What will be keeping legal, risk and compliance professionals awake at night in 2017?


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Summary: What do you expect your top regulatory challenge to be in 2017? We recently posed this question to over 250 legal, risk and compliance professionals working for UK-based banks, insurers and asset management firms - and the results are in! This year's top three regulatory issues for the sector that are keeping you up are Brexit, MiFID II and Individual Accountability.

BLP’s financial regulation group hosted its seventh annual Emerging Themes seminar in January. As in previous years, the seminar marked the launch of a substantial report, containing insights from the group on a wide range of developments in financial services law, regulation and compliance.

We asked all those registering for the event to respond to our survey question, “What do you expect your top regulatory challenge to be in 2017”. Results are set out in the pie chart below. Respondents from across the sector, including banks, insurers and asset managers, named the top their top three concerns as:

1. Brexit (40%)

2. MiFID II implementation (29%); and

3. Individual accountability and the Senior Managers & Certification regime (15%).

See the full results of the survey here > 

The UK negotiating stance on Brexit

Theresa May’s hotly anticipated speech on 17 January and subsequent comments at the World Economic Forum in Davos provided, on its face, some much needed clarity on the UK government’s negotiating objectives for exiting the European Union. Mrs May confirmed that the UK will seek to leave the EU Single Market and the Customs Union. This stance accepts the frequently cited indivisibility of the so-called four freedoms of the EU Single Market. Rather than seeking to tweak Single Market membership, Mrs May’s negotiators will avoid any “half in, half out” arrangement and instead seek the best possible comprehensive UK-EU free trade agreement. This would be a bespoke deal, rather than  an emulation of any existing model. But in reality the mood music coming from government has long been about leaving the Single Market, and Mrs May’s speech gives no indication of what the bespoke agreement will look like nor how it can be concluded in 2 years.

Mrs May made specific reference to the possibility of phased implementation for any new deal.  This shows that she has listened to industry concerns about the possibility of a “cliff edge”. But she is explicitly not advocating a transitional agreement that the City had hoped for.  She wants the final agreement in place within 2 years, which must include the implementation provisions. It remains to be seen how those implementation provisions will avoid the cliff edge (perhaps a delay to the loss of passporting?) or how acceptable they will be to the EU without the quid pro quo of freedom of movement.  

The continuing uncertainty will trouble financial services firms. Whilst comments by Mrs May and Philip Hammond in Davos were supportive of the financial sector, the potential loss of Single Market access is forcing many financial institutions to look carefully at how they may reshape their operations and relocate at least some staff. We are unlikely to receive any further official pronouncements as negotiations progress. 

Ultimately, what the “best possible” deal will look like is fully dependent on the degree of cooperation that can be achieved with the 27 Member States when the negotiations start in earnest. As outlined in our blog, 'Reading between the lines of Theresa May's 17 January speech', there is no reason for firms not to continue with developing their contingency plans for loss of Single Market access from March 2019. 

Getting ready for the MiFID II “go-live” date

The measures that comprise the fundamental overhaul of the EU’s cornerstone legislation on securities markets and investments are heading towards transposition this July. The MiFID II Directive and its companion legislation, the Markets in Financial Instruments Regulation (MiFIR), will take effect on 3 January 2018. This far reaching legislative package will impact a very wide range of authorised persons, recognised investment exchanges and some currently unauthorised businesses.

The herculean task for UK firms of tracking and digesting the developing MiFID II/MiFIR framework and the level 2 measures (over 40 pieces of secondary legislation) that will recast and expand the 2007 Markets in Financial Instruments Directive will culminate in the FCA’s final policy statements in March and June, following four weighty consultations. We will then have sight, at last, of the final shape of the rules. 

At the beginning of the year the FCA published its MiFID II applications and notifications guide. It will take early applications for authorisation and variations of permission from 30 January and will accept passport notifications from 31 July. 

Whilst the finalisation of the rules to implement the regime’s requirements will be welcome,  many of the significant number of firms to which the MiFID II regime will apply are still struggling to implement the necessary changes to systems, policies and procedures and documentation that will be required. This is one finish line that the industry is not necessarily keen to cross. 

Senior Managers and Certification Regime (SM&CR) – extension to all regulated firms

SM&CR has applied since March 2016 for deposit takers and PRA-designated investment firms. The deadline for fitness and propriety assessments and the issue of certificates to those within the CR is 7 March 2017. This is also the effective date for new rules on regulatory references and the extension of the Conduct Rules to staff who fall outside the SMR or CR.

It is expected that SM&CR’s reach will widen to cover all regulated financial services firms from next year. The FCA is actively recruiting to its SM&CR policy team, suggesting that Brexit will not delay the extension of the regime, as many had expected. Firms that will be brought into the regime from 2018 will therefore have to face the challenge of a fairly limited timeframe to prepare for implementation of what will be a significant change. For these firms, SMR and CR will replace the approved persons regime to which they are currently subject.  In an economic climate that has led many firms to introduce cost cutting measures and reduce staffing levels where possible, they will be required to devote resources to the preparation and maintenance of the relevant documentation on senior management responsibilities, and to assessing and certifying staff within the CR. All staff will need to be trained on the conduct rules applicable to their roles. 

The FCA’s consultation process is ongoing and 2017 will see developments relating to: 

  • The FCA’s detailed proposals for extending the regime;
  • In all likelihood, bringing the legal function within the regime as a Senior Management Function; and
  •  Extending the Conduct Rules to standard non-executive directors.

Financial Regulation 2017: A practical review of the year ahead

Download a copy of 2017's report for more on these topics & over 20 practical articles on other topics including competition, financial crime, data protection, FinTech and much more...

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