Consensus no more? Financial Markets Regulatory Outlook 2020 - Deloitte

 
Consensus no more? Financial Markets Regulatory Outlook 2020 - Deloitte
Consensus no more?
Financial Markets
Regulatory Outlook 2020
“At the heart of our work is the need to address the changes in climate,
  technology and demography that are transforming our societies and
  way of life.”
 Ursula von der Leyen, President of the European Commission

“…the job of a supervisor is to be slightly less optimistic than the
  average person.”
	Sabine Lautenschläger, former Member of the Executive Board and Governing Council of the ECB

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Global foreword                                                                                                                                            Global foreword

                                                                                                                                                           Executive summary

                                                                                                                                                           Medium-term trends in EMEA

                                                                                                                                                           Cross‑sector themes
After a decade of global regulatory reforms defined by the financial crisis   In our view, the risk of a recession is highest in Europe. Growth in         Sector-specific themes
and misconduct issues, the regulatory environment is now changing             Germany is expected to be as low as 0.5% in 2019, partly due to its
                                                                                                                                                           Banking
profoundly. The international consensus on regulatory reform is fraying.      manufacturing sector’s vulnerability to poor export markets, although
Political appetite for globalisation is retreating, and trade tensions        some recovery is expected in 2020.3 Italy is facing political uncertainty,   Capital Markets
are mounting. Technological change and social concerns, including             economic stagnation and resurging financial turbulence, while servicing
                                                                                                                                                           Insurance
environmental sustainability, are rising on regulators’ agendas. Financial    high public debt.4 And the UK faces an uncertain outlook, in part due to
services firms need to be prepared to respond to these trends.                Brexit. Therefore, while growth for the Eurozone in 2020 is projected at     Investment Management
                                                                              1.4%, which is similar to its post-crisis trend rate, significant downside
                                                                                                                                                           Glossary
A darkening economic outlook                                                  risks remain.5
We are likely to see weak growth in all regions in 2020, with significant                                                                                  Endnotes
downside risks.1 Regulators’ and supervisors’ work programmes are             Central bankers are likely to respond with further monetary easing,
                                                                                                                                                           Contacts
likely to be heavily influenced by their assessment of the economic           with the US Federal Reserve Board and the European Central Bank
conditions under which firms will be operating.                               having already cut rates further and renewed their asset purchase
                                                                              programmes. However, with interest rates at an unprecedented low,
Increased trade tensions, especially between the US and China, are            and with a record amount of sovereign and even corporate bonds
likely to fragment markets further, dampen growth and create a harsher        trading at negative nominal rates, the effectiveness of such measures in
business environment for financial services firms.                            isolation is debatable.6 Authorities may consider using macroprudential
                                                                              measures, such as allowing banks to run down countercyclical buffers.
In the US, the yield curve on Treasury bonds was inverted until recently,     Governments are also likely to face pressure to increase spending to
which has in the past been a harbinger of recession. Equity valuations are    stimulate growth, especially given the backlog of infrastructure spending
high due, in large part, to monetary easing: the US equity market is more     in some countries.
overvalued on some measures than at any point since the dotcom bubble.
                                                                              These macroeconomic trends and conditions will put even more
Meanwhile in China, growth has continued to slow and gross debt               pressure on financial services firms’ business models, at a time when
surged from 171% of Gross Domestic Product in 2008 to 299% in 2018.2          competition from new entrants and major digital players is
High debt levels could become unsustainable if growth slows further.          also increasing.

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Global foreword                                                                                                                                             Global foreword

                                                                                                                                                            Executive summary

                                                                                                                                                            Medium-term trends in EMEA

                                                                                                                                                            Cross‑sector themes
We expect supervisors to have a heightened focus on business model              The increasing scrutiny by investors and regulators of the value            Sector-specific themes
resilience, through stress testing, and on the quality of risk governance       generated by active management is likely to drive a continued
                                                                                                                                                            Banking
and oversight.                                                                  “search for yield” and encourage investment in more exotic and less
                                                                                liquid markets. We expect supervisors to focus increasingly on how          Capital Markets
Banks may struggle to regain profitability, and even to maintain margins,       investment managers and distributors satisfy themselves that funds
                                                                                                                                                            Insurance
through their traditional business model in a low, or negative, interest        holding higher risk assets meet the needs and risk appetite of their
rate environment. For example, Japan has had a zero or negative                 target market.                                                              Investment Management
interest rate policy for nearly two decades. Japanese banks have
                                                                                                                                                            Glossary
struggled with low interest margins and face increasing supervisory             The fraying international consensus
scrutiny on business model sustainability.7 A reduction in cross-border         With the post-crisis reforms near completion and the political              Endnotes
financial flows as risk appetites reduce may also narrow banks’ growth          environment becoming less supportive of international cooperation,
                                                                                                                                                            Contacts
opportunities. Banks will need to redouble their efforts to control costs       global standard-setting bodies – particularly the Basel Committee
and refocus on more profitable business lines. However, they will need          on Banking Supervision and the Financial Stability Board - have less
to be mindful of conduct risk. Supervisory focus on credit risk is also         ambitious plans to introduce new standards than in previous years.
likely to intensify. For example, the Bank of England estimates that global     Work to implement the remaining aspects of the G20 financial regulatory
banks retain exposures to over half of the leveraged loan market, and           reforms has slowed, with many jurisdictions behind in implementing
that the global stock of leveraged loans has reached an all-time high.8         Basel III (“Basel IV” to industry).10

Insurers, particularly those providing long-term guarantees, are also           Given the current economic conditions, political concerns will grow if
likely to find it harder to be profitable in a persistently low interest rate   regulation is seen to impede competition, new lending or investment.
environment. In Asia however, the potential for the insurance market to         We are already seeing a deregulatory stance from the US authorities,
grow in China may help insurers to generate more off-setting revenue.9          including a limited relaxation of the Volcker Rule.11 Other countries may
                                                                                follow, and we might even see competitive deregulation.
Investment managers too will likely struggle to perform well in an
environment characterised by high asset prices and low
growth potential.

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Global foreword                                                                                                                                              Global foreword

