This is a monthly initiative aimed at updating the Risk Management community with the most recent regulatory changes impacting banks and capital markets firms. We update our comprehensive regulatory database every month by tracking more than 40 regulatory and industry bodies covering North America, Europe, Africa, Latin America and Asia Pacific. Every month, we will highlight 10 regulations shortlisted on the basis of geography of coverage and anticipated business impacts. Our summaries will highlight the risks covered and business processes affected by the regulatory reforms. This item in the blog is planned to supplement an existing monthly feature namely, “Regulatory Insights” which provides a deeper analysis of the business implications of a single or much smaller set of regulatory changes.

Edition Highlights:

  • Regulations covered in the edition would change management of credit concentration, market, business cycle, sovereign, systemic, reputation, compliance, and operational risks. Banks and capital market firms would need to strengthen consumer protection, payment processing, recovery and resolution planning, valuation, data management and risk reporting.
  • Citing major deficiencies in banks’ IT and data architecture that became apparent during the global financial crisis which led to their inability to aggregate risk exposures and identify concentrations quickly; the Basel Committee’s finalized guidance would affect risk management practices of banks. Major coverage include data governance and IT architecture, risk data aggregation capabilities and risk reporting practices.
  • Suitability requirements reflect general duty of financial intermediaries to act fairly, honestly, professionally and in the best interests of the customer. Finalized guidance from the International Organization of Securities Commissions covers key principles relating to a) classification of customers, b)Disclosure requirements, c) Protection for non-advisory and advisory services, and d) robust compliance and internal suitability of policies and procedures.
  • The proposed regulation of Office of the Comptroller of the Currency would provide guidance on applicability of compliance laws, regulations and policies to activities conducted through social media by banks and other financial institutions. Major coverage include a) compliance risk management expectations, b) effect on banks’ risk profile under compliance, legal, reputation, and operational risk areas, and c)Implications for deposit and lending products, non-deposit investment products and payment systems.

Current coverage period: Through January 31, 2013
Note: Anticipated business impact for covered regulations is shown using the following rating legend:
( Low) ( Medium) ( High)

CURRENT REGULATIONS:

Bank for International Settlements (BIS)(): Regulatory consistency assessment programme (RCAP) – Analysis of risk-weighted assets for market risk
Publication Date:
January 30, 2013
Risks Covered: Market Risk
Business Processes Impacted: Risk Management and Stress Testing, Pricing and Valuation
Analysis in the study that used publicly available data reveals presence of sizeable variations in RWAs for trading book assets. Differences in composition and size of trading positions are found to be correlated with banks’ average RWAs for trading book assts. Key modeling choices used by banks (as an example, aggregation approach across assets classes) are found to explain remaining variation in RWAs for trading book assets. One of the policy actions arising out of the study would be improvement in public disclosure under Pillar III.

Financial Services Authority (FSA, UK)(): Payment protection products
Publication Date:
January 24, 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection, Payments
In the joint guidance with Office of Fair Trading, major coverage include a) risks arising out of payment protection products as they seem to offer benefits to customers, b) identification of target market for the protection and fitment of products offered to the target market, c) limiting barriers to comparing, exiting or switching over to other products, and d) product governance around design, launch, distribution and marketing strategies.

European Banking Authority (EBA)(): Risk Assessment report of the European Banking System
Publication Date:
January 23, 2013
Risks Covered: Business Cycle Risk, Credit Concentration Risk, Sovereign Risk
Business Processes Impacted: Risk Management & Stress Testing, Recovery & Resolution planning
Highlighting improved market confidence from debt and equity investors, the report identifies fragile macroeconomic environment for most European banks. Major findings include a) decreasing risk appetite and increasing strategic risk due to transition to new business models, b) significantly improved capital positions that may be plagued by uncertainty about quality of bank assets, c) short-term challenges created by a new regulatory landscape aimed at creating a more resilient banking sector in the long-run, and d) lack of customer trust due to banks’ involvement in undesirable practices.

European Banking Authority (EBA)(): Recommendation on the development of recovery plans
Publication Date:
January 23rd 2013
Risks Covered: Business Cycle Risk, Credit Concentration Risk, Sovereign Risk
Business Processes Impacted: Risk Management & Stress Testing, Recovery & Resolution planning
Noting that many banks have already started drafting their recovery plans following the initiative of the Financial Stability Board, the finalized recommendation provides a template for recovery plan with major components namely:
Summary of the plan
Description of the group
c) Discussion of internal governance
Core of recovery plan would be required to consider all recovery options including financial, operational and external impacts. Detailed communication plan and its implementation would also be a key requirement.

