More EU Financial Regulations on the Horizon

Regulators, by their nature, regulate. And, with so much technological, political and financial change happening, it’s no wonder why EU financial regulators are so busy. To add to the recent changes such as Basel III and SEPA, compliance officers need to pay attention to a host of topics.

Brexit

Unless you’ve been hiding under a rock for the past four months, you no doubt know about the UK referendum to leave the EU. What you don’t know (and no-one does yet), is how it will affect compliance and regulations both in Europe and the UK.­

One thing to consider is where to locate. Is the era of London being the leader in World finance about to end? The reasons behind its leadership success; an inviting legislation regime, a broad and diverse financial ecosystem and access to vast sums of capital, are difficult to reproduce. While jurisdictions can pass more accommodating laws, other elements require a network effect and there’s not one clear-cut choice. Some have touted Frankfurt, while others look to Paris, but Dublin has the advantage of being English-speaking.

Some even suggest that Brexit won’t end up happening, so perhaps, wait and see on this one.

MiFID II

We’ve covered the new round of European regulation, Markets in Financial Instruments Directive (MiFID 2), in a recent post. MiFID 2 extends transparency requirements, amends requirements regarding trading venues and technology and strengthens investor protection via stronger inducements, additional clients’ assets safeguards, rules on product governance, and intervention powers. “MiFID II will affect corporate treasury functions significantly,” said Chris Leonard-Appleton, Director, Regulation at Thomson Reuters.

IFRS 9

IFRS 9 is an International Financial Reporting Standard that replaces IAS 39, effective for annual periods beginning on or after January 1, 2018. It passed the EU Parliament final hurdle October 6, 2016, after being launched back in 2009.

The issue revolves around the classification and measurement of financial assets, and impairment of those assets. It is in response to the reporting of losses ‘too little, too late’ and will require banks to model credit loss risk based on expected rather than incurred losses.

IFRS 9 is not some minor tax code change; according to Adrian Docherty, head of FIG advisory at BNP Paribas, “This is a big deal — Volatility of provisions, either in hypothetical stress tests or in real stress, could be significant. You are bringing forward the bad news.”

There is confusion around IFRS 9, especially how that will impact capital requirements. There might be huge volatility around the risk measurements of loans and therefore huge volatility around the capital requirements.

60% of banks, according to a May 2016 Deloitte survey, “either did not or could not” quantify the impact of the new rules. This confusion does not seem to have diminished since then; at a recent global banking conference, some 44% of the audience said they had “no understanding” of IFRS 9.

We can only hope that specific recommendations come about before implementation, or we face a situation where every treasury will base their numbers on their own risk models.

Other changes

There are other EU regulatory changes, either proposed, or on their way. Regulators are looking at money market fund regulations to match those in the US. The implementation date for PSD2 (which we’ll look at in an upcoming post) is January 13, 2018. And, the proposal of new tax transparency rules in April, would require country-by-country revenue disclosures.

While all these new requirements might seem daunting, the rapid advancement of RegTech promises to make life easier for compliance workers. Automating many aspects of AML and KYC compliance, improving risk identification and improving data analytics and transparency, all offer ways to improve compliance productivity. As Ruth Wandhöfer, global head of regulatory and market strategy at Citi, comments, “The emergence of RegTech as a focused fintech approach to solving regulatory challenges for firms is an area that should be kept in mind by corporates”.