes
issue IBOR based products maturing
beyond end-2021 will be in for authorities and the various RFR Banking
We expect that firms will struggle to provide
particular supervisory scrutiny. working groups, we expect the likely
the full set of requested data with the accuracy Capital Markets
outcome of the transition to be the
and in the detail that supervisors want, at
onduct risk will stay at the top of the
C coexistence of multiple rates for a Insurance
least initially. Firms will either have to resort
supervisory agenda, particularly in limited set of products and time,
to manual workarounds or invest in better Investment Management
relation to the transition of products and some divergence in fallback
systems. And if progress is not sufficient,
for retail customers and SMEs, where arrangements. Glossary
the authorities will explore other ways of
incentivising firms. These could include Endnotes
increasing capital requirements, introducing
restrictions on issuing IBOR-linked products or Contacts
“Firms will either have to resort to manual increasing haircuts on IBOR-linked instruments
workarounds or invest in better systems. And if taken as collateral in central bank
market operations.
progress is not sufficient, the authorities will explore
It is possible that firms’ progress might lag
other ways of incentivising firms.” behind supervisors’ expectations, not for lack
of effort on the firms’ part but because of the
Next 17
17IBOR transition Global foreword
IBOR Executive summary
Medium-term trends in EMEA
Cross‑sector themes
“So far, the largest
IBOR transition
sheer magnitude and complexity of transition curves could have a significant negative effect
Climate change and sustainability
and, in some cases, by a lack of engagement by on valuation and solvency, especially for long- Operational and cyber resilience
their clients. term insurers, though transitional measures banks and insurers have Culture, governance, and accountability
and the MA will provide some mitigating effect. Good customer outcomes
In the UK, regulators have set clear Investment managers need to consider how been in the supervisory AI governance and model risk management
Regulating firms’ use of consumer data
expectations that firms should cease issuing
LIBOR-based cash products maturing beyond
the change to RFRs might affect their fund
performance and investment strategy and how
spotlight. However, Crypto-assets
Financial crime
2021 by end-Q3 2020. In the EU, now that €STR
is being published, the EU authorities have
they protect their customers’ best interests
through transition. In this context, they should
supervisors’ attention Stress testing
Sector-specific themes
made it clear that market participants should focus on identifying their own and their is already turning to
avoid entering into any new EONIA referencing customers’ exposure to IBOR-based products, Banking
contracts maturing after 31 December 2021. engaging with the issuers of those products the wider population of Capital Markets
While we expect market participants to do
what they can to cease issuance of new
to facilitate transition to the new RFRs and on
clear client communications.
firms.” Insurance
EONIA and IBOR-linked products in line with Investment Management
supervisory expectations, their efforts may We anticipate a significant increase in issuance
be hampered until key enablers, such as term of RFR-linked products as banks and other Glossary
structures, are in place. market participants continue to drive activity Endnotes
in them. We expect that 2020 will also see
So far, the largest banks and insurers have significant progress on developing forward- Contacts
been in the supervisory spotlight. However, looking term rates both in the UK and in the
supervisors’ attention is already turning to the EU. The development of term rates is very
wider population of firms. Insurers should be likely to facilitate and accelerate the transition,
aware of the risk of shallower risk-free curves especially for firms that so far are taking a “wait
as EIOPA moves away from deriving curves and see” approach.
based on LIBOR/EURIBOR-linked swaps – a
change that could also affect the LLP. Shallower
Next 18
18IBOR transition Global foreword
IBOR Executive summary
Medium-term trends in EMEA
Cross‑sector themes
IBOR transition
Against this background, we expect to see transactions and may slow down the transition
Climate change and sustainability
supervisors increasing the pressure on firms to altogether. Supervisors are encouraging firms Operational and cyber resilience
ensure that they identify and mitigate conduct not to rely on fallbacks; where they are used, Culture, governance, and accountability
risks arising in the course of IBOR transition. we expect them to investigate whether this Good customer outcomes
AI governance and model risk management
The principal conduct risks faced by firms are is appropriate.
