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Regulatory intelligence

The global state of compliance and regulatory reform

Stacey English  Head of Regulatory Intelligence

Stacey English  Head of Regulatory Intelligence

Regulatory reform is a perpetual work in progress

As compliance professionals try to reconcile themselves to increased regulatory burden and personal liabilities, they likely entered 2016 wondering whether the tide might turn at last. The UK shows signs that it might be time to end banker bashing and take on a more pragmatic approach to financial regulation while maintaining a hard line on bad behavior. In the US, we see a period of regulatory consolidation with Wall Street’s political unpopularity lingering and an unsettling election year upon us.

The shift in leadership at the UK Financial Conduct Authority signals a more bank-friendly approach from the Conservative government. Top UK regulators have, however, been at pains to play down significant changes the government proposes making to the Senior Managers and Certification Regime (SMR), which were published in draft legislation and a policy paper in October.

The changes effectively subject senior managers to a duty of responsibility rather than proving they have done the right thing. Regulators are clear that the focus for firms and individuals should be on complying with both the letter and spirit of the rules rather than considering ways to circumvent them. The SMR came into effect in March making the lives of compliance professionals harder and the Treasury Committee will be keeping a watchful eye on its implementation.

Stacey English on cybersecurity threats and regulatory reform

European legislation also looms large, with the EU having just recently agreed to sweeping changes to data protection regulations. The proposed regulation is extraterritorial in effect, with the protection of transfers of personal data to third (non-EU) countries and international organizations being “ensured” through adequacy decisions.

Firms also have to grapple with the scope of the Market Abuse Regulation (MAR) following the far broader definition of “financial instrument” in the revised Markets in Financial Instruments Directive, MiFID II, which includes financial and commodity derivatives, for example. MAR also covers financial instruments admitted to trading or traded on multilateral trading facilities, financial instruments traded on organized trading facilities and emission allowances.

In the US, the regulatory tide shows few signs of ebbing, even if the big push of Dodd-Frank reforms is nearing completion. The US securities industry is focused on investor protection through issues such as a proposed fiduciary standard for brokers and systemic risk over- sight for asset managers. Banking will feel pressure for deep cultural reforms and control improvements against money laundering and terrorism financing. This comes amid a greater determination to hold executives personally and even criminally accountable for their firms’ lapses.

Financial services firms will face technology challenges, including a growing regulatory focus on cybersecurity threats. They also face opportunities such as “blockchain” secure-transaction technology.

European and US regulations will also dominate the agenda in Asia, where firms will have to contend with the growing extraterritorial impact of such regulations at the same time as economic growth in the region begins to stutter. Most Asian jurisdictions remain on track to implement G20-driven rules on capital, over-the-counter (OTC) derivatives clearing and resolution regimes but regulators and policy makers will also seek to increase cooperation within the region to ensure it has sufficient clout in wider regulatory matters.

There are other risks too: implementation of the European Union’s Fourth Money Laundering Directive, the fight against cybercrime and fast-evolving developments in financial technology. It promises to be another unforgiving year for compliance professionals.

United States

While US regulators aim to wrap up Dodd-Frank, their focus turns to new areas of cybersecurity, margin rules for uncleared swaps, capital thresholds for systemically important institutions and the Department of Labor’s fiduciary duty proposal for brokers dealing with clients’ retirement accounts.

Banking culture reform – an indefinite quest

The thorny issues of banking culture will be an important focus for US financial regulation in  2016. Senior managers at both large and small firms can expect to be scrutinized about what progress they’ve made toward instilling strong ethics and values, and will need to be able to demonstrate to supervisors that they have policies and procedures in place to deal with misconduct. The problem with cultural reform in banking is that the process is indefinite and the benefits are often hard to quantify.

What a year ago was transformative delight has given way to skepticism and questions about whether FinTech start-ups may have over promised on what they can deliver, and this has led to regulatory concerns.


Canada’s 2016 regulatory outlook will be dominated by work to complete capital market reforms, improve investor protection, address financial stability concerns and meet challenges over anti-money-laundering (AML) enforcement. Despite the ouster of longtime Conservative leader Stephen Harper in November elections, Prime Minister Justin Trudeau’s new Liberal government is expected to complete financial regulation initiatives already underway.

Suitability, adviser-client relations and the protection of seniors will remain major priorities for all Canadian investment regulators, including the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA).

UK and Europe

Could the imminent arrival of the UK’s new individual accountability regime bring about excessively cautious and defensive behavior on the part of some managers, while undermining collective decision making by banks’ executive committees and boards? Such an outcome would of course be the opposite of what legislators and regulators intended when drawing up the new rules.

The Financial Services (Banking Reform) Act 2013 renamed these elements the Senior Managers and Certification Regime (SMR) which, together with high-level Conduct Rules that will eventually apply to nearly all employees of a bank, have come to be dubbed the Individual Accountability Regime (IAR). The scheme went into effect in March.

MiFID II: Welcome to the regulatory twilight zone

The planned application date for the MiFID II is barely a year away. Nevertheless, a proposed delay, disagreements about the contents of the regulatory technical standards and promises of further guidance on implementation, as well as unhappiness about how the regulation is being transposed at the national level, have all combined to create a regulatory twilight zone in which market participants are struggling to identify a way forward.

Asia Pacific

Hong Kong faces uncertain future

Hong Kong faces considerable uncertainty during 2016, as monetary policy movements look set to trigger an outflow of the international capital to which the territory’s financial services sector has become accustomed. Closer to home, the prospect of a further slowdown in the Chinese economy will also have implications for Hong Kong. Nevertheless, there is likely to be plenty of regulatory and compliance activity in the territory, with a host of new developments planned.

FinTech revolution

Technological solutions to regulatory challenges will become more commonplace as the FinTech revolution continues to gather pace. In South Korea, another country whose fund distribution solutions the Hong Kong SFC studied, a Web-based fund supermarket was launched in 2014, driving distribution costs down to a third of the cost of funds sold elsewhere. On the back of this success, South Korea’s government has also recently opened two purely Web-based banks, making it one of the first Asian jurisdictions to do so.


Australian financial services firms are preparing for a challenging environment in 2016 as the country’s regulators push ahead with a suite of coordinated international and domestic reforms.

The regulators’ broad agenda will be to bolster financial sector resilience, improve conduct, embed better standards of corporate culture and address the challenges and opportunities associated with technology.

The main developments in 2016 will include: new capital standards and ratios to bolster banking sector resilience, central clearing of OTC derivatives for some entities, a new professional standards framework for financial advisers, the Australian Securities and Investment Commission (ASIC)’s new powers to ban individuals from managing financial firms and implementation of the Asia Region Funds Passport initiative.

Learn more

Download the full State of Regulatory Reform 2016 report.

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