Regulatory futures: challenges and opportunities in 2021

April 2021 | FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

April 2021 Issue

2020 will be remembered as a historic year. In terms of the business environment, coronavirus (COVID-19) caused massive dislocation across the vast majority of industries, including financial services (FS). The long-term implications have yet to be determined.

COVID-19 has also affected the regulation of the FS industry, with regulators forced to introduce a raft of often hastily assembled measures to curb the pandemic’s immediate, and likely insidious, impacts.

“FS firms are currently dealing with regulatory repercussions brought about by the pandemic, as well as Brexit and political changes,” says Lisa Lee Lewis, head of risk consulting EMEA advisory at Norton Rose Fulbright LLP. “While the Biden administration’s financial services policy is a key consideration for global FS firms, the UK is making headway in driving its own regulatory laws, independent of the EU, and focus on climate change, conduct and financial crime risks remain top priority.”

Another key regulatory change pertains to operational resilience. “The pandemic has placed a significant focus on operational resilience matters, which is one of the key priorities for regulators and challenges for FS firms this year,” contends Ms Lewis. “In light of various incoming regulations and the ongoing pandemic-related strain, firms should continue to adapt and improve their operational resilience through regular cross-mapping, stress-testing and lessons learnt exercises.”

According to Michelle Kirschner, a partner at Gibson, Dunn & Crutcher UK LLP, one area increasingly within regulatory purview is firms’ management of conduct risk. “This is a continuing area of focus, particularly as a result of more staff working from home and consequential difficulties in monitoring their activities,” she notes. “Another prevalent theme of the current regulatory climate relates to governance and individual accountability.

“As we move further away from the implementation phase of the Senior Managers and Certification Regime (SMCR), we anticipate an increase in enforcement action against key individuals,” she continues. “Environmental, social and governance (ESG) is also much more at the forefront. In the European Union (EU), for example, FS firms will be grappling this year with a new ESG regulatory framework – legislation that will focus on conduct risks relating to ESG, especially around greenwashing and disclosures.”

Compliance obligations

In the current pandemic environment and beyond, FS firms need to implement an overarching compliance programme which meets extensive regulatory and public policy challenges and concerns, while, at the same time, recognising and maximising value.

“While there may have been a short period in 2020 when firms were given time to revisit their oversight processes, that time has passed.”

“Regulatory forbearance in certain areas does not replace a firm’s obligations under the regulatory system,” affirms Ms Kirschner. “In the UK, the Financial Conduct Authority (FCA) has stated that its expectations around conduct are unchanged. While there may have been a short period in 2020 when firms were given time to revisit their oversight processes, that time has passed. The regulator now expects firms’ control environments to work adequately in light of the risks to which the business is exposed.

“To this end, firms need to have appropriate systems and controls in place to manage the enhanced risks that arise in the context of a pandemic,” she adds. “Such frameworks should be frequently assessed by the firm to ensure their efficacy. Market abuse and personal account dealing, especially, remain key areas of regulatory focus.”

Furthermore, the implementation of risk frameworks will allow FS firms to keep pace with changes to employee working styles, customer spending, consumer behaviour and how markets are operating, much of which is inextricably linked to the evolving nature of the pandemic.

Mirroring this view is Weronika Sowa, an associate at Norton Rose Fulbright LLP. “FS firms’ compliance arrangements must be robust enough to effectively manage risks, such as increased misconduct, failure to escalate concerns or increased COVID-19-driven financial crime,” she concurs. “However, any changes to compliance monitoring must be carefully considered. Decisions taken should be risk assessed, documented and go through appropriate governance protocols.”

Future focus

The events of 2020 and 2021 have undoubtedly reshaped the landscape of FS regulation, forcing a major rethink around societal and economic issues. While FS firms adapt to the pressures engendered by the regulatory changes introduced during the pandemic, there must also be a clear consensus as to the direction of future regulation.

“Regulators have warned FS firms against complacency, stressing the importance of remaining vigilant to pandemic-related regulatory changes, as well as future unforeseen operational disruption entirely unrelated to COVID-19, such as technology outages and cyber attacks,” says Ms Lewis. “In light of this, we anticipate a growing tension between the need for commercial viability and an accelerated regulatory focus on forbearance for vulnerable customers and the need to treat them fairly.”

For her part, Ms Kirschner expects to see action from the FCA toward FS firms that have not met the regulator’s requirements during the pandemic. “In particular, we expect firms’ operational and financial resilience to be scrutinised by the FCA, testing, among other things, firms’ risk assessments and business continuity policies,” she concludes. “FS firms should not be complacent and should continue to ensure they meet their regulatory obligations.”

Fraser Tennant