After enduring a very tumultuous year, which has included record fines and a decision to dramatically alter the regulatory environment with plans to abolish the Financial Services Authority (FSA), UK financial services firms’ biggest challenge in 2011 will be navigating and preparing for anticipated dramatic changes in how regulation is structured and delivered in the UK and Europe, according to Wolters Kluwer Financial Services’ regulatory experts.
The FSA has taken a hard line with financial services firms in 2010, issuing the greatest level of financial penalties in any single year since it took over UK regulation in 2001. Fines have exceeded £221.7m so far this year. However, many industry professionals have stated this stronger arm is a little too late, and support the UK government’s decision to dismantle the UK tripartite regime (HM Treasury, Bank of England and FSA) and break up the FSA. This has left the financial services industry anxiously waiting to see what the new regulatory structure will look like.
The planned restructure poses an obstacle for UK financial firms, which must adopt a proactive approach to compliance as they try to pick their way through the “minefield of change”, according to Mary Stevens, manager, Regulatory Content-UK, Wolters Kluwer Financial Services. At the same time, firms are preparing for influential legislation passed in 2010, such as the Bribery Act, which provides a new legal framework to combat bribery in the public and private sectors.
“We will likely start to see the first bribery and corruption cases make headlines as the Bribery Act takes effect next spring,” said Stevens. “It poses much concern for UK financial services firms conducting business globally because they will face the challenge of ensuring compliance with UK internal policies within different jurisdictions.”
“The Bribery Act has prompted a somewhat panicked response as the industry awaits clear guidance and ultimately the application and interpretation of case law on the procedures and adequacy standards that will need to be followed,” added Steve Blackbourn, compliance consultant at Wolters Kluwer Financial Services.
From a UK perspective, regulatory experts expect 2011 will also find financial firms and professionals rushing to meet the requirements of the Retail Distribution Review (RDR). The review affects qualifications that must be obtained by independent financial advisers and wealth managers and is scheduled to take effect in 2012. Additionally, financial firms will be anticipating a stronger focus on insider trading as new requirements emerge regarding the retention of phone conversation records, and more guidance on the FSA’s Mortgage Market Review (MMR), which could lead to radical changes in the way mortgages are offered in the UK.
Firms will pay close attention to current EU directives as well, such as Solvency II, which outlines capital requirements and risk management standards for the insurance industry.
“There has been a large focus around the challenges of Solvency II this year,” said Mike MacDonagh, enterprise risk management (ERM) product manager for Sword, part of ARC Logics. “While most of that focus has been on the capital calculation elements of Pillar 1 of Solvency II, we are also seeing many financial firms looking ahead at the governance and enterprise risk management framework requirements around Pillar 2 of Solvency II and starting projects to address it.”
Chancellor of the Exchequer of the UK, George Osborne, has confirmed that the centre piece of new global standards for bank regulation will also involve higher capital and liquidity requirements. With that in mind, experts say that projects around Basel III, which governs the capital requirements for global lenders, will also play a major role in 2011.
“Next year will be dominated by Basel III,” said Selwyn Blair-Ford, global head of regulatory policy at FRSGlobal, part of Wolters Kluwer Financial Services. “Specifically, concerns with capital buffers, the redefinition of regulatory capital and the introduction of the liquidity regime will all have a significant impact. That’s not to say that Basel III will be implemented next year, but there is a tendency at present for firms to want to demonstrate that they are ‘Basel III ready’.”
Blair-Ford notes that the Basel III framework, which has the potential to impact many financial business models, will help ensure firms have a global view of their liquidity at all times – a growing concern in the financial industry and among individual investors.
“I think we can expect firms to increasingly consider how to create a holistic infrastructure that combines risk and regulation in a way that satisfies both management and regulators’ needs,” he said.
“There is still a lot of work to do in the UK to rebuild consumer confidence and trust in the financial services industry,” said Blackbourn. “Key will be the evolution and impact of the new UK regulatory framework. Equally important will be the ability of financial organisations to remain alert and to adequately respond to the pace and scope of change, while properly understanding, articulating and mitigating their perceived risks.”
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