Regulating firms’ use of consumer data
likely to arise from inadequate governance, Crypto-assets
unclear external and internal communications, Figure 1. Total value of cleared derivatives contracts referencing GBP LIBOR Financial crime
and the potential for staff to act in a manner Stress testing
30
which may cause detriment to the market, 30 June 2019 Commitment to maintain LIBOR ends (end-2021)
31 October 2018 Sector-specific themes
clients and competition, for example by taking
30 April 2018 25
advantage of confidential information about Banking
31 July 2017
their clients’ trading intentions. 20 Capital Markets
£ trillions
We expect the various RFR Working Groups 15 Insurance
to intensify their efforts to foster international Investment Management
10
cooperation and agree on aligned conventions
across derivatives, bonds and loans. However, Glossary
5
despite these efforts, the likely outcome of the Endnotes
transition will be the coexistence of multiple 0
rates, for a limited set of products and time.
2017 19 21 23 25 27 29 Contacts
Maturity date
In 2020, firms should focus on the application
of fallbacks in their new and legacy contracts Source: Bank of England, July 2019 Financial Stability Report, Chart B, page 51. Includes gross notional outstanding of all interest rate
where potential divergence may create basis derivatives with a GBP LIBOR-linked floating leg, cleared at LCH Ltd excluding inflation swaps. 31 July 2017, 30 April 2018, 31 October
2018 and 30 June 2019 refer to observation dates for roll-off profile.
risk. The development of fallbacks for different
LIBOR currencies is not necessarily following
the same synchronised plan, which poses
challenges and complexities for cross-border
Next 19
19Climate change and sustainability Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
IBOR transition
We expect some regulators within EMEA,
In focus their accountability regimes, where
particularly those belonging to the NGFS,
Climate change and sustainability
Operational and cyber resilience
these exist, to achieve climate
to follow the PRA’s lead by issuing their own Culture, governance, and accountability
Whilst the political and policy risk objectives.
supervisory expectations on climate risk Good customer outcomes
debate will continue, we do not governance and management. We however AI governance and model risk management
think that regulators are yet at the he rapid emergence of different and
T Regulating firms’ use of consumer data
anticipate that regulators in France, the Crypto-assets
point of using the prudential capital potentially conflicting sustainability
Netherlands and UK will continue to lead the Financial crime
regime explicitly to promote green standards across the globe will
way in this area, in ways that are consistent Stress testing
objectives. intensify efforts to achieve greater
with NGFS outputs. And in this respect, in the
global coordination in this area. Sector-specific themes
UK, more granular expectations will emerge
ather, a growing number of
R on climate risk management, scenario analysis, Banking
regulators in the region will follow espite the prominence of investor
D
disclosure and stress testing in the first Capital Markets
the PRA’s example and issue their activism in climate risk matters, we
instance through the BoE’s 2021 BES – all of
own supervisory statements on expect that regulators within the Insurance
which are also policy focus areas for the EBA.
managing financial risks from EU will remain the greater force for
change in this area. Investment Management
climate change, whilst also deploying In response, firms should focus on
understanding and mapping the physical Glossary
and transition risks of climate change. They Endnotes
Within the EU we expect debates around so- This is because brown factors can be
should develop and embed climate scenarios
called “brown penalising” or ”green supporting” calibrated, to a considerable degree, around Contacts
and stress testing to inform risk identification
factors to intensify in the context of CRD 6/ physical and transition risks and associated
processes whilst enhancing risk modelling
CRR 3 and Solvency 2, whilst moves towards data, that are already crystallising. Other policy
frameworks. They should also ensure that
integrating ESG into the SREP for banks will makers may, in contrast, take a more positive
boards develop sufficient climate risk expertise
continue. We expect regulators, if pressed, view of the merits of incentivising green
by providing adequate training.
generally to favour brown penalising factors supporting factors relative to brown
over green supporting measures. penalising ones.