                                                                                                                                                             Executive summary

                                                                                                                                                             Medium-term trends in EMEA

                                                                                                                                                             Cross‑sector themes
While deregulation might reduce some compliance costs, global firms           Regulating technological innovation                                            Sector-specific themes
will face more complexities and expenditure as regulatory standards           Policymakers and regulators will continue to be challenged by the
                                                                                                                                                             Banking
across jurisdictions diverge in timing and substance. The G20                 need to respond to the pace and scale of technological change. The
highlighted market fragmentation as an area of concern in 2019, and           financial services regulatory debate will be characterised by issues           Capital Markets
the Financial Stability Board has an ongoing work programme in this           such as whether to expand the regulatory perimeter, risks associated
                                                                                                                                                             Insurance
area.12 It is unlikely that global standard-setters will be able to reverse   with increasing use of artificial intelligence, the impact of innovation
fragmentation that has already happened, but their efforts could reduce       on operational resilience and cyber security, and digital ethics. These        Investment Management
future divergence.                                                            are global issues, but a lack of political will and adequate international
                                                                                                                                                             Glossary
                                                                              bodies in some policy domains will likely hinder efforts to align
More accountability for senior individuals                                    regulatory approaches.                                                         Endnotes
In contrast, regulators are increasingly holding senior individuals to
                                                                                                                                                             Contacts
account for the compliance, professional standards and culture of             Cross-sector policies will increasingly affect financial services firms,
their firms. Following the introduction of the UK’s Senior Managers and       although these will differ across regions. For example, in relation to
Certification Regime, similar regimes have emerged, or are emerging, in       data protection, the EU is taking a stricter stance on individuals’ right to
several other jurisdictions including Ireland, Australia, Hong Kong Special   access and control personal data than the US and China.15 Globally, the
Administrative Region, Singapore and South Africa. Other jurisdictions        emergence of tighter data localisation requirements will also introduce
are driving increased accountability through different mechanisms.            additional obstacles to cross-border data flows.
The US Federal Reserve Board has proposed guidance which seeks
to delineate the roles, responsibilities and accountabilities of senior       The growing evidence that ineffective implementation of technological
management and the board better.13 The Belgian Parliament recently            change can increase cyber and operational risk is also attracting
announced the introduction of a “Bankers Oath” similar to that which          regulatory scrutiny. International standard-setters will likely try to
the Netherlands introduced in 2015.14 In response to these initiatives,       establish baseline common approaches for operational resilience, but
firms will need to foster a culture of accountability through measures        we expect progress on cyber resilience to be made mostly at the G7 and
such as balanced incentive plans; strong governance and controls; and         European levels.
appropriate monitoring, reporting, escalation and disciplinary action.

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Global foreword                                                                                                                                              Global foreword

                                                                                                                                                             Executive summary

                                                                                                                                                             Medium-term trends in EMEA

                                                                                                                                                             Cross‑sector themes
These trends will affect firms’ ability to use and share data to innovate,      Financial inclusion is another area of focus globally. The World Bank        Sector-specific themes
enhance their cross-border resilience, and deliver value and security to        Group estimates that in 2017 there were still 1.7 billion adults without
                                                                                                                                                             Banking
their clients.                                                                  a basic transaction account, primarily in Asia and Africa.17 It has a goal
                                                                                for all adults to have access to an account to store money and make          Capital Markets
Regulators and supervisors will also need to accelerate their own               payments by 2020. In developed countries, regulators are focused on
                                                                                                                                                             Insurance
digital transformation. Well-resourced regulatory data science and              barriers to financial inclusion such as overly complex processes, lack
analytics capabilities will be essential to understand and supervise a          of accessibility for “non-standard” customers, including the elderly         Investment Management
financial sector characterised by an increasingly blurred regulatory            or people with disabilities. Firms should expect to be challenged by
                                                                                                                                                             Glossary
perimeter and greater technological complexity. Part of the solution            regulators if their services are unduly hard for certain groups to access.
may be for financial, security and data protection authorities to share                                                                                      Endnotes
resources, capabilities and insights more effectively. We see efforts in        Conclusion
                                                                                                                                                             Contacts
this direction, but more work is needed before regulators and firms can         Although the post-crisis wave of regulatory change is subsiding, there
reap the benefits. Progress will more likely be achieved at national than       is much to attract regulatory and supervisory attention in 2020 and
at international level, mainly because of the absence of cross-sectoral         firms should not expect scrutiny to abate. Against a darkening economic
global standard-setting bodies.                                                 background, there will be increased focus on firms’ financial and
                                                                                operational resilience, how they adapt to technological change and
Responding to social concerns                                                   innovation, and how they respond to political and social pressures in
Environmental sustainability is a rising social concern, and in Europe          areas such as sustainability and financial inclusion. In an environment
and Asia, a major focus for financial services regulators.16 In the US, it is   where boards and individual senior managers are increasingly being
not - at least not at federal level. However, even where regulators do not      held to account for their actions, financial services firms will need to
introduce specific requirements, firms will need to consider how climate        ensure they have the foresight, governance, skills and operational
change and unsustainable business models will affect their asset and            capabilities to adapt and respond effectively.
liability exposures, as well as the new opportunities that may arise from
the increasing customer demand for “green” products, including green
investment funds.

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Global foreword                                                                                                                                                                                      Global foreword

                                                                                                                                                                                                     Executive summary

                                                                                                                                                                                                     Medium-term trends in EMEA

                                                                                                                                                                                                     Cross‑sector themes

                                                                                                                                                                                                     Sector-specific themes

                                                                                                                                                                                                     Banking

                                                                                                                                                                                                     Capital Markets

                                                                                                                                                                                                     Insurance

                                                                                                                                                                                                     Investment Management

                                                                                                                                                                                                     Glossary

                                                                                                                                                                                                     Endnotes

                                                                                                                                                                                                     Contacts
Tony Wood                                                            Irena Gecas-McCarthy                                         David Strachan
Centre for Regulatory Strategy                                       Centre for Regulatory Strategy                               Centre for Regulatory Strategy
APAC                                                                 Americas                                                     EMEA

1.   International Monetary Fund, World Economic Outlook, October 2019                          12. Financial Stability Board, Report on Market Fragmentation, June 2019
2.   International Banker, How Much of a Concern Is China’s Debt Problem?, April 2019           13. Federal Reserve Board, Federal Reserve Board invites public comment on two proposals;
3.   International Monetary Fund, World Economic Outlook, October 2019                              corporate governance and rating system for large financial institutions, August 2017

4.   International Monetary Fund, Italy: Toward Growth, Social Inclusion, and Sustainability,   14. Moniteur Belge N. 96, May 2019; Foundation for Banking Ethics Enforcement (Netherlands),
     February 2019                                                                                  The Banker’s Oath

5.   International Monetary Fund, World Economic Outlook, October 2019                          15. The EU General Data Protection Regulation introduced rules on the collection and use of
                                                                                                    personal data, including, for example, the obligation to limit the amount of data held to that
6.   Bank for International Settlements (BIS), BIS Quarterly Review, September 2019
                                                                                                    which is necessary for the stated purpose, and the right of individuals to have their personal
7.   Japan Financial Services Agency (JFSA), Publication of summary points from JFSA policy         data erased in certain circumstances.
     assessment and strategic priorities 2019, August 2019
                                                                                                16. In the EU, the European Commission has adopted an action plan on financing sustainable
8.   Bank of England, Financial Stability Report, July 2019                                         growth. In Asia, regulators in several countries (including Australia, Hong Kong Special
9.   Deloitte, A demanding future The four trends that define insurance in 2020, 2019               Administrative Region, Japan and Singapore) have also released goals to promote
                                                                                                    sustainability in financial services. In Singapore and Hong Kong Special Administrative
10. Financial Stability Board, Implementation and Effects of the G20 Financial Regulatory
                                                                                                    Region, this includes developing environmental, social and governance reporting guidelines
    Reforms 5th Annual Report, October 2019
11. Financial Times, US regulators unveil final rewrite of Volcker rule, August 2019
                                                                                                    for financial services firms.                                                                                Next         7
                                                                                                17. The World Bank, UFA2020 Overview: Universal Financial Access by 2020, October 2018                                        7
EMEA Financial Markets Regulatory Outlook 2020: at a glance                                                                                   Click the boxes to be taken
                                                                                                                                              to the corresponding chapter

    MEDIUM-TERM                                                                                 KEY STRATEGIC
                                                                  SECTOR-SPECIFIC                                                             FIRMS WILL HAVE TO
    TRENDS IN                     CROSS-SECTOR THEMES
                                                                  THEMES                        CHALLENGES
    EMEA

