This is a monthly initiative aimed at updating the Risk Management community with some of the most recent regulatory changes impacting Banks & Capital Markets firms. We update our comprehensive regulatory database every month by tracking more than 40 regulatory and industry bodies covering North America, EALA and APAC. Every month, we will highlight approximately 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 some of the regulatory reforms. This newsletter is planned to supplement the existing monthly newsletter “Regulatory Insights” which provides a deeper analysis of business implications & Accenture’s point of view on a single or much smaller set of regulatory changes.

Edition Highlights:

  • The Basel Committee’s revised market risk proposals2 would provide an additional tool for risk assessment to handle exposures to illiquid, complex products. More rigorous model approval process would be required for advanced approaches.
  • The U.S. federal banking agencies (OCC, FDIC, the Fed) proposed rules3 that would implement the liquidity coverage ratio and quantitative standards established by the Basel Committee.
  • The FCA published its findings1 on Anti-Money Laundering and Anti-Bribery and Corruption based on its review of 22 wealth and asset management firms.

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

CURRENT REGULATIONS:

Financial Conduct Authority (FCA) (): Anti-Money Laundering and Anti-Bribery and Corruption Systems and Controls: Asset Management and Platform Firms
Publication Date:
October 31st 2013
Risks Covered: Operational Risk
Business Processes Impacted: AML & Counter-terrorist Financing
The FCA’s review1 focused on the adequacy of firms’ systems & controls in relation to Anti-Money Laundering (AML) and Anti-Bribery and Corruption (ABC). While some good practices were found, major common weaknesses include a) treating AML and ABC from a compliance perspective rather than a part of risk management, b) lack of controls / inconsistent controls resulting in failure to carry out enhanced due diligence for high-risk customers, and c) inadequate risk assessments resulting in non-measurable risks.

Bank for International Settlements (BIS) (): Fundamental review of the trading book: A revised market risk framework
Publication Date:
October 31st 2013
Risks Covered: Market Risk
Business Processes Impacted: Risk Management & Stress Testing
The Basel Committee’s second consultation2 comprises a revised market risk framework that incorporates the lessons learnt post May 2012 when the first consultation was issued. Key revisions include a) incorporation of risk of market illiquidity in the market risk metrics, b) additional tools for risk assessment to handle exposures to illiquid, complex products, c) updated internal models-based approach with a more rigorous model approval process, and a more consistent identification of market risk factors, and d) a more objective boundary between the trading book and banking book.

Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (the Fed) (): Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring
Publication Date:
October 30th 2013
Risks Covered: Liquidity Risk, Compliance Risk
Business Processes Impacted: Funding & Liquidity Management, Risk Management & Stress Testing
Applicable to large banks and savings associations, the proposed rule3 of the U.S. federal banking agencies would implement the Liquidity Coverage Ratio and associated quantitative standards established by the Basel Committee. However, the proposed rule is more stringent in terms of types of assets that will qualify as high-quality liquid assets and the assumed rate of outflows of certain types of funding. Moreover, the transition period associated with the proposed rule is shorter than that of the Basel Committee’s standards.

Hong Kong Monetary Authority (HKMA) (): Treat Customers Fairly
Publication Date:
October 28th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection, Audit, Legal & Compliance
With a view to promoting a strong culture among banks of treating their consumers fairly, the HKMA’s charter4 is aimed at retail consumers. Key principles include a) designing of products and services with a view to meeting the needs of customers, b) provision of full information on products and services before, during and after the point of sale, c) accuracy of promotion materials and avoidance of misleading marketing practices, d) efficient complaints handling system, and e) banks’ participation in financial education initiatives aimed at promoting financial literacy.

European Banking Authority (EBA) (): Legal Entity Identifier
Publication Date:
October 28th 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Reporting, Audit, Legal & Compliance
The EBA’s consultation5 would require all entities with reporting obligations to obtain a pre-Legal Entity Identifier (Pre-LEI) with a view to ensuring submission of high quality, reliable and comparable of data to the EBA. With the global initiative on LEI coordinated by the Financial Stability Board is not yet fully operational, a number of entities already issue Pre-LEI that will be eligible to become true LEIs once the global LEI is fully operational.

