No more waiting for the bus - capital markets regulatory response in the 2020s

The regulatory agenda post-2008 was dominated by a series of ‘big bus’ legislative initiatives such as Dodd-Frank, EMIR, MiFID II, Basel III and more. Implementing these regulations was a huge challenge, but the structure and focus of firms’ regulatory programmes was effectively determined for them by the new requirements. As we look forward, past the challenges of Brexit and COVID-19 lockdowns, the future looks quite different. Rather than more ‘big buses’ coming along on the legislative front, we expect to see the supervisory agenda driving significant change. This by its nature will be less pre-structured and require more flexible response. Firms’ change programmes are likely to be more varied as a result, and will potentially require greater thought and imagination to structure.

Three key themes around which the agenda will be shaped stand out from recent conversations with our clients:

Responsive, targeted regulatory interventions

A proactive posture from supervisors combined with the broader climate means that responsive, targeted regulatory interventions (sometimes called ‘microregulation’) tackling market events as they occur, are becoming an increasingly important part of the landscape. For example:

• ‘Dear CEO’ letters (e.g. RE climate related risks) and related exercises
• Deep dives on risk themes raised by high impact loss events, such as due to operational errors or risk judgements
• Wider thematic exercises (e.g. attestations required around the impact of Negative Interest Rates, Operational Resilience)

Responding rapidly and effectively to these exercises will give supervisors greater confidence in a firm’s ability to tackle the issue. To achieve this, firms need to shape the required response into an appropriately structured delivery project. Organisational transparency and data management are key to achieving this – and the agility and the ability rapidly to scale and to access and deploy the right skills for a point response critical enablers.

Large Scale Market Transitions

There may be fewer new ‘big bus’ legislative initiatives, but there are still huge market transitions and changes with high supervisory focus taking place:

• With the Brexit transition period over, and with post-Brexit Operating Models in place (although still being embedded), increased regulatory fragmentation is expected to be a key challenge. Banks, for example, face potential divergence between EU and UK regulation. The implications of this will need to be managed alongside addressing any operational inefficiencies that have arisen over the past few years as the new operating models have been established
• Additional regulatory divergence could also occur as global agendas diverge. UK government and supervisors may increasingly consider competitiveness of the UK financial system alongside regulation – including for example in the recent call for evidence for the UK review into bank ring-fencing and prop trading
• New asset classes will bring new regulatory and supervisory focus. ESG-linked products, and Crypto assets moving into the mainstream, are examples of new business lines which will bring new challenges

Emerging Technology

Responding to the impact of new technologies and technological possibilities is one of the defining challenges of our age. In addition to responding to the impact of technology change on markets, and deploying these technologies in their own businesses, institutions should expect an increasing level of supervisory focus on themes arising from these processes:

• Scrutiny of the use of cloud and cloud-enabled business models – the underlying technology may no longer be ‘emerging’, but the growing importance of these models – accelerated by changes in operations in response to COVID-19 – is a major disruptor. Supervisors will look to see that controls and governance are developing appropriately. Firms need to get this right, without compromising the benefits on offer from using the technology
• Increasingly pervasive use of AI and automated decision making processes for both commercial advantage and for performance of control functions. Supervisors are keen to ensure the use of these models is appropriately governed, and that outcomes are fair for customers
• Next generation technology – quantum computing, neuromorphic computing and other truly new capabilities may unlock possibilities hard to specify precisely at this point. Supervisors are alert to future technological developments, and to the risks and control challenges associated with these, as they learn along with the industry

We may well revisit these themes in greater detail in the coming weeks – let us know what you think and what you find interesting!

For additional reading, Deloitte’s EMEA Centre for Regulatory Strategy flagship report Financial Markets Regulatory Outlook 2021 is available. The report explores how major regulatory and supervisory trends will affect the financial services industry in the year ahead and how firms can respond to them effectively. You can download the full report or browse through its findings on our website via this link.