                                                                                    •   Low interest rates, sluggish economic      •   Adapt their business models to
                                                                                        growth and competition from new                ensure they are resilient to low
                                                                                        entrants and major digital players will        growth and interest rates, while
                                                                                        continue to put pressure on firms’             continuing to invest in new
                                                 Climate
    Political trends                                                                    business models and resilience.                technology and digital solutions.
                       IBOR transition           change and       Banking
    and uncertainty
                                                 sustainability
                                                                                    •   Global firms will find it increasingly     •   Build group systems and control
                                                                                        costly and complex to comply with              frameworks with sufficient flexibility
                                                                                        diverging national standards, as the           to adapt to national divergence from
                                                 Culture,                               international regulatory consensus             global regulatory standards.
                       Operational                                                      continues to fray.
    The role of                                  governance,
                       and cyber                                  Capital Markets
    central banks                                and
                       resilience                                                   •   Political, technological,                  •   Ensure their boards and senior
                                                 accountability
                                                                                        environmental and demographic                  managers have the necessary
                                                                                        forces will have a profound impact on          knowledge and skills, and diversity
                                                                                        the medium-term regulatory outlook             of thought, to manage new and
                                                 AI governance                          and firms’ strategies.                         emerging changes in their firm’s
    Technological      Good customer                                                                                                   external environment.
                                                 and model risk   Insurance
    change             outcomes
                                                 management
                                                                                    •   Regulators and society will                •   Demonstrate that good outcomes
                                                                                        increasingly expect firms to integrate         for customers and society are a
                                                                                        fairness, ethics, sustainability,              core priority. Areas of focus include
                                                                                        protection of vulnerable individuals,          providing value for money, supporting
                       Regulating
    Socio-economic                                                Investment            as well as their “purpose”, into the           financial inclusion, and the fair
                       firms’ use of             Crypto-assets                          core of their business.                        treatment of vulnerable customers
    transformation                                                Management
                       consumer data                                                                                                   and those with non-typical needs.

                                                                                    •   The quality and effectiveness of           •   Enhance their governance and risk
                                                                                        boards’ challenge will be further              management frameworks to manage
                                                                                        tested against a broadening set of             new risks and regulatory obligations,
                       Financial crime           Stress testing                         critically important risks and strategic       especially as the interaction between
                                                                                        issues. Regulators will increasingly           different risk classes (e.g. conduct,
                                                                                        hold individual senior managers to             data protection, and model risk)
                                                                                        account for their firm’s conduct.              increases.
Medium-term trends in EMEA                                                                                                           Global foreword

                                                                                                                                     Executive summary

                                                                                                                                     Medium-term trends in EMEA
                                                                                                                                     Political trends and uncertainty
                                                                                                                                     The role of central banks

As set out in the global foreword, the              We have identified the following forces that we
                                                                                                      “A number of forces are at
                                                                                                                                     Technological change
                                                                                                                                     Socio economic transformation
regulatory agenda of the past ten years             believe could reshape FS regulation over the
was shaped by the financial crisis and a            coming years:                                       work, including politics,    Cross‑sector themes
variety of conduct of business issues that
emerged subsequently, including benchmark                                                               economics, technological     Sector-specific themes

manipulation and product mis-selling scandals.
​
                                                             Political trends and uncertainty           innovation and changes       Banking

If the crisis and its aftermath have propelled                                                          in society’s expectations.   Capital Markets

regulatory reform for the last decade, the                                                                                           Insurance
environment in which regulation will be made                                                            All are likely to have a
                                                                                                                                     Investment Management
and applied in 2020 and beyond could turn                    The role of central banks                  profound effect on
out to be quite different, especially in the EU                                                                                      Glossary
and UK. That said, the precise direction in                                                             the medium-term              Endnotes
which regulation will head is not yet clear. A
number of forces are at work, including politics,                                                       regulatory outlook.”         Contacts
economics, technological innovation and                      Technological change
changes in society’s expectations. All are likely
to have a profound impact on the medium-
term regulatory outlook. While we do not
expect these forces to play out fully in 2020                Socio-economic transformation
(and, where we do, this is already reflected
in the predictions we make), we think they
nevertheless provide important context for
what follows in this Outlook.

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Medium-term trends in EMEA                                                                                                                            Global foreword

                                                                                                                                                      Executive summary

                                                                                                                                                      Medium-term trends in EMEA
                                                                                                                                                      Political trends and uncertainty
                                                                                                                                                      The role of central banks

                                                   UK will effectively be obliged to implement       unlikely that it could be included in any FTA    Technological change
                                                                                                                                                      Socio economic transformation
          Political trends and uncertainty         EU regulations and directives “line-by-line”      agreed between the UK and the EU by the end
                                                   in order to receive a positive equivalence        of 2020. However, equivalence – which the UK     Cross‑sector themes
                                                   assessment from the EU. The CEO of the PRA        and EU have declared that they should each
                                                                                                                                                      Sector-specific themes
In the UK the recently elected Conservative        has noted that it would be “undesirable” for      endeavour to complete for their respective
government has made it clear that the UK           the UK to become a rule-taker from the EU.1       markets before the end of June 2020 –            Banking
will ratify the UK-EU Withdrawal Agreement         And the CEO of the FCA has made the case          could be a step towards a more ambitious
                                                                                                                                                      Capital Markets
and leave the EU by 31 January 2020. The           for outcomes-based equivalence and looking        agreement on FS market access.
Withdrawal Agreement allows for a Transition       for opportunities to improve onshored                                                              Insurance
Period which will run to 31 December 2020.         EU legislation on a “same outcome, lower          Another outcome is that the UK chooses to
                                                                                                                                                      Investment Management
The UK Prime Minister Boris Johnson and the        burden” basis.2 Pursuing either of these two      pursue an approach focused on deregulation
government have committed not to extend            (outcomes-based and line-by-line) approaches      post-Brexit, including reining back or de-       Glossary
the Transition Period and to negotiate a UK-       to equivalence would see the UK continue          emphasising those post-crisis reforms
                                                                                                                                                      Endnotes
EU FTA by the end of 2020.                         to follow the substance of both current and       that are seen to reduce the international
                                                   future EU FS legislation.                         competitiveness of the UK‘s FS markets and       Contacts
A key question is how FS regulation evolves                                                          giving the PRA and FCA a statutory objective
after the UK has left the EU. The previous         However, other regulatory outcomes are            to promote such competitiveness. This could
Conservative government under Theresa              possible. One is that the UK and the EU           also see the UK prioritise future financial
May made clear that it would continue to           reach agreement on an approach to mutual          relationships and partnerships with the US,
adhere to global regulatory standards and          market access which improves on the current       Asia and Switzerland over those with the EU.
we expect the UK to remain an active and           equivalence framework. Such an agreement
committed member of the global standard-           would recognise the very close integration        Increasing regulatory divergence between the
setting bodies. However, it is less clear how      of the UK’s and EU27’s financial markets and      UK and EU may prompt the latter to review,
closely the UK will continue to track EU           services. However, as none of the EU’s existing   and possibly withdraw, any initial equivalence
regulation. This issue is directly linked to the   FTAs includes such a framework for FS, and        decisions.
debate about equivalence, and whether the          given the complexity of negotiating one, it is

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Medium-term trends in EMEA                                                                                                                                 Global foreword