Bank for International Settlements (BIS) (): Liquidity stress testing: a survey of theory, empirics and current industry and supervisory practices
Publication Date:
October 23rd 2013
Risks Covered: Liquidity Risk
Business Processes Impacted: Risk Management & Stress Testing, Funding & Liquidity Management
The Basel Committee’s report6 on liquidity stress testing surveys current practices, identifies gaps, and suggests solutions, where possible. Some key messages include a) adoption of approaches to deriving valuable information from adequately designed and properly implemented liquidity stress tests rather than excessively relying on standardized liquidity metrics such as Liquidity Coverage Ratio, b) understatement of risk caused by separate liquidity and solvency stress tests and the need for focusing on an integrated exercise, and c) need for integration of outcome of liquidity stress tests into banks’ business practices.

International Organization Of Securities Commissions (IOSCO) (): Securities Markets Risk Outlook 2013 -2014
Publication Date:
October 15th 2013
Risks Covered: Market Risk, Liquidity Risk
Business Processes Impacted: Trading, Risk Management & Stress Testing
The IOSCO’s report7, based on extensive consultation and surveys, highlights trends, vulnerabilities, and systemic risks in securities markets. Some key risks analyzed in depth include a) shortage of high-quality collateral due to growing demand for collateral and its potential impact on pricing, b) impact of counterparty credit risk shifting from bilateral OTC contracts to central counterparties, c) risks related to low interest rate environment, and d) risks related to capital flows of emerging markets.

Consumer Financial Protection Bureau (CFPB) (): A review of the impact of the CARD Act on the consumer credit card market
Publication Date:
October 1st 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Consumer Protection, Audit, Legal & Compliance
The CFPB’s report8 on Credit Card Accountability Responsibility and Disclosure Act (CARD Act) found that a) total cost of credit declined by 2 percent between 2008 and 2012, b) over-limit fees was effectively eliminated, c) size of late fees diminished, d) responsible access to credit remains available, and e) protection of young customers from cards they cannot afford. However, some areas of concern include disclosures, deferred interest products, add-on products, and fee harvester cards.

Prudential Regulation Authority (PRA), Bank of England (): A framework for stress testing the UK banking system
Publication Date:
October 1st 2013
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Risk Management & Stress Testing
The Discussion paper9 of PRA brings out the framework for annual and concurrent stress tests of the UK banking system in the medium-term. Some key coverage includes a) purpose of stress testing, b) frequency and timing, c) coverage of institutions, d) scenario design, e) asset quality reviews and stress testing, f) modeling of scenarios, and g) using the outputs of stress tests for key decision making in banks and to assess the resilience of the financial system.

European Securities and Markets Authority (ESMA) (): Reporting requirements for alternative fund managers
Publication Date:
October 1st 2013
Risks Covered: Operational Risk, Compliance Risk
Business Processes Impacted: Reporting, Audit, Legal & Compliance
The ESMA’s final regulation10 relates to regulatory reporting requirements of alternative investment fund managers (which includes hedge funds, private equity and real estate funds). The reporting requirement would cover the following a) principal exposures and portfolio concentration, b) total value of assets under management, c) principal markets / instruments of trading, d) breakdown of portfolio in accordance with investment strategies, e) turnover in various markets, and f) risk profile in terms of risk measures, liquidity position and leverage.

FORTHCOMING REGULATIONS:

Financial Conduct Authority (FCA)
Detailed proposals for the FCA regime for consumer credit

The document contains11 the FCA’s regulatory proposal for the consumer credit industry in the light of FCA’s taking over the regulation of the consumer credit industry from the Office of Fair Trading on April 1, 2014. Key proposals would include a) strengthened scrutiny at the time of entry, b) proactive supervision and enforcement, c) conduct rules and guidance, d) risk-based approach to dealing with consumers, and e) complaints to the ombudsman service and redress for consumers.

Footnotes

  1. Financial Conduct Authority (FCA): Anti-Money Laundering and Anti-Bribery and Corruption Systems and Controls: Asset Management and Platform Firms
  2. Bank for International Settlements (BIS): Fundamental review of the trading book: A revised market risk framework
  3. Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (the Fed): Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring
  4. Hong Kong Monetary Authority: Treat Customers Fairly
  5. European Banking Authority (EBA): Legal Entity Identifier
  6. Bank for International Settlements (BIS): Liquidity stress testing: a survey of theory, empirics and current industry and supervisory practices
  7. International Organization Of Securities Commissions (IOSCO): Securities Markets Risk Outlook 2013 -2014
  8. Consumer Financial Protection Bureau (CFPB): A review of the impact of the CARD Act on the consumer credit card market
  9. Prudential Regulation Authority (PRA), Bank of England: A framework for stress testing the UK banking system
  10. European Securities and Markets Authority (ESMA): Reporting requirements for alternative fund managers
  11. Financial Conduct Authority (FCA): Detailed proposals for the FCA regime for consumer credit

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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