Last updateWed, 21 Mar 2018 3pm

Thomson Reuters Sees Rising International Divergence in Regulatory Reform as Financial Firms Race to Harness and Apply Fast-Developing Digital Technology

Ten years after the financial crisis, the resulting push for global regulatory harmony is giving way to divergent stances on the need for compliance, as long-awaited major reforms take effect in the EU, while in the U.S. the Trump Administration rolls out its deregulatory agenda set a year ago. Compliance officers and regulatory professionals everywhere are bracing to address these changes, and keep up with the unbridled development of digital technology as it affects their operations, according to Thomson Reuters eighth annual Special Report on the State of Regulatory Reform.

The EU’s Markets in Financial Instruments Directive II (MiFID II) January 3 effective date is raising questions even as it seeks to resolve non-compliance issues, with a last-minute mini-flurry of waivers, extensions and consultations announced to offset many looming pressure points. Indeed, those expecting the European Securities and Markets Authority (ESMA) to use its product-banning powers straight out of the gate must await the outcome of yet another regulatory pronouncement in three key areas: investor protection contracts; a six-month “breathing space” granted for issuers and traders who had failed to get a Legal Entity Identifier on MiFID II-affected transactions and the predicted evaporation of research coverage on smaller companies as new rules on research become effective.

In the U.S., President Trump’s early vow to “dismantle” financial regulations hindering the economy has since been translated into a blueprint for action, promising more relaxed banking regulations and eased oversight of capital standards, both among smaller banks and insurers. While U.S. enforcement agencies have created units and bolstered technological capability to be tough on financial crime, money laundering and investor protection, they are offering forbearance when companies make efforts to cooperate. In sum, the real change appears to be coming through the executive branch, which is wielding its bureaucratic tools to carry out its agenda within existing law.

“In 2018, compliance officers are putting the theories of regulatory change into reality. The Markets in Financial Instruments Directive II is now in effect and the General Data Protection Regulation is looming. These are significant challenges both in Europe and well beyond its borders,” said Alexander Robson, editor in chief, Thomson Reuters Regulatory Intelligence in London. “Political shifts are also driving regulatory change. Beyond an agreed financial settlement, the UK and EU have yet to reach terms for their planned divorce and how that will affect the provision of financial services. After Britain exits, passporting likely will be history and any structure for recognizing regulatory equivalence, whilst logical, is some way from being decided between both parties.

“In the U.S., President Trump is working to reshape the post-crisis regulatory landscape put in place by the Dodd Frank Act, even as Congress is gridlocked. His financial agencies are implementing the president's deregulatory agenda with an ambitious strategy that includes pressuring budgets, halting rules in the pipeline, revised enforcement policies and other bureaucratic tools.

“As if that wasn’t enough, fintech is developing at a speed that demands attention, while regulators also have to contend with the spread of cryptocurrencies and their associated risks.”

The potential consequences of other regulatory reforms in Europe identified by the report include financial firms having to grapple with the General Data Protection Regulation (GDPR) from May 26 this year. Cited as an even bigger compliance challenge than MiFID II by some politicians, GDPR is arguably the biggest overhaul of data protection rules in two decades. Thomson Reuters forecasts that the penalties for non-compliance will likely be severe.

The report looks at each of the world’s financial regions in turn, summarizing the key regulatory changes underway and offering insights into the regulatory events that may shape the year ahead. In the Asia-Pacific section, it highlights the shifting enforcement landscape, exemplified by the tougher stance taken by the Australian Transactions Reports and Analysis Centre’s new chief executive in guiding the financial intelligence agency through a challenging period. Regional firms and regulators are watching closely her stance in resolving the Commonwealth Bank of Australia money laundering / terrorism financing litigation, set to be the biggest civil enforcement action in that country’s history.

On the RegTech front, U.S. officials also have moved into the realm of digital financial services by creating a charter process for online banks, while in the UK, regulatory “sandboxes” are serving to encourage the industry’s use of digital services and bring them under the supervisory umbrella.

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