2016: An EMEA regulatory view

Selwyn Blair-Ford is head of regulatory policy EMEA at Wolters Kluwer

If 2015 was all about how the financial sector continued its post 2008 crisis transformation, 2016 looks set to promise even more developments in the same vein across the EMEA region. The ongoing change continues to be remarkable in its depth and scope impacting financial institutions and technology firms like Wolters Kluwer Financial Services who exist to enable banks and others to navigate risk and regulatory complexity, writes Selwyn Blair-Ford

We have, of course, seen continued progress with Basel III. Previous years have seen increases in absolute levels of liquidity and capital and 2015 continued this trends and added further measures.  This has included reporting of Liquidity Coverage Ratio and additional liquidity reporting. The requirements for net stable funding and the leverage ratios. We have also seen the development of capital and systemic buffers ready for 2016 implementation. Firms have also been working hard on their Resolution and Recovery plans. Perhaps more significantly is the acceptance of change across the industry. This is reflected by the continued high levels of investment by firms in keeping breast and improving their prudential regulatory processes.

2015 also marked he rise of what has been labelled Basel IV. This has included the Fundamental Review of the Trading Book, Interest Rate Risk in the Banking Book, Standardized Credit Risk, Standardized Counterparty Credit Risk and Margin Requirements for Non-Centrally Cleared derivatives. We can add to this the prospect of the Basel Committee reviewing the modelled approaches for operational risk. Although these measures are due to be implemented from 2017 forward, they each represent a significant change, impacting materially on the economic business models of many financial activities.

With 2016 now in full swing the focus of financial firms on these measures are intensifying and will continue to do so. For most firms the questions at the moment are what does this mean for our business? Will our current business models be viable? Who can we go to for help in understanding and influencing these proposals? 2016 will, as a consequence, be an intense year.

The financial sector in Europe will also need to contend with other trends. The European Central Bank (ECB) is increasing its hold over the Euro zone. We can expect firms to see new supervisory measures and stronger imposition of the ECB regulatory ethos on all regulated firms.

Firms and regulators will be continue to get to grips with a world no longer governed solely by capital, but increasingly by liquidity and leverage too. The pressure for firms to realign their activities to this new world will grow greater over time and the convergence of governance, finance, risk and compliance is set to continue to help tackle the new reality banks find themselves in. As a result, 2016 will be another busy and transformative year.

To keep Banking Technology readers up to date with what to expect this year, Wolters Kluwer Financial Services suggests a good place is to start is this article (link to http://www.wolterskluwerfs.com/article/eu-regulatory-round-up-2015-and-2016.aspx), available on our Insights page, written by Michael Imeson. Below is a snapshot of upcoming regulatory developments as detailed in the article.

Anti-Money Laundering Directive, 4th.

Despite coming into force in 2015, the Directive will not apply to banks and the other firms it affects until member states have transposed it into national law by June 2017. The Regulation will also not apply until June 2017, although it does not have to be transposed into national laws as, being a Regulation, it is directly applicable in every state.

Meanwhile, the Joint Committee of the three European Supervisory Authorities (ESAs) – the European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority – is consulting on two sets of anti-money laundering (AML) and countering the financing of terrorism (CFT) guidelines which set out how the Directive should be applied by banks, other financial firms and national authorities across the EU.

Bank Recovery and Resolution Directive

The Bank Recovery and Resolution Directive (BRRD) entered into force on 1 January 2015, with countries given a year to transpose it into national law. 1 January 2016 is the date on which the BRRD has to be applied by member states. In the eurozone states, however, it will be applied through the Single Resolution Mechanism (SRM) of the Banking Union (see the Banking Union section, below), not through national regulatory regimes.

Banking Union

The Single Resolution Mechanism (SRM), whose purpose is to ensure an orderly sale or winding up (“resolution”) for failing banks, with minimal costs to taxpayers and the real economy came into effect on 1 January 2016. It includes a Single Resolution Fund (SRF), collected from all eurozone banks, to ensure the orderly resolution of failing banks. Starting from 2016, the SRF will be built up over eight years.

The European Deposit Insurance Scheme (EDIS), which will protect up to €100,000 per depositor per bank if a bank fails, will develop over many years, in three stages. During the first stage, which will last until 2020, the EDIS will act as the re-insurer of national deposit guarantee schemes (NDGS). During stage two, which will run from 2020 to 2024, it will act as a co-insurer with NDGS, with the contribution by the EDIS increasing over time. By stage three, the final stage, to be completed by 2024, the EDIS will be the full insurer of national deposit guarantee schemes (NDGS).

The single rulebook is mostly complete, but more rules will come into effect in 2016 and later.

CRD IV:

CRD IV will not be fully implemented until 1 January 2019, in line with the timing of the Basel standards. For example:

The European Banking Authority (EBA) guidelines for “common procedures and methodologies” for the supervisory review and evaluation process (SREP) under the Directive – guidelines for national regulatory authorities to follow – must be implemented by 1 January 2016.

Global Systemically Important Institutions (G-SIIs) will have to start phasing in additional capital buffers from 1 January 2017. The UK’s Prudential Regulation Authority disclosed its latest list of UK G-SIIs in December 2015 (HSBC, Barclays, RBS and Standard Chartered), along with the different buffers that will apply to them from 2017.

MiFID II

MiFID II entered into force in 2014, but it cannot be implemented until the Level 2 technical implementing measures are written by the European Commission and the European Securities and Markets Authority (ESMA), work on which continued throughout 2015 and will continue into 2016.

The technical implementing measures should be finalised by June 2016, and MiFID II will fully apply on 1 January 2017.

UCITS

Undertakings in Collective Investments in Transferable Securities (UCITS), are retail collective investments schemes in the EU. The UCITS V Directive was published in the Official Journal in 2014 but the level 2 measures which add the detailed rules were drafted in 2015.

The UCITS V Directive will be implemented on 18 March 2016. However, most national regulators are still working on their rules. The UK’s FCA, for instance, will continue to publish guidance and progress reports right up to implementation.