The “Regulatory Reform” newsletter is the monthly initiative aimed at updating the Finance and Risk community with the most recent regulatory changes impacting Banks and Capital Markets firms. We update our regulatory database every month by tracking more than 40 regulatory and industry bodies covering North America, EALA and APAC. Every month, we will seek to highlight approximately 10 regulations shortlisted on the basis of geographic coverage and anticipated business impacts. Our summaries will seek to highlight the risks covered and business processes affected by the regulatory reforms. This newsletter is planned to supplement the existing newsletter “Regulatory Insights” which provides a deeper analysis of business implications and Accenture’s point of view on a single or much smaller set of regulatory changes.

Edition Highlights:

  • The Basel Committee proposes3 to replace the existing capital floor based on the Basel I framework with a new capital floor based on the standardized approaches of Basel II/III.
  • The Financial Stability Oversight Council’s (FSOC’s) evaluation6 of asset management products and services in the US focuses on liquidity and redemptions, leverage, and resolution.
  • Joint consultation2 of the European Supervisors would deal with regulating cross-selling practices to help customers make better and more informed decisions.

Current coverage period: Through December 31st, 2014
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
( Low) (Medium) (High)

CURRENT REGULATIONS:

European Commission (EC) ():
A single rulebook for the resolution of failing banks will apply in the EU as of 1 January 2015
Publication Date: Dec 31st 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Recovery and Resolution Planning
New single rulebook1 of Bank Recovery and Resolution Directive (BRRD) that came into force on January 1, 2015 would harmonize and improve the tools dealing with bank crises across the European Union. Under the BRRD, banks are required to prepare recovery plans. Regulatory authorities are granted a set of powers to intervene in the operations to prevent them from failing. In addition, in the event of failure, authorities are equipped with comprehensive powers and tools to restructure them at a national level, as well as cooperation arrangements to tackle cross-border banking failures.

European Securities and Markets Authority (ESMA), European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) ( ):
Joint Committee Consultation Paper on guidelines for cross-selling practices
Publication Date: Dec 22nd 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection, Audit, Legal and Compliance
The joint guidelines2of the European Union (EU) regulators are aimed at addressing conduct of business standards towards customers in relation to cross-selling of products in the EU financial sector. Cross-selling, while it can benefit customers, can also lead to customers purchasing products that they do not necessarily want or may be unsuitable for. Key requirements in the consultation to address these risks are a) enhanced disclosure and transparency around prices, costs, and other non-price features, and b) communication of all relevant information in a timely and exhaustive manner.

Bank for International Settlements (BIS) ( ):
Capital floors: the design of a framework based on standardised approaches
Publication Date: Dec 22nd 2014
Risks Covered: Credit Risk, Operational Risk, Market Risk
Business Processes Impacted: Capital Adequacy and Capital Planning

The Basel Committee’s consultation3 proposes to replace the existing transitional capital floor based on Basel I framework. The new capital floor will be based on standardized, non-internal modeled approaches that are currently under consultation for credit, market, and operational risks. This is with the purpose of lessening the impact of model risk and measurement errors stemming from internally-modeled approaches. This would promote comparability of capital adequacy across banks in different jurisdictions and also make sure it does not fall below the stipulated level.

European Securities and Markets Authority (ESMA) ( ):
Final Report: ESMA’s Technical Advice to the Commission on MiFID II and MiFIR
Publication Date: Dec 19th 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection, Audit, Legal and Compliance

The ESMA’s technical advice4 launches a consultation regarding the implementation of the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR). The new framework would aim to protect investors’ interests in the secondary markets and when they are sold investment products. Key proposals include a) product governance for manufacturers and distributors of financial products, and b) disclosure to provide clients with details of all costs and charges related to their investment, including cost aggregations.

The International Accounting Standards Board (IASB) ():
Disclosure Initiative: Proposed amendments to IAS 7
Publication Date: Dec 18th 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Finance and Performance Management, Reporting

The IASB’s proposals5 relate to disclosures of statement of cash flows with the objective of improving information to users of financial statements. Impacts are in two areas a) reconciliation of the amounts in the opening and closing statements of financial position for financing activities, and b) extension of disclosures in relation to an entity’s liquidity, especially on the restrictions concerning the use of cash and cash equivalent balances, including tax liabilities that would arise on the repatriation of foreign cash and cash equivalent balances.

Financial Stability Oversight Council (FSOC) ():
Notice Seeking Comment on Asset Management Products and Activities
Publication Date: Dec 18th 2014
Risks Covered: Liquidity Risk, Operational Risk
Business Processes Impacted: Risk Management and Stress Testing, Recovery and Resolution Planning

The Council is inviting public comments in its effort6 to evaluate potential risks to the US financial system arising out of asset management products and services that could impact the overall financial stability. The areas of focus include liquidity and redemptions, leverage, operational functions, and resolution in the asset management industry. The Council recognizes that asset management is a key segment of the financial services industry and operates with significant differences within itself, across investment strategies, corporate structures, regulatory regimes, and customers.

