May 2022

Welcome to the latest edition of KPMG Regulatory Horizons from KPMG's EMA FS Regulatory Insight Centre (RIC) — with forward-looking insights and commentary on financial services regulation that impacts the EMA region.

Unsurprisingly during 2020 and 2021, European policy makers and regulators were very much focused on the impacts of, and recovery from, the COVID-19 pandemic. There is now cautious hope that the worst has passed. This quarter’s issue of KPMG Regulatory Horizons shows that regulators are now looking to the future — including the challenges of digital and sustainable finance. However, they have also had to react to and monitor the impacts on financial markets and services of Russia’s aggression towards Ukraine. At the international level, the FSB’s recently published workplan reflects most of these areas of focus — please see a summary below.

Based on the EBA’s initial assessment, there is limited direct impact on EU banks from the Russian invasion of Ukraine but second order effects may be more material from a financial stability perspective. The EBA strongly encourages banks and other financial institutions to consider carefully the prudential and business impacts of the short and longer-term risks they face in light of these geopolitical developments. Cyber risks in particular require continued attention. ESMA is coordinating the regulatory response to the Ukraine crisis and closely monitoring the impact on financial markets and reminds issuers of the need for transparency in financial reporting and market disclosures on the impacts of the crisis. Both Authorities reiterate the need for firms to comply with EU sanctions.

Regulators are considering how to balance the innovations and efficiencies that digital finance can bring with the associated risks. This issue covers developments in cryptoasset regulation and Central Bank Digital Currencies (CBDCs), how the expansion of big tech platforms into financial services is causing regulatory concern around potential anti-competitive behaviour, and how regulators are preparing for a world in which digital financial services could, theoretically, be delivered from anywhere.

As sustainable finance regulation develops, regulators continue to target better data and harmonised reporting standards for environmental objectives. However, initial policy work is also in progress on defining “socially sustainable” (the S in ESG) — it is likely that an EU “S” Taxonomy will present even more difficulties than the “E”.

More established frameworks also present new challenges — the European Commission’s October 2021 proposal to implement remaining Basel reforms is prompting varied reactions from market participants and supervisors, including the ECB — read more below.

Financial Stability Board 2022 Work Programme

Priority areas of work and new initiatives:

  • Supporting international cooperation and coordination on current financial stability issues, including the economic impact of the Russia-Ukraine conflict and the lessons learned from the impact of COVID-19
  • Enhancing the resilience of non-bank financial intermediation (NBFI), while preserving its benefits, including continuing work on open-ended funds (OEFs), margining practices, the liquidity, structure and resilience of core bond markets, and USD funding and emerging market economy vulnerabilities
  • Enhancing cross-border payments by implementing actions under the roadmap
  • Harnessing the benefits of digital innovation while containing its risks, including the regulation and supervision of stablecoins and unbacked crypto-assets, and considering risks arising from decentralised finance (DeFi)
  • Addressing climate-related financial risks by coordinating international work through the FSB’s roadmap

Continuing financial stability work:

  • Cyber and operational resilience — including work on third-party risk management and outsourcing and encouraging greater convergence in cyber incident reporting
  • Enhancing central counterparty (CCP) resilience, recovery and resolvability
  • Completing resolution reforms — including the conduct of resolution planning and resolvability assessments, the availability and allocation of loss-absorbing resources and the access to funding in resolution