In the UK, in-scope banks and insurers will
also need to implement the plan that they
Next 20
20Climate change and sustainability Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
IBOR transition
submitted to the PRA in October 2019 for Moves are afoot in the UK and EU to make Firms should therefore continue to make
Climate change and sustainability
integrating climate risks into their governance TCFD disclosures mandatory. In 2020 the FCA progress on TCFD‑consistent disclosures in line Operational and cyber resilience
and financial risk management frameworks. will consult on TCFD-aligned disclosures for with these initiatives. They should focus their Culture, governance, and accountability
certain issuers, the EBA will be submitting attention on identifying material climate risks Good customer outcomes
AI governance and model risk management
On governance structures, forthcoming technical standards to the EC on CRR 2, Pillar 3 and related data to support this, establishing
Regulating firms’ use of consumer data
changes to AIFMD, UCITS, MiFID 2, IDD and ESG disclosures and the EC intends to launch effective governance structures, conducting Crypto-assets
Solvency II will require firms to ensure that a review on NFRD. The BoE has also confirmed scenario analysis, developing strategies Financial crime
sustainability risks are incorporated into that it expects TCFD consistent disclosures resilient to climate change and developing Stress testing
organisational requirements, risk management by 2022 for listed companies and large asset appropriate metrics.
Sector-specific themes
procedures and product governance. owners.
Additionally, amendments to IDD and MiFID 2 Banking
will mean that both investment firms providing Figure 2. Eurozone firms' exposure to climate-sensitive sectors (by issuer sector) in 2018
Capital Markets
advice/portfolio management and firms
distributing insurance-based investment
450 9 Insurance
400 8
products will need to make changes to their Investment Management
350 7
suitability processes to address clients’
Glossary
% of total holdings
ESG preferences. 300 6
EUR (bn)
250 5
Endnotes
In relation to firms’ strategies, the greater 200 4
regulatory/policy focus within the EU on 150 3
Contacts
defining sustainability, reflecting customers’ 100 2
ESG preferences, managing ESG risks and 50 1
removing barriers to the development of green 0 0
Banks Investment funds Insurance corporations Pension funds
products and services, can all be expected
to drive ESG product and service innovation Energy-intensive Fossil fuels Housing Transport Utilities % of total holdings (right-hand scale)
by firms, including to meet growing customer
demands in this area. Source: ECB, Climate change and financial stability, May 2019
Next 21
21Climate change and sustainability Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
“Despite the rising
IBOR transition
Firms will also start preparing to comply with the Firms in the EU will therefore need to ensure
Climate change and sustainability
Disclosure Regulation. In the case of investment that all communications about sustainable Operational and cyber resilience
products, this will include preparing and products and services clearly and fairly prominence of investor Culture, governance, and accountability
disclosing information on how negative impacts articulate their ESG credentials, together with Good customer outcomes
on financial returns arising from sustainability the way in which these objectives are achieved, activism in relation to AI governance and model risk management
Regulating firms’ use of consumer data
risks are integrated into risk policies, how
financial entities consider the adverse impacts
and that there is clarity about performance
measurement.
climate risk, we expect Crypto-assets
Financial crime
of sustainability factors, and, in the case
of investment products with sustainability Finally, we expect ESG shareholder activism
that regulators within Stress testing
Sector-specific themes
characteristics, how such characteristics are by asset owners and managers to intensify. the EU will remain the
met. Meanwhile, we anticipate that firms will This will be driven amongst other factors by Banking
begin to think about the strategic implications regulatory stewardship developments. Despite greater force for change.” Capital Markets
flowing from the taxonomy as well as how to the rising prominence of investor activism
implement and use it. in relation to climate risk, we expect that Insurance
regulators within the EU will remain the greater Investment Management
We anticipate that the growth in consumption force for change.
of sustainable financial products by retail Glossary
investors will be accompanied by a growing Endnotes
focus by conduct regulators in the EU on
“greenwashing”. Greenwashing refers to Contacts
the practice where firms market/portray
products, activities or policies as producing
environmental outcomes, when this is not the
case. The FCA and AMF, informed by the EU’s
developing work on disclosure, taxonomy
and labelling, are expected to lead the way
in this work.