                                                                                                                                                           Executive summary

                                                                                                                                                           Medium-term trends in EMEA
                                                                                                                                                           Political trends and uncertainty
                                                                                                                                                           The role of central banks

At the EU level the new European                    • Developments in innovation and technology        • This will be the first EU administration which    Technological change
                                                                                                                                                           Socio economic transformation
Commission has announced a very ambitious             continue to raise questions about the              has had to make FS legislation without
work programme in relation to FS, particularly        regulatory perimeter and which activities          the UK as a member. The UK has typically          Cross‑sector themes
in relation to ESG, FinTech, digital technologies     should fall within it. The ongoing debate          promoted adherence to global standards
                                                                                                                                                           Sector-specific themes
and the CMU. However, while the ambition is           around GSCs is a prime example of this.            (e.g. those produced by the BCBS in relation
clear, a number of factors make the new EU            The boundary between FS and non-FS is in           to bank capital), principles and outcomes-        Banking
administration less predictable than it was:          some areas increasingly blurred and, as a          based regulation, and the need for EU
                                                                                                                                                           Capital Markets
                                                      result, we expect the Competition and the          financial markets to be integrated into global
• This is the first European Parliament since         Internal Market Directorates to have a much        wholesale markets. It remains to be seen          Insurance
  direct elections began in 1979 in which the         stronger influence on the development of FS        what approach the EU will take to new FS
                                                                                                                                                           Investment Management
  two main political groups from the centre-          legislation than in the past. In many respects     regulation. But greater divergence from
  right and centre-left have not, between             the injection of cross-sector perspectives         global standards, increasingly detailed rule      Glossary
  them, formed a majority. The Green group,           into sector-specific FS regulation is welcome      making and higher barriers for firms based
                                                                                                                                                           Endnotes
  holding one tenth of the Parliament’s seats,        in that it reflects the reality of a market        outside the EU seeking to access EU financial
  will be able to exert considerable influence        in which participants from outside the             markets are all increasingly likely outcomes.     Contacts
  on FS regulatory policy, should it choose           regulatory perimeter are involved with or          How the European Commission proposes to
  to do so. Our central scenario is that the          provide services to “traditional” FS. However,     implement the final stages of Basel III will be
  Greens will want to inject much more of             this may well complicate and slow down             a leading indicator of its future direction.
  an environmental perspective into new               the legislative process, given the interest of
  FS legislation, albeit from an already high         a larger number of very senior European
  base given the large number of ESG-related          Commission stakeholders. At a time when
  measures that were agreed at the end of the         the pace of innovation is increasing, any
  last Parliament.                                    such slowing down of the legislative process
                                                      would not be in the interests of either FS
                                                      providers or consumers.

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Medium-term trends in EMEA                                                                                                                                Global foreword

                                                                                                                                                          Executive summary

                                                                                                                                                          Medium-term trends in EMEA
                                                                                                                                                          Political trends and uncertainty
                                                                                                                                                          The role of central banks

                                                     Both sides of the debate implicitly, and                                                             Technological change
                                                                                                                                                          Socio economic transformation
          The role of central banks                  sometimes explicitly, challenge the                         Technological change
                                                     independence of central banks in setting                                                             Cross‑sector themes
                                                     monetary policy.
                                                                                                                                                          Sector-specific themes
Central banks are currently in the public                                                               Technological change creates twin pressures
and political spotlight in a way that is             In other countries in the region not subject to    on the FS industry. First, there is a notable     Banking
unprecedented since the case for central bank        low or negative rates, such as South Africa and    difference in the speed of technological
                                                                                                                                                          Capital Markets
independence in relation to monetary policy          Turkey, steps have been taken, or suggested,       innovation relative to the speed of legislative
was generally accepted during the 1990s. This        to increase political influence on the central     and regulatory change. Regulators may have        Insurance
is in large part because of the low and in some      bank.3, 4                                          to respond to this by making greater use,
                                                                                                                                                          Investment Management
cases negative nominal interest rates that                                                              temporarily if not permanently, of industry
have persisted for a number of years, across         The spotlight so far has been on central bank      codes and other voluntary standards if they       Glossary
a number of European countries, in the face          independence in relation to monetary policy.       wish to avoid stifling innovation or - at the     Endnotes
of weak economic growth. This has generated          However, in the event that any changes were        other extreme - being bypassed altogether.
a heated debate between those who argue              made to central banks’ mandates, these could       Second, technological change looks set to alter   Contacts
for ever more accommodating monetary                 well spill over to their role and autonomy in      the regulatory perimeter, as new products and
policy including QE and even unconventional          relation to FS regulation and supervision,         non-FS firms push up against it. Over the next
monetary measures to stimulate growth or             implying greater political influence on them.      few years legislators and regulators are likely
avoid tipping countries into recession; and          This could well be the case where FS regulation    to have to make some pivotal decisions, such
those who are concerned about the impact of          might otherwise inhibit new lending and            as whether to bring systemically important
this stance on the profitability and viability of    investment, or where governments choose to         services providers (such as CSPs) into the
certain types of FS firms, particularly banks and    use regulatory policy as a means to achieve        regulatory perimeter.
insurers, as well as the wider economic and          wider economic or social goals, e.g. in relation
social effects of the high asset prices that loose   to climate change.
monetary policy is seen to drive.

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Medium-term trends in EMEA                                                                                                                                  Global foreword

                                                                                                                                                            Executive summary

                                                                                                                                                            Medium-term trends in EMEA
                                                                                                                                                            Political trends and uncertainty
                                                                                                                                                            The role of central banks

Broader political and social concerns around      Two competing objectives, which extend                                                                    Technological change
                                                                                                                                                            Socio economic transformation
the deployment of technology will increasingly    beyond FS, will shape EU policy in this area                   Socio-economic transformation
influence FS regulatory policy. This will be      in the coming years. The first is to make the                                                             Cross‑sector themes
evident, for example, in relation to the use of   EU a leading global, digitally autonomous,
                                                                                                       The last decade has seen an increasing blurring      Sector-specific themes
consumer data to fuel technological and           technological player. This includes the creation
digital innovation.                               of a dynamic and competitive data-based              of the boundaries between regulatory and             Banking
                                                  ecosystem and economy through initiatives            social policy. Shifts in society’s expectations
                                                                                                                                                            Capital Markets
                                                  such as Open Finance, CMU, and the broader           have influenced and in some cases redefined
“Technological change                            set of initiatives under the Digital Single Market   what are considered acceptable regulatory            Insurance
  looks set to alter the                          umbrella. The second objective is to set best-       interventions. In recent years, for example, the
                                                                                                       European Commission has included diversity
                                                                                                                                                            Investment Management
                                                  in-class standards for data privacy, ethics,
  regulatory perimeter, as                        and consumer protection, with a number of            requirements in legislation such as CRD 4            Glossary
                                                                                                       and MiFID 2. This represents a departure
  new products and non-FS                         flagship initiatives to promote a coordinated
                                                  EU approach on the human and ethical                 from traditional regulatory scrutiny of board
                                                                                                                                                            Endnotes

  firms push up against it.                       implications of AI expected in                       composition, which typically focused on              Contacts
                                                  early 2020.                                          competency and propriety.
  Over the next few years
                                                                                                       Legislators’ and regulators’ work in relation to
  legislators and regulators                      This poses data-driven FS businesses both
                                                  a challenge and an opportunity. Those FS             ESG issues, and within this, climate change,
  are likely to have to make                      businesses that can establish themselves as          illustrate this trend even more clearly. The
                                                  a trusted guardian of their customers’ data          adverse impact of climate change increasingly
  some pivotal decisions.”                        stand to gain a competitive advantage. But the       forms the backdrop to public debates around
                                                  consequences of any unlawful, or unethical,          sustainable economic development. The EU has
                                                  use of consumer data on a firm’s standing in         already signalled through a series of measures
                                                  the market and with its customers could              and proposals that the financial sector has a role
                                                  be profound.                                         to play, both as a source of financing, and as a
                                                                                                       crucial part of society’s risk management efforts.
                                                                                                                                                                             Next              13
Medium-term trends in EMEA                                                                                                                                 Global foreword

