Regulators are advancing their sustainable and digital finance agendas, while seeking to tackle the longer-term impacts of the pandemic.
Regulatory work programmes retain pre-pandemic priorities, but those priorities are viewed from a new perspective. Systemic risks, financial stability and consumer protection remain on the agenda and are joined by a new priority — recovery.
The Financial Stability Board's (FSB's) 2021 work programme includes continued work on the impact of the pandemic and policy measures taken but also covers several other broad issues. Work on non-bank financial intermediation (NBFI) will include money market funds, open-ended funds, margin calls, bond market liquidity and cross-border USD funding. The resilience, recovery and resolvability of central counterparties (CCPs) and enhancing cross-border payments also feature, as do cyber and operational resilience, and climate change and sustainable finance. The FSB again underlines that firms must prepare for the transition to risk-free rates by end-2021 (see Most LIBORs to cease end-2021).
The European Commission's new strategy to stimulate the “openness, strength and resilience” of the EU's economy and financial system is three-fold:
- To promote the international role of the euro by supporting the development of euro-denominated instruments and benchmarks, fostering the euro's status as an international reference currency in the energy and commodities sectors, and bolstering its use as the default currency for sustainable finance products
- To develop and improve the resilience of EU financial market infrastructures, including with regard to the extraterritorial application of sanctions by third countries and technical issues related to the transfer to EU CCPs of euro-denominated financial contracts cleared outside the EU
- To promote the uniform implementation and enforcement of the EU's own sanctions, including developing a database — the Sanctions Information Exchange Repository — to ensure effective reporting and exchange of information
The document notes that Brexit strengthens the need for the EU to develop its own capital markets and EU clearing members are expected to reduce their exposures to UK CCPs. It also emphasises the importance of sustainable finance and digital transformation, including a digital euro.
Portugal now holds the Council of the EU's rotating Presidency and has presented three priorities:
- Promoting a recovery that is boosted by the green and digital transitions
- Delivering the Social Pillar as a key element for ensuring a fair and inclusive green and digital transition
- Strengthening the strategic autonomy of a Europe that is open to the world
Financial services are regarded as a key element in delivering a fair, green and digital recovery. This will largely translate into implementing the recovery measures outlined during the second half of 2020 and progressing work on the Commission's sustainable finance and digital packages. Specific areas of work will include:
- Completing Banking Union and work on the final Basel reforms
- Work on non-performing loans, building on the 2017 Council action plan and the Commission's recent legislative plan (see Bank distributions, bad loans and consolidation)
- Considering various issues arising from the Commission's anti-money laundering action plan
- Helping to deepen Capital Markets Union, as outlined in the Council's December 2020 conclusions
- Commencing in Q2 the review of the Central Securities Depositaries Regulation (see Refining the capital markets framework)
- Recognising the benefits of digitalisation and considering the risks, within the Commission's ambitious timetable
- Considering follow-up work to the renewed sustainable finance strategy (see Sustainable finance: a regulatory imperative)
- Progressing discussions on the final Green Bond Standard when it is issued
- Preparing the ground for the reviews of Solvency II and MiFID II/MiFIR
The Council will also need to continue to deal with fall-out from the pandemic and the various areas of uncertainty arising from the end of the Transition Period and the ongoing EU-UK negotiations on the equivalence framework (see Post-Transition: impact on financial services).
Firms should consider all these issues and will need to navigate the impacts on their business models.
Retail agenda not forgotten
Amid the debate about the impact of the pandemic in the capital markets, regulators remain attuned to the need to protect retail consumers.
IOSCO's Retail Market Conduct Task Force has issued its initial findings and observations on the impact of the pandemic on retail market conduct, including on the value of investment products and retail investor trends. All parties have been challenged by high market volatility, pressures created by reduced profitability, heightened financial and psychological pressures on firms and investors, and constraints posed by remote working on firms and regulators. The report notes that common types of harmful behaviour in times of stress include mis-selling, mis-labelling and misleading disclosure. Changes in investor behaviour include increased participation in online trading, and in unlicensed and riskier products.
- Proactive monitoring of investor behaviour and offerings targeting vulnerable investors
- Supervisory scrutiny of certain firm behaviour that may flag potential misconduct
- Regulatory communication during stressed times
- Monitoring of return to “normal” and taking effective enforcement action
- Leveraging experience from periods of stress to enhance regulatory requirements and approaches
Within Europe, the debates on product disclosures and on costs and charges continue. Product providers await the conclusion of the discussions between the Commission and the ESAs on what changes are needed to the PRIIP KID and whether the Level 1 regulation needs to be amended. Meanwhile, retail investors continue to receive figures in KIDs that all three sectors — insurers, fund managers and structured product providers — believe are flawed and misleading, but they have different views on how the rules should be amended.
The impending MiFID II review has re-opened the debate about inducements. Analysis has begun of the experience in those countries that impose a complete ban on commissions to distributors out of the product — the Netherlands and the UK. And ESMA has launched a Common Supervisory Action (CSA), to assess compliance with the relevant cost-related UCITS provisions and the obligation not to charge investors undue costs.
For more thoughts on the above points, see KPMG's publication series on regulating the new reality.