5 EU Financial Regulation Questions that Need to be Answered in 2018
2017 was the year for MiFID II. Pretty much everyone in the European financial industry has had enough about hearing of MiFID II preparation. As MiFID II dominated the discussion in 2017, ahead of going into effect next week, other areas of financial regulation took a back seat.
Looking ahead towards next year, we wanted to take a look at some of financial regulation topics and questions that didn’t get much interest in 2017, but shouldn’t be ignored.
Looking ahead to 2018
1) GDPR implementation – At the end of May 2018, the EU is set to implement the General Data Protection Regulation (GDPR Link.) Not specific to the financial industry, other sectors have had GDPR on their radars in 2017, but it took a backseat among financial firms. As a result, the financial industry has some catching up to do with GDPR.
GDPR focuses on how firms are handling data privacy. For investment firms, this means ensuring that not only their internal systems meet GDPR requirements, but also solutions from external vendors.
The question for 2018 is whether investment firms will be able to implement GDPR checks in time and spot gaps in handling client data.
2) GDPR vs Financial Regulation (especially MiFID II) – Those familiar with MiFID II will know that one of its huge changes is the requirement of personal details related to clients and internal traders and portfolio managers. This data needs to be included in transaction reporting (MiFIR) submissions that are shared with Nation Competent Authorities (NCAs) and Approved Reporting Mechanisms (ARM).
Regulation around client data is nothing new. Most regulators around the world require investment firms to store client and trade data for seven years. However, MiFID II added a new layer of implementing a process to share portions of client information.
But now we have GDPR coming that includes limitations of how and where client information can be stored and shared. This has created cases where requirements under financial regulation legislation are at odds with GDPR. In 2018, ESMA will need to address the question of how to deal with conflicts between existing financial regulation and GDPR.
3) RegTech & regulators – In 2017, regulation technology (RegTech), split from being a small sector under FinTech to its own large category (more on the growth of RegTech). As financial regulation surrounding AML/KYC, transaction reporting, corporate governance and trade monitoring has grown, it has led investment firms to seek technology solutions to help them with the compliance burdens.
But where does RegTech go in 2018?
To really grow and gain wider adoption the RegTech industry would benefit with proactive measures from regulators. Headed by the FCA, many EU regulators do provide forums for investment firms and technology firms to interact and work on standards. But, more work is needed to promote standards, vendor certification and inclusion of regulatory guidelines that take better account of using 3rd party RegTech providers.
4) EMIR fines – The FCA answered the question of whether any firm is going to get fined for EMIR infractions in October. At that time, Merrill Lynch got hit with a £34.5 million fine for incorrect reports.
However, yet to be answered is whether the Merrill fine was a one time penalty or are the FCA and other regulators delving deeper to review EMIR infractions as other firms.
With MiFID II around the corner, until the FCA’s was announced, the industry feeling was that regulators would hold off on fines until 2018. The opinion was based on two things. One, the burden of complying with MiFID II moved investment firm resources from being able to improve their EMIR reporting. Second, communication from regulators has been that they had already issued a one year delay, and expect strong compliance of MiFID II come 2018. This signaled that regulators would be proactive of monitoring MiFID II compliance in 2018, with checks expected across all reporting requirements.
For the most part, this theory has been true. With the exception of Merrill Lynch, investment firms weren’t penalized in 2017 about EMIR. But, in 2018 we should get a better idea of just how diligent regulators will be to review for EMIR infractions.
5) Brexit – Yeah, yeah, yeah. This has been a large topic for both 2016 and 2017. Nonetheless, it remains very much in play in 2018. Specifically around financial regulation there is very little concrete plans around Brexit.
Still not understood is whether passporting of clients will continue to exist, what happens to UK customers at EU investment firms and how transaction reporting will look after Brexit?
These questions will get answers. However, the longer the delays for Brexit treaties to get passed, it reduces the time for investment firms to comply to the new rules. Also, financial regulators will have their share of work putting in place systems to handle any new regulation.
This issue was seen with MIFID II. ESMA currently continues to issue clarifications of rules around MiFID II even as the law goes into effect in a few days. Also, some country regulators have struggled to create testing environments and connections for firms to submit MiFIR transaction reports.
Overall, along with most industries, the financial sector is hoping to get Brexit answers in 2018.