                                                                                                                                                           Executive summary

                                                                                                                                                           Medium-term trends in EMEA
                                                                                                                                                           Political trends and uncertainty
                                                                                                                                                           The role of central banks

“Shifts in society’s                             Demographic change is already having                 • they may face access problems due to              Technological change
                                                                                                                                                           Socio economic transformation
                                                  economic consequences that need to be                  increasing digitalisation and use of new
  expectations have                               factored into strategic plans across multiple          technologies to deliver FS products in new        Cross‑sector themes
                                                  sectors. Supervisors will be particularly              ways.
  influenced and in some                          attentive to the risk that some demographic
                                                                                                                                                           Sector-specific themes
                                                                                                       At the same time, millennials are set to become
  cases redefined what are                        groups will be “left behind” by a FS sector that
                                                  fails to adapt to meet their needs.
                                                                                                       the largest segment of the global workforce
                                                                                                                                                           Banking
                                                                                                       over the next decade, with the median
  considered acceptable                                                                                age of Africa’s population being only 19.4.6
                                                                                                                                                           Capital Markets

                                                  Europe’s population is ageing rapidly, with                                                              Insurance
  regulatory interventions.”                      the number of FS consumers older than
                                                                                                       Millennials also form the greatest share of
                                                                                                       the emerging alternative workforce, which           Investment Management
                                                  65 growing ever larger. In the UK alone, the
The over-arching question from a regulatory                                                            comprises temporary, on-call contract workers,
                                                  number of over 65s has grown from 9.1m in                                                                Glossary
perspective is how far legislators (and                                                                freelancers, independent contractors and
                                                  1991 to 11.8m in 2016; this is expected to grow
potentially regulators as well) will use FS                                                            gig-workers and is the fastest growing labour       Endnotes
                                                  further, to 20.4m, by 2041.5
regulation, including prudential capital                                                               group in the EU. The FS industry needs to
                                                                                                                                                           Contacts
regimes, to achieve broader public policy                                                              adjust to the emergence of this labour group
                                                  Elderly consumers face a number of challenges
goals in relation to climate and the wider                                                             in terms of how it treats them as customers.
                                                  when it comes to interacting with FS:
environment. An important early test of this                                                           The income volatility of this ever-growing
will be whether the European Commission (or                                                            group leaves its members at risk of financial
                                                  • they are more likely to have fixed incomes,
the European Parliament) seeks to introduce                                                            exclusion, with banks in particular struggling to
                                                    giving them a stable but less flexible pool of
“brown penalising factors” or ”green supporting                                                        offer appropriate products.
                                                    resources to draw on;
factors” into the CRD 6/CRR 3 proposals and/or
into the review of Solvency 2.                    • they are also more likely to suffer from
                                                    ageing-related illnesses which mean they are
                                                    particularly at risk of financial detriment; and

                                                                                                                                                                            Next              14
Medium-term trends in EMEA                         Global foreword

                                                   Executive summary

                                                   Medium-term trends in EMEA
                                                   Political trends and uncertainty
                                                   The role of central banks

Some regulators (particularly the FCA in the       Technological change
                                                   Socio economic transformation
UK) are very alert to the implications of these
demographic shifts and what they mean for          Cross‑sector themes
financial exclusion and the fair treatment
                                                   Sector-specific themes
of customers.7 Other regulators are less
directly engaged, despite similar demographic      Banking
trends in their countries. But even where FS
                                                   Capital Markets
regulators are not making the consequences of
demographic change a priority, FS firms would      Insurance
be unwise to ignore its effects. This links to
                                                   Investment Management
the wider debate about FS firms’ purpose and
whether they are meeting the needs of all their    Glossary
stakeholders, rather than focussing primarily
                                                   Endnotes
on shareholder value. Even in the absence of
regulatory pressure to do so, firms that fail to   Contacts
engage with the changing composition and
needs of their customer base could seriously
reduce customer loyalty and erode their
reputation and business franchise.

                                                                    Next              15
Cross‑sector themes                                                     Global foreword

                                                                        Executive summary

                                                                        Medium-term trends in EMEA

                                                                        Cross‑sector themes

In the year ahead we see ten issues of strategic significance for all
                                                                        IBOR transition
                                                                        Climate change and sustainability

sectors of the EMEA FS industry:                                        Operational and cyber resilience
                                                                        Culture, governance, and accountability
                                                                        Good customer outcomes

1   IBOR transition                                                     AI governance and model risk management
                                                                        Regulating firms’ use of consumer data

2   Climate change and sustainability
                                                                        Crypto-assets
                                                                        Financial crime
                                                                        Stress testing
3   Operational and cyber resilience
                                                                        Sector-specific themes
4   Culture, governance, and accountability                             Banking
5   Good customer outcomes                                              Capital Markets

6   AI governance and model risk management                             Insurance

                                                                        Investment Management
7   Regulating firms’ use of consumer data
                                                                        Glossary
8   Crypto-assets
                                                                        Endnotes
9   Financial crime                                                     Contacts
10 Stress testing

                                                                                          Next              16
                                                                                                            16
IBOR transition                                                                                                                      IBOR
                                                                                                                                                     Global foreword

                                                                                                                                                     Executive summary

                                                                                                                                                     Medium-term trends in EMEA

                                                                                                                                                     Cross‑sector themes
                                                                                                                                                     IBOR transition
                                                                                                 Even though the transition away from IBORs
 In focus                                              the information asymmetry will be
                                                                                                 is ostensibly market-driven, there is intense
                                                                                                                                                     Climate change and sustainability
                                                                                                                                                     Operational and cyber resilience
                                                       greatest. Firms need to be able to
                                                                                                 supervisory interest in this topic across           Culture, governance, and accountability
 ​​        Supervisory scrutiny will increase         evidence that they have identified the
                                                                                                 the region, especially in the UK, with some         Good customer outcomes
            further in 2020 as the clock runs down     relevant risks, reviewed their existing                                                       AI governance and model risk management
                                                                                                 supervisors already requesting detailed
            to end-2021. Firms will be required to     conduct risk framework and, where                                                             Regulating firms’ use of consumer data
                                                                                                 information on firms’ transition plans. Firms       Crypto-assets
            provide quantitative and qualitative       needed, followed an appropriate
                                                                                                 will have to provide quantitative and qualitative   Financial crime
            data to evidence their progress on         remediation plan.
                                                                                                 data on a regular basis to evidence                 Stress testing
            transition. Those which continue to                                                  their progress.
                                                        espite the best efforts of the
                                                       D                                                                                             Sector-specific themes
            issue IBOR based products maturing
            beyond end-2021 will be in for             authorities and the various RFR                                                               Banking
                                                                                                 We expect that firms will struggle to provide
            particular supervisory scrutiny.​          working groups, we expect the likely
                                                                                                 the full set of requested data with the accuracy    Capital Markets
                                                       outcome of the transition to be the
                                                                                                 and in the detail that supervisors want, at
      ​​    onduct risk will stay at the top of the
           C                                           coexistence of multiple rates for a                                                           Insurance
                                                                                                 least initially. Firms will either have to resort
           supervisory agenda, particularly in         limited set of products and time,
                                                                                                 to manual workarounds or invest in better           Investment Management
           relation to the transition of products      and some divergence in fallback
                                                                                                 systems. And if progress is not sufficient,
           for retail customers and SMEs, where        arrangements.                                                                                 Glossary
                                                                                                 the authorities will explore other ways of
                                                                                                 incentivising firms. These could include            Endnotes
                                                                                                 increasing capital requirements, introducing
                                                                                                 restrictions on issuing IBOR-linked products or     Contacts
“Firms will either have to resort to manual                                                     increasing haircuts on IBOR-linked instruments

