2016 has been another difficult year for the financial sector, with economic and political uncertainty complicating the completion of the post-crisis regulatory repair agenda.

A prolonged period of tepid economic growth and persistently low and volatile interest rates has squeezed profitability in some sectors and put significant pressure on longstanding business models and balance sheet management. Firms are further challenged by continuing uncertainty over the final shape of post-crisis financial regulation. While regulators are keen to preserve the hard won reforms of recent years, rising political uncertainty in developed economies (as demonstrated by Brexit and the US Presidential election results) has increased the volatility and hence unpredictability of the macro-policy environment.

Compared to international peers, European financial services firms have faced a more challenging set of circumstances than most in the last decade. The largest European firms, in particular, have struggled to adjust to Europe’s post-crisis political economy – characterised by slower growth, lower interest rates and more regulatory change and uncertainty than in some other jurisdictions.

There is growing recognition that the challenges faced by many European financial services firms are not cyclical but are instead, deep, unresolved and structural in nature. Both international and European authorities have called for firms, particularly banks, to tackle these challenges. Danièle Nouy, Chair of the Supervisory Board of the European Central Bank, cautioned in a recent speech that “in these uncertain, changing times, the usual truth applies: the banks that adapt will thrive, those that don’t, will fail.”

Nearly ten years since the beginning of the financial crisis, European financial services firms need to refresh their strategies for how they respond to regulation and how they perform in a regulatory, economic and political environment that could become fundamentally more constraining.

What’s in store for the year ahead?

Deloitte’s EMEA Centre for Regulatory Strategy is launching the Financial Markets Regulatory Outlook 2017, our annual flagship report that forecasts the most significant developments we believe will drive financial services policy in the year ahead.

In the light of the challenges the industry faces, we consider that understanding the developments below, and their implications, is now more crucial than ever. 

• Brexit – While the strategic and regulatory implications of Brexit will remain unclear in the near term, supervisors in the UK and EU will be watching closely firms’ preparations, actions and contingency plans.
• Resolvability – Regulators will focus on resolvability instead of the EU’s stalled Bank Structural Reform proposal, as supervisory attention turns to the practical side of bank resolution, which goes well beyond having a plan on paper.
• Financial resilience – Firms will have to model the impact of forthcoming capital rules, as the Basel Committee for Banking Supervision finishes most of its work on the post-crisis capital agenda early in the year. Firms will also have to enhance their balance sheet management capabilities as part of adopting Total Loss-Absorbing Capacity (TLAC) rules, Minimum Requirements for Own Funds and Eligible Liabilities (MREL) and the ninth International Financial Reporting Standard (IFRS9).
• Conduct and culture – When firms reinforce their efforts to tackle poor culture, a lack of accountability and misaligned incentives, they will face further supervisory scrutiny to ensure that effective measures have been taken.
• Regulation of new technologies – European and national regulators will support innovative entrants while also becoming increasingly vigilant about the risks they might pose.
• Cyber and IT resilience – Supervisory expectations around cyber resilience will rise and are likely to encourage more detailed planning for firms’ responses to scenarios such as cyber breaches and technological failures.
• Opening up markets – The regulatory emphasis on the transparency of disclosures on products and services, especially on costs and charges, will herald new competitive pressures for large incumbent firms, which will have to make strategic decisions around their positioning in the market.
• Evolution of the trading landscape – The upcoming regulatory requirements around trading and post-trading activities will prompt market participants to revisit their existing operations, systems, procedures and product offerings.

In addition to these developments, a top theme for 2017 must now be how firms can design strategies to ensure they thrive in the medium to long-term. Our outlook features the following as key elements of an effective response to regulatory change and continuing uncertainty: 

• Controls efficiency – The imperative to reduce compliance costs will compel firms to turn to RegTech to improve the efficiency of their controls and compliance activities. These solutions are likely to be costly, but a broader need to invest in technological improvement presents an opportunity to find synergies with compliance needs.
• Governance strategy – Boards and senior management teams will come under added pressure to show supervisors that they can effectively manage groups comprising a multitude of legal entities spanning numerous jurisdictions. As part of this, subsidiaries are already coming under increased scrutiny to demonstrate their ability to operate independently of their parent company if the need arose.
• Business model sustainability – For the purposes of rationalising costs, restoring returns and managing heightened scrutiny from supervisors and resolution authorities, firms will be pressured to integrate regulatory compliance, stress testing and resolution planning more comprehensively into the development of their business strategy.

At the core of our report is the belief that to succeed in the coming year, firms must accelerate strategic choices aimed at improving the way they integrate regulatory and commercial thinking. Our Financial Markets Regulatory Outlook 2017 gives our views on how they might begin to do that in the year ahead, and the challenges that they are likely to face along the way. To read more, you can download your copy here.

This post was written by Deloitte’s EMEA Centre for Regulatory Strategy and first published on the Deloitte Financial Services UK blog.

Sven Probst - Financial Services and Banking Lead

Sven leads the Financial Services and Banking practice in Switzerland. Having started his career as a banker he has been providing external advice and assurance services to the industry for over 20 years. Sven has a broad range of experience and expertise covering governance and control, regulatory challenges, investigations, payments and sanctions, project management, IT and Cyber risk. In his previous life he has also been the CEO of an IT services provider.

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Stephan Welti - Regulatory, Compliance & Legal Lead

Stephan is Head of the Regulatory, Compliance & Legal practice, focusing on the national and international financial services industry. Prior to joining Deloitte, he was Member of the Executive Committee and General Counsel of a leading Swiss Private Bank, following previous roles in that organisation. Before, Stephan has worked at a number of leading business law firms focusing on Banking, Finance and Capital Markets as well as Corporate Law / M&A.

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Leif Boegelein, Partner, Financial Services

Leif has more than 15 years of experience working with financial institutions on the design and implementation of risk methodologies in the context of risk management, capital management and valuation.

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