Regulatory reform and uncertainty hasn’t slowed the pursuit of partnerships and technology that will improve customer experience and enhance compliance, explains Sanjeev Chatrath, Managing Director, Asia.
Despite the accelerated pace of regulatory reform throughout the last decade, uncertainty in the financial services industry remains close to an all-time high.
Firms are still trying to get to grips with the regulatory regimes in their home jurisdictions while the number of extraterritorial regulations continues to rise. Regulatory change has become the only constant.
This made the discussions held at the 2017 Thomson Reuters Pan Asian Regulatory Summit more relevant than ever.
Financial markets may appear to be taking global political and economic uncertainty in their stride, but new challenges and risks demand attention.
There were three key themes at the summit, which we will see discussed well into 2018:
- The need for innovative anti-money laundering tools.
- The constant threat of cyber attacks.
- The challenge of meeting impending regulatory implementation deadlines.
While many of the large regulatory reform initiatives that were conceived in the aftermath of the financial crisis are now in their final implementation phases, it would be wrong to think that the era of big regulatory changes is nearing an end.
MiFID II impact
Donald Trump may have won the U.S. presidency on a deregulatory agenda, but other jurisdictions, like the European Union (EU), have continued their own fast pace of rule writing and implementation.
Next year, a number of big EU regulatory changes will come into effect and impact the financial industry worldwide.
Participants from all parts of the financial industry will face a different world on January 3, 2018, when the European Union’s Markets in Financial Instruments Directive II (MiFID II) takes effect.
This new directive has been years in the making, but for many in the industry, the full effect of its implementation has only just begun to sink in.
The directive aims to do for bonds and derivatives what the first MiFID did for securities — and much more.
The key areas to address include:
- The unbundling of research costs from commissions paid to investment banks.
- A requirement to provide pre- and post-trade transparency for transactions in financial instruments.
- New trade reporting rules.
- An obligation for anyone involved in a transaction to have a legal entity identifier.
MiFID II also extends the requirements of best execution across all asset classes, while at the same time establishing a greater number of venues to aggregate all that data.
Execution venues, market makers and buy-side firms will all have to publish execution reports, requiring more sophisticated systems and processes to handle the increased workload.
Because of its extra-territorial nature, a transaction involving a European financial product or investor will be as applicable under MiFID II to a small bank in the U.S. Midwest as it would be to a broker in Hong Kong.
Time is preciously short for financial institutions planning to be ready when it takes effect.Discover how Thomson Reuters empowers the world’s leading banks and investment managers to make informed KYC and onboarding decisions
New insurance regime
Meanwhile, more domestic risks and developments are set to keep the financial industry busy. This year, Hong Kong welcomed the new Insurance Authority (IA) into the community.
Its chief executive officer, John Leung, used the summit as an opportunity to provide insights into what the new IA regulatory regime will entail for Hong Kong’s insurance sector.
Measures include a risk-based capital regime, the promotion of InsureTech, and new regulations for insurance intermediaries.
Digital currencies have been a hot topic for some time now, and recent developments have seen them make headlines once more.
Discussions about potential regulations for the digital currency market have intensified as a result, with the need to preserve a balance between transparency and privacy a key concern.
As well as suggesting new regulatory reform debates, advances in technology also present opportunities for regulators and the industry to introduce new solutions to address market needs and make firms’ offerings more efficient and relevant.
The Hong Kong Monetary Authority (HKMA) recently announced its plans for a “new era of smart banking” that will facilitate easier opening of internet-only banks and greater adoption of mobile banking.
The HKMA, IA and Securities and Futures Commission have all established “sandboxes” for testing out new technologies.
Paul Chan, Hong Kong’s chief financial secretary, described for the summit’s audience recent developments to make these sandboxes more effective, and called on the industry to work together to realize the positive benefits of innovation.
KYC industry solutions
Part of the HKMA’s smart banking initiative involves looking at ways to simplify the customer on-boarding process when opening bank accounts, which has been a point of consternation in some sectors in recent years.
Some individuals and smaller firms found that banks introduced much stricter customer due diligence requirements, making account opening a far more time consuming process.
Banks, on the other hand, said they had no choice but to do so in order to remain compliant and avoid regulatory enforcement.
One technology the HKMA is looking to introduce to smooth this process out is know-your-client (KYC) industry solutions.
Essentially, a KYC industry solution is a shared database between banks and regulators containing due diligence information on existing customers.
Hence, if a customer has been screened by one bank, they would not face the same documentary requirements if they decided to use banking facilities at another bank with access to the database.
Such innovative and cost-effective initiatives are generally welcomed in the industry, which has been laboring under ever-increasing compliance costs since the financial crisis.
There are benefits for Hong Kong’s government and regulators too: the territory will undergo a mutual evaluation of its Anti-Money Laundering (AML) regime by inspectors from the Financial Action Task Force in 2018.
The Hong Kong government recently tightened AML standards for identifying beneficial owners and reporting of suspicious transactions, which will go some way to addressing any gaps in the territory’s AML regime.
The introduction of a KYC industry solution is likely to be seen as another positive development.
This year has been a busy one for regulators and industry participants — and 2018 is unlikely to be any quieter.
Discussions and debates concerning regulatory reform will continue long into the future.
It is clear from the conversations we have had at the 2017 summit that, while uncertainty may still reign, determination to collaborate and use technology to improve customer experience and compliance is strong.