  workarounds or invest in better systems. And if                                                taken as collateral in central bank
                                                                                                 market operations.
  progress is not sufficient, the authorities will explore
                                                                                                 It is possible that firms’ progress might lag
  other ways of incentivising firms.”                                                            behind supervisors’ expectations, not for lack
                                                                                                 of effort on the firms’ part but because of the
                                                                                                                                                                       Next              17
                                                                                                                                                                                         17
IBOR transition                                                                                                                    Global foreword
                                                                                                                           IBOR    Executive summary

                                                                                                                                   Medium-term trends in EMEA

                                                                                                                                   Cross‑sector themes

                                                                                                         “So far, the largest
                                                                                                                                   IBOR transition
sheer magnitude and complexity of transition       curves could have a significant negative effect
                                                                                                                                   Climate change and sustainability
and, in some cases, by a lack of engagement by     on valuation and solvency, especially for long-                                 Operational and cyber resilience
their clients.                                     term insurers, though transitional measures           banks and insurers have   Culture, governance, and accountability
                                                   and the MA will provide some mitigating effect.                                 Good customer outcomes

In the UK, regulators have set clear               Investment managers need to consider how              been in the supervisory   AI governance and model risk management
                                                                                                                                   Regulating firms’ use of consumer data
expectations that firms should cease issuing
LIBOR-based cash products maturing beyond
                                                   the change to RFRs might affect their fund
                                                   performance and investment strategy and how
                                                                                                         spotlight. However,       Crypto-assets
                                                                                                                                   Financial crime
2021 by end-Q3 2020. In the EU, now that €STR
is being published, the EU authorities have
                                                   they protect their customers’ best interests
                                                   through transition. In this context, they should
                                                                                                         supervisors’ attention    Stress testing

                                                                                                                                   Sector-specific themes
made it clear that market participants should      focus on identifying their own and their              is already turning to
avoid entering into any new EONIA referencing      customers’ exposure to IBOR-based products,                                     Banking
contracts maturing after 31 December 2021.         engaging with the issuers of those products           the wider population of   Capital Markets
While we expect market participants to do
what they can to cease issuance of new
                                                   to facilitate transition to the new RFRs and on
                                                   clear client communications.
                                                                                                         firms.”                   Insurance
EONIA and IBOR-linked products in line with                                                                                        Investment Management
supervisory expectations, their efforts may        We anticipate a significant increase in issuance
be hampered until key enablers, such as term       of RFR-linked products as banks and other                                       Glossary
structures, are in place.                          market participants continue to drive activity                                  Endnotes
                                                   in them. We expect that 2020 will also see
So far, the largest banks and insurers have        significant progress on developing forward-                                     Contacts
been in the supervisory spotlight. However,        looking term rates both in the UK and in the
supervisors’ attention is already turning to the   EU. The development of term rates is very
wider population of firms. Insurers should be      likely to facilitate and accelerate the transition,
aware of the risk of shallower risk-free curves    especially for firms that so far are taking a “wait
as EIOPA moves away from deriving curves           and see” approach.
based on LIBOR/EURIBOR-linked swaps – a
change that could also affect the LLP. Shallower
                                                                                                                                                     Next              18
                                                                                                                                                                       18
IBOR transition                                                                                                                                                                                                Global foreword
                                                                                                                                                                                 IBOR                          Executive summary

                                                                                                                                                                                                               Medium-term trends in EMEA

                                                                                                                                                                                                               Cross‑sector themes
                                                                                                                                                                                                               IBOR transition
Against this background, we expect to see            transactions and may slow down the transition
                                                                                                                                                                                                               Climate change and sustainability
supervisors increasing the pressure on firms to      altogether. Supervisors are encouraging firms                                                                                                             Operational and cyber resilience
ensure that they identify and mitigate conduct       not to rely on fallbacks; where they are used,                                                                                                            Culture, governance, and accountability
risks arising in the course of IBOR transition.      we expect them to investigate whether this                                                                                                                Good customer outcomes
                                                                                                                                                                                                               AI governance and model risk management
The principal conduct risks faced by firms are       is appropriate.
                                                                                                                                                                                                               Regulating firms’ use of consumer data
likely to arise from inadequate governance,                                                                                                                                                                    Crypto-assets
unclear external and internal communications,        Figure 1. Total value of cleared derivatives contracts referencing GBP LIBOR                                                                              Financial crime
and the potential for staff to act in a manner                                                                                                                                                                 Stress testing
                                                                                                                                                                                          30
which may cause detriment to the market,                              30 June 2019                         Commitment to maintain LIBOR ends (end-2021)
                                                              31 October 2018                                                                                                                                  Sector-specific themes
clients and competition, for example by taking
                                                           30 April 2018                                                                                                                  25
advantage of confidential information about                                                                                                                                                                    Banking
                                                      31 July 2017
their clients’ trading intentions.                                                                                                                                                        20                   Capital Markets

                                                                                                                                                                                                 £ trillions
We expect the various RFR Working Groups                                                                                                                                                  15                   Insurance
to intensify their efforts to foster international                                                                                                                                                             Investment Management
                                                                                                                                                                                          10
cooperation and agree on aligned conventions
across derivatives, bonds and loans. However,                                                                                                                                                                  Glossary
                                                                                                                                                                                          5
despite these efforts, the likely outcome of the                                                                                                                                                               Endnotes
transition will be the coexistence of multiple                                                                                                                                            0
rates, for a limited set of products and time.
                                                           2017                19                 21                23                 25                 27                29                                 Contacts
                                                                                                                 Maturity date
In 2020, firms should focus on the application
of fallbacks in their new and legacy contracts       Source: Bank of England, July 2019 Financial Stability Report, Chart B, page 51. Includes gross notional outstanding of all interest rate
where potential divergence may create basis          derivatives with a GBP LIBOR-linked floating leg, cleared at LCH Ltd excluding inflation swaps. 31 July 2017, 30 April 2018, 31 October
                                                     2018 and 30 June 2019 refer to observation dates for roll-off profile.
risk. The development of fallbacks for different
LIBOR currencies is not necessarily following
the same synchronised plan, which poses
challenges and complexities for cross-border
                                                                                                                                                                                                                                 Next              19
                                                                                                                                                                                                                                                   19
Climate change and sustainability                                                                                                                            Global foreword

