Financial services firms need a globally coordinated approach from their watchdogs to address regulatory divergence, according to Deloitte’s centre for regulatory strategy
The new year will likely continue the political challenges from 2017, above all the implications of Brexit and Trump populism, according to a report from Deloitte.
Persistent uncertainty and lack of clarity on how events will play out has regulators and companies worried, the advisory warned.
“Supervisors across the globe are very alert to the financial stability risks posed by the political and economic climate, and we expect them to focus on the ability of financial institutions in all sectors to deal with the downside risks of an abrupt shift in market sentiment and any increase in asset price volatility, irrespective of the trigger,” said the report.
The consultancy’s centre of regulatory strategy foresees that in the US some changes will be made to the Dodd-Frank bill spawned by the financial crisis, whereas Europe still needs focus on an ongoing stack of legislative work and assessment of existing rules.
However, coping with continuing regulatory uncertainty, for example from the implementation of MiFID II’s revamped rules for in protecting investors in European markets, will maintain compliance challenges in the year to come.
Diverging regulatory frameworks will be more common and therefore companies should be prepared to deal with overlaps, incompatibilities and potential synergies, Deloitte suggested.
“Giving into reform fatigue could erode the willingness of G20 members to rely on each other’s systems and institutions,” wrote the governor of the Bank of England, Mark Carney, in a letter to G20 leaders in July.
“The net result would be less and more expensive financing for households and businesses, and very likely lower growth and higher risks across the G20,” added Carney.
Boards will not only need to keep their risk profile under scrutiny, by engaging with stress testing, for example, but also be able to demonstrate a clear commitment to regulatory change and its desired outcomes.
“We expect some supervisors to begin to challenge boards, risk committees and senior management to demonstrate that they understand the impact on their customer bases, business models and risk profiles, and are set to take effective mitigating actions where needed,” mentioned the study.
Insurance market focus
When it comes to insurers, the study considered profitability and low interest rates, disruption and innovation, and continuing regulatory and capital changes to remain major challenges in 2018.
Board members’ grasp of how regulations will affect their business and accountability are key to the scrutiny of firms by supervisors, Deloitte warned.
“Insurers are grappling with continuing regulatory change in the context of technological disruption, a persistent soft market and a continued low yield environment that is necessitating changes in asset strategies, business models and risk appetite,” said the study.
They also face challenges in delivering the product innovation needed to meet changing customer needs,” said Deloitte.
The report foresaw an acceleration of product innovation and disruption in general insurance in the new year, as companies analyse opportunities for data development within underwriting, pricing, and product delivery.
Economic growth prospects remain largely positive, with China, Europe and Southeast Asia particularly outperforming expectations.