The annual assessment from Deloitte’s EMEA Centre for Regulatory Strategy explores the regulatory themes that will shape the financial services industry in 2020. Our Centre’s predictions can help leaders anticipate the regulatory landscape in 2020 on topics such as LIBOR / SARON transition, climate risk, cyber resilience, prevention of financial crime, and market access.
The Swiss Financial Market Supervisory Authority (FINMA) inaugural public risk monitor report1 supports our view and cites these topics as ‘critical risks’ facing the Swiss financial services industry.
After a decade of global reforms defined by the financial crisis and misconduct issues, the regulatory environment is now changing and the international consensus on reform is fraying. The precise direction of change is not yet clear; but the political appetite for globalisation is retreating and trade tensions are mounting; and technological change and social concerns, including environmental sustainability, are rising on regulators’ agendas. All these developments are likely to have a profound impact on the medium-term regulatory outlook, and while we do not expect these forces to play out fully in 2020 we believe that financial services firms need to prepare to respond to them.
In our Regulatory Outlook we explore four medium-term trends and ten cross-sector themes of strategic significance, as well as a number of additional themes specific to each of the banking, capital markets, insurance and investment management sectors.
For the year ahead we see five top strategically significant regulatory trends for all sectors of the Swiss FS industry:
- IBOR transition - The discontinuation of LIBOR will have major repercussions due to the high transaction volumes involved and the wide-ranging technical interlinkages. These represent a significant financial stability risk. While Switzerland has already proposed an alternative, in the form of SARON (Swiss Average Rate Overnight), discontinuation of LIBOR (GBP) benchmarking remains a challenge: many key currencies e.g. GBP, USD and JY do not have an alternative and financial products still reference LIBOR for the setting of interest rates. FINMA-mandated self-assessments show that the majority of banks are still well behind schedule in their efforts to prepare for the replacement of LIBOR. In addition, the slow progress has been restricting the adoption so far of alternative benchmark interest rates. Given the degree of risk arising from continued reliance on LIBOR, regulated firms should expect increasing regulatory scrutiny of their transition efforts as the end of 2021 approaches.
- Climate change and sustainability - Sustainability is on the agenda for all federal institutions, including the Federal Department of Finance and the Swiss National bank. This topic has been given a further boost by the political focus on climate change and the Green Liberal movement gaining support in the 2019 Swiss national elections. Whilst the political policy debate will continue, we do not think that regulators are yet at the point of using the prudential capital regime explicitly to promote green objectives. The rapid emergence of different and potentially conflicting sustainability standards across the globe will intensify efforts to achieve greater coordination in this area, compounded by investor activism around climate risk concerns.
- Operational and cyber resilience - Looking back at the legislative framework for MiFID II, which went live in 2018, late information and unstructured implementation damaged operational performance. The Financial Services Act including FINSA (and in German FIDLEG) and FINIG, the Swiss counterparts of MiFID II and AIFMD, came into force at the beginning of 2020, with extended transition periods.2 Firms will need to manage their programs effectively to maintain operational performance.
Separately, we expect greater scrutiny of cloud services as firms move closer towards a digital banking environment. One of the main concerns of Swiss banks in this area is the U.S. Cloud Act. The recently-published Swiss Bankers Association guidelines gave some initial guidance on the completion of a risk assessment supported by the cloud service provider. Banks are well advised to consider these non-binding recommendations when making use of cloud services.
- Crypto-assets - On 27.11.2019 the Federal Council announced, based on a report and public consultation, that there will be no specific technology act. The Swiss parliament is expected to address the proposal for the first time in 2020 Q1. Realistically changes to the law cannot be expected before 2022 but firms will need to monitor developments closely in 2020/21, as Switzerland continues to lead in this area.
- Financial crime prevention - In response to a number of major international money-laundering cases in recent years with connections to Switzerland, defences against money laundering and terrorist financing are being increased and supervisory attention intensified. Recent changes to the Anti-Money Laundering Ordinance will be followed by further changes in 2020.
So while the post-financial crisis wave of regulatory changes may be subsiding, financial services firms should not expect supervisory scrutiny to lessen as we move into 2020.
Read the full EMEA Regulatory Outlook report to find out what lies ahead for financial institutions. A summary of the key trends most relevant for financial services organisations headquartered or operating in Switzerland are summarised in our Swiss Foreword. You can visit our dedicated website here.
1 FINMA Risk Monitor Report 2019, December 2019 - Published by the Swiss Financial Market Supervisory Authority
2 Information about FIDLEG and FINIG, FINMA, 2018, https://www.finma.ch/de/bewilligung/fidleg-und-finig/