                                                                                                                                                             Executive summary

                                                                                                                                                             Medium-term trends in EMEA

                                                                                                                                                             Cross‑sector themes
                                                                                                                                                             IBOR transition
                                                                                                          We expect some regulators within EMEA,
           In focus                                     their accountability regimes, where
                                                                                                          particularly those belonging to the NGFS,
                                                                                                                                                             Climate change and sustainability
                                                                                                                                                             Operational and cyber resilience
                                                        these exist, to achieve climate
                                                                                                          to follow the PRA’s lead by issuing their own      Culture, governance, and accountability
 ​​         Whilst the political and policy            risk objectives.
                                                                                                          supervisory expectations on climate risk           Good customer outcomes
             debate will continue, we do not                                                              governance and management. We however              AI governance and model risk management

             think that regulators are yet at the        he rapid emergence of different and
                                                        T                                                                                                    Regulating firms’ use of consumer data
                                                                                                          anticipate that regulators in France, the          Crypto-assets
             point of using the prudential capital      potentially conflicting sustainability
                                                                                                          Netherlands and UK will continue to lead the       Financial crime
             regime explicitly to promote green         standards across the globe will
                                                                                                          way in this area, in ways that are consistent      Stress testing
             objectives.​                               intensify efforts to achieve greater
                                                                                                          with NGFS outputs. And in this respect, in the
                                                        global coordination in this area.                                                                    Sector-specific themes
                                                                                                          UK, more granular expectations will emerge
      ​​     ather, a growing number of
            R                                                                                             on climate risk management, scenario analysis,     Banking
            regulators in the region will follow         espite the prominence of investor
                                                        D
                                                                                                          disclosure and stress testing in the first         Capital Markets
            the PRA’s example and issue their           activism in climate risk matters, we
                                                                                                          instance through the BoE’s 2021 BES – all of
            own supervisory statements on               expect that regulators within the                                                                    Insurance
                                                                                                          which are also policy focus areas for the EBA.
            managing financial risks from               EU will remain the greater force for
                                                        change in this area.                                                                                 Investment Management
            climate change, whilst also deploying                                                         In response, firms should focus on
                                                                                                          understanding and mapping the physical             Glossary
                                                                                                          and transition risks of climate change. They       Endnotes
Within the EU we expect debates around so-           This is because brown factors can be
                                                                                                          should develop and embed climate scenarios
called “brown penalising” or ”green supporting”      calibrated, to a considerable degree, around                                                            Contacts
                                                                                                          and stress testing to inform risk identification
factors to intensify in the context of CRD 6/        physical and transition risks and associated
                                                                                                          processes whilst enhancing risk modelling
CRR 3 and Solvency 2, whilst moves towards           data, that are already crystallising. Other policy
                                                                                                          frameworks. They should also ensure that
integrating ESG into the SREP for banks will         makers may, in contrast, take a more positive
                                                                                                          boards develop sufficient climate risk expertise
continue. We expect regulators, if pressed,          view of the merits of incentivising green
                                                                                                          by providing adequate training.
generally to favour brown penalising factors         supporting factors relative to brown
over green supporting measures.                      penalising ones.
                                                                                                          In the UK, in-scope banks and insurers will
                                                                                                          also need to implement the plan that they
                                                                                                                                                                               Next              20
                                                                                                                                                                                                 20
Climate change and sustainability                                                                                                                                                                             Global foreword

                                                                                                                                                                                                              Executive summary

                                                                                                                                                                                                              Medium-term trends in EMEA

                                                                                                                                                                                                              Cross‑sector themes
                                                                                                                                                                                                              IBOR transition
submitted to the PRA in October 2019 for          Moves are afoot in the UK and EU to make                                 Firms should therefore continue to make
                                                                                                                                                                                                              Climate change and sustainability
integrating climate risks into their governance   TCFD disclosures mandatory. In 2020 the FCA                              progress on TCFD‑consistent disclosures in line                                    Operational and cyber resilience
and financial risk management frameworks.         will consult on TCFD-aligned disclosures for                             with these initiatives. They should focus their                                    Culture, governance, and accountability
                                                  certain issuers, the EBA will be submitting                              attention on identifying material climate risks                                    Good customer outcomes
                                                                                                                                                                                                              AI governance and model risk management
On governance structures, forthcoming             technical standards to the EC on CRR 2, Pillar 3                         and related data to support this, establishing
                                                                                                                                                                                                              Regulating firms’ use of consumer data
changes to AIFMD, UCITS, MiFID 2, IDD and         ESG disclosures and the EC intends to launch                             effective governance structures, conducting                                        Crypto-assets
Solvency II will require firms to ensure that     a review on NFRD. The BoE has also confirmed                             scenario analysis, developing strategies                                           Financial crime
sustainability risks are incorporated into        that it expects TCFD consistent disclosures                              resilient to climate change and developing                                         Stress testing

organisational requirements, risk management      by 2022 for listed companies and large asset                             appropriate metrics.
                                                                                                                                                                                                              Sector-specific themes
procedures and product governance.                owners.
Additionally, amendments to IDD and MiFID 2                                                                                                                                                                   Banking
will mean that both investment firms providing     Figure 2. Eurozone firms' exposure to climate-sensitive sectors (by issuer sector) in 2018
                                                                                                                                                                                                              Capital Markets
advice/portfolio management and firms
distributing insurance-based investment
                                                              450                                                                                                                   9                         Insurance
                                                              400                                                                                                                   8
products will need to make changes to their                                                                                                                                                                   Investment Management
                                                              350                                                                                                                   7
suitability processes to address clients’
                                                                                                                                                                                                              Glossary

                                                                                                                                                                                        % of total holdings
ESG preferences.                                              300                                                                                                                   6
                                                  EUR (bn)

                                                              250                                                                                                                   5
                                                                                                                                                                                                              Endnotes
In relation to firms’ strategies, the greater                 200                                                                                                                   4

regulatory/policy focus within the EU on                      150                                                                                                                   3
                                                                                                                                                                                                              Contacts
defining sustainability, reflecting customers’                100                                                                                                                   2
ESG preferences, managing ESG risks and                        50                                                                                                                   1
removing barriers to the development of green                   0                                                                                                                   0
                                                                                Banks              Investment funds        Insurance corporations          Pension funds
products and services, can all be expected
to drive ESG product and service innovation                  Energy-intensive       Fossil fuels   Housing     Transport      Utilities    % of total holdings (right-hand scale)
by firms, including to meet growing customer
demands in this area.                              Source: ECB, Climate change and financial stability, May 2019
                                                                                                                                                                                                                                Next              21
                                                                                                                                                                                                                                                  21
Climate change and sustainability                                                                                                    Global foreword

                                                                                                                                     Executive summary

                                                                                                                                     Medium-term trends in EMEA

                                                                                                                                     Cross‑sector themes

                                                                                                        “Despite the rising
                                                                                                                                     IBOR transition
Firms will also start preparing to comply with the   Firms in the EU will therefore need to ensure
                                                                                                                                     Climate change and sustainability
Disclosure Regulation. In the case of investment     that all communications about sustainable                                       Operational and cyber resilience
products, this will include preparing and            products and services clearly and fairly           prominence of investor       Culture, governance, and accountability
disclosing information on how negative impacts       articulate their ESG credentials, together with                                 Good customer outcomes

on financial returns arising from sustainability     the way in which these objectives are achieved,    activism in relation to      AI governance and model risk management
                                                                                                                                     Regulating firms’ use of consumer data
risks are integrated into risk policies, how
financial entities consider the adverse impacts
                                                     and that there is clarity about performance
                                                     measurement.
                                                                                                        climate risk, we expect      Crypto-assets
                                                                                                                                     Financial crime
of sustainability factors, and, in the case
of investment products with sustainability           Finally, we expect ESG shareholder activism
                                                                                                        that regulators within       Stress testing

