KPMG Regulatory Barometer

The new KPMG Regulatory Barometer aims to help firms identify the key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change.

Financial services firms have to handle frequent regulatory updates from multiple sources and it can be difficult to distil the volume and complexity of regulatory change into a single view. The first edition of the Barometer identifies nine key regulatory themes and assigns them each a regulatory impact score based on attributes such as volume of updates, complexity and time to implementation. The theme scores are aggregated into an additional single metric to represent the overall level of regulatory pressure — over time, we will track these scores to gauge whether the relative pressure is rising, falling or remains constant.

We don’t expect all of the key themes to impact equally across all sectors or even all firms in a sector — certain topics or aspects within themes may be more or less relevant for banks and, at individual firm level, there may be different interplays, trade-offs and tensions depending on business models and exposures.

Below we pull out the key messages for banks to help direct you to the most relevant sections of the Barometer for your business. We hope you find this useful and welcome your feedback.

In many respects, banks have been at the sharp end of regulatory demands on ESG, particularly around the financial risks of climate change, and we expect this to continue. Stress testing and the measurement and management of climate-related financial risk will require continuing efforts as methodologies evolve and mature. Capital considerations are front of mind too, with regulators in both the UK and the EU considering how best to reflect climate and environmental risks in the ICAAP. In the capital markets, increasing scrutiny of ESG ratings and the functioning of carbon markets will likely lead to tighter regulation. Meanwhile the requirements for disclosures — prudential, corporate and product-related — are ramping up and banks are being called upon to support the “just transition”. All banks must engage proactively on the topic and be making demonstrable changes. 

Banks demonstrated resilience through the pandemic with support from governments and regulators. Conditions continue to be uncertain due to the situation in Ukraine and resulting economic pressures. Regulators are keen to build on the improvements made since the global financial crisis to ensure that prudential frameworks remain robust and banks are able to support the real economy in times of stress. With this in mind, they are looking to implement the final Basel reforms over a multi-year period and are reviewing the operation of capital and liquidity buffers. Calls for proportionality and consideration of local specificities may result in regional variations in Basel implementation requirements, adding to the complexity for banks operating across borders. Resolution and leverage ratio frameworks for banks are largely complete but will be subject to ongoing review and refinement. A proportionate prudential regime for smaller firms is being developed in the UK, to reduce regulatory burden and encourage competition. Model risk management practices are also under close scrutiny in the UK. 

There has been a significant increase in digitalisation, accelerated by the pandemic, which is driving more immediate communication with customers through online tools and new technologies. Retail banks have embraced the opportunities offered by initiatives such as Open Banking. Banks are also exploring where and how artificial intelligence and machine learning can be embraced, with opportunities to not only improve client service and trading strategies but also bring efficiencies to risk and operational processes. However, this technology needs to be carefully overseen — and much like regulators, banks will want to explore the opportunities that crypto-assets and emerging technologies bring while carefully managing the downside risks to themselves and to their clients.

Banks should act on regulatory requirements to identify their most important services, test them from end to end under severe but plausible scenarios and demonstrate that they can remain within their stated tolerances for disruption. In an increasingly digital world, cyber risk is heightened, and new threats are emerging including outages due to extreme climate events. Banks must consider the possibility of more than one concurrent disruptive event and not just the potential impacts on their own businesses, but also the wider financial system and customers. Increase reliance on third parties, particularly those deemed “critical”, extends the need for clear oversight of these arrangements. 

Banks operating in the wholesale markets may want to track closely the reviews on MiFIR in the EU and the UK and their likely impact on trading and trade and transaction reporting. Primary market legislation is also under review in both jurisdictions and may change the way banks support their clients in raising capital in public markets. And the LIBOR transition is not over yet — banks still need to prepare for the cessation of USD LIBOR in June 2023.

The continuing regulatory reviews of margin practices should hopefully ensure a reduction in volatility in margin calls at times of markets stress and their knock-on impacts on banks' liquidity. As consumers and vendors of market data, banks will be keen for the regulatory developments in this space to deliver better and more cost-efficient access to data. As payment infrastructure evolves, banks will need to ensure that their own systems keep pace. Regulators' increasing focus on vulnerable customers is likely to result in measures on access to cash and compensation from fraud to which banks will need to adapt.

In both the EU and the UK, we are seeing regulators seeking to enhance levels of protection and this could have a material impact on all retail banks. The pace and significance of change is very different from what we have seen before — regulators are moving away from prescription and focusing more on culture, behaviours and outcomes. The impacts are not just operational — with scrutiny of pricing/value for money, there may be direct commercial implications for banks' bottom lines. 

Banks are continuing to respond to the implications of new arrangements — both proactively and reactively. For example, some have altered their regulatory footprint by establishing subsidiaries in the EU. They are also tracking the different approaches to key issues across the UK and the EU to ensure that they identify any divergence that could have a consequential impact on their business  — and even existing jurisdictional arrangements. The reviews of MiFIR and implementation of Basel reforms, as referenced above, are both areas where this could be significant. 

Banks have been strengthening frameworks over the last few years in response to regulatory expectations. Regulators continue to assert the importance of robust governance in delivering resilient banks that provide good outcomes for their clients without misconduct. Pandemic-driven moves to hybrid and remote working have introduced new challenges to governance frameworks and operations. And increasing focus on diversity and inclusion is likely to continue to drive changes in corporate governance arrangements and how banks operate.

We don't yet know how all the current regulatory initiatives will play out in detail — but the Regulatory Barometer is here to help you track new developments and stay on top of the evolving agenda. Please share your feedback with us and look out for the next issue in 2023.