Board of Governors of the Federal Reserve System (the Fed) ():
Regulatory Capital Rules: Regulatory Capital, Proposed Rule Demonstrating Application of Common Equity Tier 1 Capital Qualification Criteria; Regulation Q
Publication Date: Dec 19th 2014
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Capital Adequacy and Capital Planning

The Board has invited public comments on proposed rulemaking7 to provide additional information on how to apply its revised capital framework under which certain capital instruments issued by institutional investors may not qualify as common equity Tier 1 capital. The proposal includes examples of such capital instruments, explains features that prevent such instruments from qualifying as common equity Tier 1 capital, and provides suggestions on changes that would allow the qualification.

Bank for International Settlements (BIS) ( ):
Revisions to the securitisation framework
Publication Date: Dec 11th 2014
Risks Covered: Credit Risk, Liquidity Risk
Business Processes Impacted: Capital Adequacy and Capital Planning

As part of its overall Basel III agenda to reform regulatory standards for banks, and to address several shortcomings of the Basel II securitization framework and strengthen related capital standards, the Committee has issued a revised securitization framework.8 Key revisions pertain to the following: a) the hierarchy of approaches, b) the risk drivers used in each approach, and c) the amount of regulatory capital banks must hold for exposures to securitizations. The framework will come into effect in January of 2018.

Group of 30 (G30) ( ):
The Digital Revolution in Banking
Publication Date: Dec 10th 2014
Risks Covered: IT Risk
Business Processes Impacted: Information Technology, Risk Management and Stress Testing

This paper9 published by the Group of Thirty discusses how the emergence of a range of different digital technologies is both posing a new challenge to the financial services industry where it is now getting adopted, and providing an opportunity to transform the markets for the customer and possibly disrupt established players. It also raises key policy questions and implications and provides suggestions on the way forward for their discussion and elaboration.

Board of Governors of the Federal Reserve System (the Fed) ( ):
Risk-Based Capital Guidelines: Implementation of Capital Requirements for Global Systemically Important Bank Holding Companies
Publication Date: Dec 18th 2014
Risks Covered: Compliance Risk, Systemic Risk
Business Processes Impacted: Capital Adequacy and Capital Planning

In order to further strengthen the capital positions of the largest, most systemically important US bank holding companies, the Board is proposing10 a methodology to identify whether a US bank holding company is a Global Systemically Important Bank (GSIB) and subsequently to apply a GSIB capital surcharge framework tor such organizations and calculate the risk-based capital surcharge they will be subject to. Under this framework, agreed to by the Basel Committee on Banking Supervision, a GSIB will calculate its capital surcharge following two methods and use the higher of the two surcharges. The proposal would be phased-in beginning on January 1, 2016, becoming fully effective on January 1, 2019.

FORTHCOMING REGULATIONS:

Financial Conduct Authority (FCA): The commercial importance of culture to industry
The FCA leadership speech11 identifies significant challenges faced by both regulators and the banking industry in the areas of culture and governance, despite important improvements in the last 18 months. From the regulatory perspective, the priorities are to remain focused on future standards as much as past indiscretions. It is important for banking business leaders to continue to ask sensible questions – it is not just “is this product or strategy legal?” – but “is it right in the long-term interests of clients?”.

Footnotes:

  1. European Commission (EC): A single rulebook for the resolution of failing banks will apply in the EU as of 1 January 2015
  2. European Securities and Markets Authority (ESMA), European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA): Joint Committee Consultation Paper on guidelines for cross-selling practices
  3. Bank for International Settlements (BIS): Capital floors: the design of a framework based on standardised approaches
  4. European Securities and Markets Authority (ESMA): Final Report: ESMA’s Technical Advice to the Commission on MiFID II and MiFIR
  5. The International Accounting Standards Board (IASB): Disclosure Initiative: Proposed amendments to IAS 7
  6. Financial Stability Oversight Council (FSOC): Notice Seeking Comment on Asset Management Products and Activities
  7. Board of Governors of the Federal Reserve System (the Fed): Regulatory Capital Rules: Regulatory Capital, Proposed Rule Demonstrating Application of Common Equity Tier 1 Capital Qualification Criteria; Regulation Q
  8. Bank for International Settlements (BIS): Revisions to the securitisation framework
  9. Group of 30 (G30): The Digital Revolution in Banking
  10. Board of Governors of the Federal Reserve System (the Fed): Risk-Based Capital Guidelines: Implementation of Capital Requirements for Global Systemically Important Bank Holding Companies
  11. Financial Conduct Authority (FCA): The commercial importance of culture to industry

DISCLAIMER: This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with approximately 319,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

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