Next 22
22Operational and cyber resilience Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
IBOR transition
firms to strengthen their management of cyber
In focus upervisors will continue to
S risk, and teams previously less exposed to
Climate change and sustainability
Operational and cyber resilience
challenge rigorously firms’ Cloud supervisory scrutiny will need to adapt to what Culture, governance, and accountability
Firms will need to demonstrate they migration plans, and will further will be a more intrusive approach. Good customer outcomes
have considered, and can manage, clarify policy on outsourcing AI governance and model risk management
Regulating firms’ use of consumer data
the full range of technology and arrangements. Firms should engage EU-level negotiations will take time, but we Crypto-assets
resilience risks they face, especially proactively with supervisors on anticipate faster progress from regulatory Financial crime
as they upgrade their core systems Cloud transition and demonstrate authorities. In particular, we expect the SSM Stress testing
to be able to innovate. robust governance and risk to weigh the development of an assessment
Sector-specific themes
management capabilities. framework for the cyber resilience of directly
upervisors in some EU jurisdictions
S supervised banks similar to the Cyber Banking
will have new means of evaluating I nternational standard-setting Resilience Oversight Framework developed Capital Markets
and understanding firms’ bodies will make some, still slow, by the ECB for FMIs in 2018. EIOPA will
approaches and resilience to cyber progress in building consensus finalise its guidelines on ICT and cyber Insurance
and operational risks, and will put for the development and security governance, building on the EBA’s Investment Management
pressure on them to address areas of implementation of a common final guidelines on the same topic. It will also
deficiency. regulatory approach to cyber and consider applying threat-led cyber resilience Glossary
operational risks. testing to the insurance sector. On the Endnotes
supervisory front, when outages occur, senior
executives in the UK can expect heightened Contacts
Supervisors will expect firms to demonstrate The European Commission is expected to
they have thought deeply about the full range table a comprehensive legislative proposal scrutiny under the SM&CR, and will need to
of technology and resilience risks they face, in 2020 on the management of cyber risks show what steps they have taken to mitigate
especially as they upgrade their core systems in FS, intended to harmonise and clarify the risks of operational disruptions, especially
as part of digital transformation programmes. expectations for risk management practices. during IT change programmes.
These have too often been a key driver of In time, clearer powers and expectations will
operational failures in FS. enable supervisors to apply more pressure on In the UK, responding to Parliament’s call to
prioritise this work, the BoE, PRA and FCA
Next 23
23Operational and cyber resilience Global foreword
Executive summary
Medium-term trends in EMEA
Cross‑sector themes
IBOR transition
will will finalise their approach to operational will be using the results of these tests as tools competition, are increasingly concerned
Climate change and sustainability
resilience in 2020, and start implementing it to help them assess whether firms are taking about the concentration risk of large‑scale Operational and cyber resilience
before the end of 2021. Boards and senior steps to address the vulnerabilities revealed. outsourcing to unregulated CSPs. The EU, Culture, governance, and accountability
management will need to communicate clearly including the UK, will consider legislation to Good customer outcomes
AI governance and model risk management
to their supervisors their impact tolerance levels FS authorities, whilst recognising the bring CSPs within the regulatory perimeter, but
Regulating firms’ use of consumer data
for operational disruption. This should include: importance of the Cloud for innovation and progress is likely to take time due to difficult Crypto-assets
Financial crime
• identifying their important business Figure 3. Cloud adoption amongst respondents to Deloitte’s Digital Risk Survey Stress testing
services;
Sector-specific themes
100
• mapping the underlying systems and 85% Banking
processes that support them; 80
Capital Markets
• articulating impact tolerance statements for
each of these services; and 60 Insurance
• demonstrating what they have done to 40 Investment Management
30%
improve the resilience of these services in 27%
Glossary
the face of a disruption. 20
19%
10%
Endnotes
The first tests under the ECB’s TIBER‑EU 0
Overall Adopted Adopted for Adopted for Experimenting Contacts
framework have already started. In 2020 adoption at scale customer use cases internal use cases
we expect an increase in the number of
EU countries introducing these, including
cross‑border tests. In the UK, the FPC’s cyber Top three barriers to scaling adoption
stress test of large FS firms will be repeated with Risk appetite Maturity of governance model Regulatory scrutiny
increasingly challenging scenarios. Firms must
prepare to engage with their supervisors, who Source: Deloitte, Digital risk survey, October 2019
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