                                                                                                                                     Sector-specific themes
characteristics, how such characteristics are        by asset owners and managers to intensify.         the EU will remain the
met. Meanwhile, we anticipate that firms will        This will be driven amongst other factors by                                    Banking
begin to think about the strategic implications      regulatory stewardship developments. Despite       greater force for change.”   Capital Markets
flowing from the taxonomy as well as how to          the rising prominence of investor activism
implement and use it.                                in relation to climate risk, we expect that                                     Insurance
                                                     regulators within the EU will remain the greater                                Investment Management
We anticipate that the growth in consumption         force for change.
of sustainable financial products by retail                                                                                          Glossary
investors will be accompanied by a growing                                                                                           Endnotes
focus by conduct regulators in the EU on
“greenwashing”. Greenwashing refers to                                                                                               Contacts
the practice where firms market/portray
products, activities or policies as producing
environmental outcomes, when this is not the
case. The FCA and AMF, informed by the EU’s
developing work on disclosure, taxonomy
and labelling, are expected to lead the way
in this work.
                                                                                                                                                       Next              22
                                                                                                                                                                         22
Operational and cyber resilience                                                                                                                          Global foreword

                                                                                                                                                          Executive summary

                                                                                                                                                          Medium-term trends in EMEA

                                                                                                                                                          Cross‑sector themes
                                                                                                                                                          IBOR transition
                                                                                                       firms to strengthen their management of cyber
            In focus                                        upervisors will continue to
                                                           S                                           risk, and teams previously less exposed to
                                                                                                                                                          Climate change and sustainability
                                                                                                                                                          Operational and cyber resilience
                                                           challenge rigorously firms’ Cloud           supervisory scrutiny will need to adapt to what    Culture, governance, and accountability
  ​​         Firms will need to demonstrate they          migration plans, and will further           will be a more intrusive approach.                 Good customer outcomes
              have considered, and can manage,             clarify policy on outsourcing                                                                  AI governance and model risk management
                                                                                                                                                          Regulating firms’ use of consumer data
              the full range of technology and             arrangements. Firms should engage           EU-level negotiations will take time, but we       Crypto-assets
              resilience risks they face, especially       proactively with supervisors on             anticipate faster progress from regulatory         Financial crime
              as they upgrade their core systems           Cloud transition and demonstrate            authorities. In particular, we expect the SSM      Stress testing
              to be able to innovate.​                     robust governance and risk                  to weigh the development of an assessment
                                                                                                                                                          Sector-specific themes
                                                           management capabilities.                    framework for the cyber resilience of directly
       ​​     upervisors in some EU jurisdictions
             S                                                                                         supervised banks similar to the Cyber              Banking
             will have new means of evaluating             I nternational standard-setting            Resilience Oversight Framework developed           Capital Markets
             and understanding firms’                       bodies will make some, still slow,         by the ECB for FMIs in 2018. EIOPA will
             approaches and resilience to cyber             progress in building consensus             finalise its guidelines on ICT and cyber           Insurance
             and operational risks, and will put            for the development and                    security governance, building on the EBA’s         Investment Management
             pressure on them to address areas of           implementation of a common                 final guidelines on the same topic. It will also
             deficiency.                                    regulatory approach to cyber and           consider applying threat-led cyber resilience      Glossary
                                                            operational risks.                         testing to the insurance sector. On the            Endnotes
                                                                                                       supervisory front, when outages occur, senior
                                                                                                       executives in the UK can expect heightened         Contacts
Supervisors will expect firms to demonstrate           The European Commission is expected to
they have thought deeply about the full range          table a comprehensive legislative proposal      scrutiny under the SM&CR, and will need to
of technology and resilience risks they face,          in 2020 on the management of cyber risks        show what steps they have taken to mitigate
especially as they upgrade their core systems          in FS, intended to harmonise and clarify        the risks of operational disruptions, especially
as part of digital transformation programmes.          expectations for risk management practices.     during IT change programmes.
These have too often been a key driver of              In time, clearer powers and expectations will
operational failures in FS.                            enable supervisors to apply more pressure on    In the UK, responding to Parliament’s call to
                                                                                                       prioritise this work, the BoE, PRA and FCA
                                                                                                                                                                            Next              23
                                                                                                                                                                                              23
Operational and cyber resilience                                                                                                                                                   Global foreword

                                                                                                                                                                                   Executive summary

                                                                                                                                                                                   Medium-term trends in EMEA

                                                                                                                                                                                   Cross‑sector themes
                                                                                                                                                                                   IBOR transition
will will finalise their approach to operational      will be using the results of these tests as tools                    competition, are increasingly concerned
                                                                                                                                                                                   Climate change and sustainability
resilience in 2020, and start implementing it         to help them assess whether firms are taking                         about the concentration risk of large‑scale             Operational and cyber resilience
before the end of 2021. Boards and senior             steps to address the vulnerabilities revealed.                       outsourcing to unregulated CSPs. The EU,                Culture, governance, and accountability
management will need to communicate clearly                                                                                including the UK, will consider legislation to          Good customer outcomes
                                                                                                                                                                                   AI governance and model risk management
to their supervisors their impact tolerance levels    FS authorities, whilst recognising the                               bring CSPs within the regulatory perimeter, but
                                                                                                                                                                                   Regulating firms’ use of consumer data
for operational disruption. This should include:      importance of the Cloud for innovation and                           progress is likely to take time due to difficult        Crypto-assets
                                                                                                                                                                                   Financial crime
• identifying their important business                Figure 3. Cloud adoption amongst respondents to Deloitte’s Digital Risk Survey                                               Stress testing

  services;
                                                                                                                                                                                   Sector-specific themes
                                                      100
• mapping the underlying systems and                                   85%                                                                                                         Banking
  processes that support them;                         80
                                                                                                                                                                                   Capital Markets
• articulating impact tolerance statements for
  each of these services; and                          60                                                                                                                          Insurance
• demonstrating what they have done to                 40                                                                                                                          Investment Management
                                                                                                 30%
  improve the resilience of these services in                                                                                                    27%
                                                                                                                                                                                   Glossary
  the face of a disruption.                            20
                                                                                                                          19%
                                                                                                                                                                           10%
                                                                                                                                                                                   Endnotes
The first tests under the ECB’s TIBER‑EU                0
                                                                     Overall                   Adopted                 Adopted for            Adopted for          Experimenting   Contacts
framework have already started. In 2020                             adoption                   at scale            customer use cases      internal use cases
we expect an increase in the number of
EU countries introducing these, including
cross‑border tests. In the UK, the FPC’s cyber                                                         Top three barriers to scaling adoption
stress test of large FS firms will be repeated with                            Risk appetite                Maturity of governance model             Regulatory scrutiny
increasingly challenging scenarios. Firms must
prepare to engage with their supervisors, who         Source: Deloitte, Digital risk survey, October 2019

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