Office of the Comptroller of the Currency (OCC)(): Social Media: Consumer Compliance Risk Management Guidance
Publication Date:
January 23, 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance
The proposed regulation would provide guidance to address applicability of federal consumer protection and compliance laws, regulations and policies to activities conducted through social media by banks and other financial institutions. Major coverage include a) compliance risk management expectations, b) effect on risk profile under compliance, legal, reputation and operational risk areas, and c) implications for deposit and lending products, non-deposit investment products, payment systems, and Bank Secrecy / Anti-Money Laundering programs.

International Organization Of Securities Commissions (IOSCO)(): Suitability Requirements With Respect To the Distribution of Complex Financial Products
Publication Date:
January 21,2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection, Audit, Legal & Compliance
The finalized regulation covers key principles categorized into a) classification of customers and general duties irrespective of classification, b) disclosure requirements, c) protection for non-advisory and advisory services, d) compliance function and internal suitability of policies and procedures, e) incentives, and f) enforcement.

Initial sections contain definitions for key terms namely, complex financial products and distribution, and outcome of survey on current regulatory frameworks with respect to conduct of business.

Financial Services Authority (FSA, UK)(): Risks to customers from financial incentives
Publication Date:
January 16, 2013
Risks Covered: Reputation Risk, Operational Risk, Compliance Risk
Business Processes Impacted: Consumer Protection
The finalized guidance contains examples of how financial incentives offered by firms to their staff can be a source of mis-selling of financial products to customers and lack of preparedness of firms to adequately manage these risks. Major coverage include a) management of incentive schemes, b) guidance on incentive scheme features that increase the risk of mis-selling, c) guidance on managing the risks and governance of incentive schemes, and d) work to be carried forward by the Financial Conduct Authority.

International Organization Of Securities Commissions (IOSCO)(): Financial Benchmarks
Publication Date:
January 11, 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Pricing and Valuation
The consultation highlights characteristics of a credible benchmark namely representativeness, reliability, transparency, and being a subject matter of governance and accountability mechanisms. Major areas of coverage include a) quality and integrity of methodologies, b) transparency of benchmark methodologies and changes in methodologies, c) Governance—conflicts of interest, ownership and control of administrators, and d) accountability—complaints processes, documentation requirements and audit reviews.

Consumer Financial Protection Bureau (CFPB)(): Proposed Amendments to the Ability to Repay Standards under the Truth in Lending Act (Regulation Z)
Publication Date:
January 10, 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Lending and Investment, Audit, Legal and Compliance
The proposed regulation addresses several exemptions & modifications. Major exemptions and modifications include a) exemption for credit extended pursuant to a Community-Focused Lending Program, b) exemption for credit extended pursuant to a Homeownership Stabilization and Foreclosure Prevention Program or similar program, c) loans held in portfolio by small creditors, and d) higher-priced covered transaction threshold for Balloon-Payment Qualified Mortgages.

Bank for International Settlements (BIS)(): Principles for effective risk data aggregation and risk reportingPublication Date: January 9, 2 013
Risks Covered: Systemic Risk
Business Processes Impacted: Risk Management, Stress Testing and Reporting
The Basel Committee’s finalized guidance would affect risk data aggregation capabilities and internal risk reporting principles, and risk management practices of banks. Major coverage are a) overarching governance and infrastructure including data architecture and IT infrastructure, b) risk data aggregation capabilities, c) risk reporting practices, d) tools for supervisory review and cooperation, and e) implementation timelines and transitional arrangements.

FORTHCOMING REGULATIONS

HM Treasury (UK): UK Government published Banking Reform Bill

The BankingRreform Bill could change the structure of the UK banking sector in a big way. The Bill would a) require UK banks to separate everyday banking activities from more volatile investment banking activities, b) give preference to depositors if a bank enters insolvency, c) give power to the government to ensure that banks are more able to absorb losses during a crisis, and d) Ensure more powers to the new prudential regulator to focus attention on holding banks responsible for the strength of their ring-fence.

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. If you require advice or further details on any matters referred to, please contact Accenture.

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