With Brexit ‘done’, the Financial Conduct Authority (FCA) and European Securities and Markets Authority (Esma) are already diverging in the way they apply the financial rulebook, as they compete on the global regulatory stage for the financial services’ centre crown.
After much industry speculation, the reality is the two regulators – because of the diplomatic tussles – are getting no closer to an agreement on supervisory equivalence. In fact, in many ways they have never been further from it.
Gone are the days when mutual deadlines were set, and long-awaited regulatory changes were planned in advance. Instead, investment firms – inside and outside the EU – now face the idea that existing legislation is there to be unpicked and tweaked intermittently, with fewer warnings and far less time to prepare.
Regulatory fragmentation is here to stay. It’s time to look forward rather than waste precious time hoping for equivalence.
The first example of this is Mifid II, which is being reapproached and readdressed by Esma and the FCA, but in very different ways. Esma may have made its intentions clear through the Mifid II ‘quick fix’ proposals, but final rule changes will not be implemented across the bloc until February 2022.
The FCA shared its response on 28 April, providing the first of three consultation papers which will review Mifid II and suggest reforms. The regulator is focused on the areas it views as most relevant, irrespective of the proposed changes put forward by Esma. This move signals yet more regulatory divergence and outlines the UK’s desire to compete with Europe as an international financial hub.
Firms must prepare for the ‘what’ and not the ‘when’
Esma and the FCA are changing the game and, in turn, are in turn forcing firms to reassess their approach to regulatory change. The tension between regulators protecting and promoting financial products and the system in which they operate has always been there, but we can expect it to get significantly more overt.
Despite the prolonged uncertainty around changes like Mifid II’s refresh, firms will benefit in the long-term if they are focused on the regulator’s substance, not timing. Esma and the FCA are giving clues to what is coming.
To do so, horizon scanning and scenario planning have long been part of regulatory change. These tools will become even more important as firms become more fixated on what legislators want to do rather than when they are doing it.
So, the first port of call for wealth managers will be to get to grips with the contrasting philosophies between the two regulatory bodies. Or, in other words, their differing outlooks which are underpinned by political ambitions.
Strong relationships with each regulator have never been more critical, either directly through third-party vendors or via industry associations. Wealth managers should also keep a close eye on speeches from regulators that signal a direction of change and provide details on the expected outcomes for firms and clients.
For instance, during a speech at a post-trade conference, the FCA first announced its intention to consult on changes similar to the Mifid quick fix proposals.
International firms operating across the EU and UK should be particularly hawk-eyed and take note of the British regulator’s drive to implement significant regulatory change at a notable pace. Since the UK’s official separation from the EU at the end of last year, the country’s regulators have already voiced their desire to make their own amends to three areas of incoming EU legislation, including prudential rules, Mifid II and Central Securities Depositories Regulation.
Wealth firms should also be privy to the fact that managing regulatory change no longer sits within the confines of the compliance team, it requires executive input and action. Failure to engage senior executives may mean that well-intended projects are incorrectly scoped and left with insufficient lead time to deliver the technology requirements to meet new standards.
Without the assurance of UK-EU equivalence, wealth managers may be feeling uncomfortable in the face of uncertainty. The key will always be preparation. Firms that work to anticipate the next move from regulators, and actively identify gaps in the insight they are receiving, will benefit in the long run.
Linda Gibson is director and head of regulatory change at Pershing