2018 will be a transitional year for financial regulation as we move from a decade of policy debate to a time of conclusion and implementation in several key areas.
2017 was a year of review, delay, and debate – it lacked a degree of finality on many issues. We predict that 2018 will be a year of action. While there is no appetite for a roll back of the post-crisis regulatory framework, there is consensus that targeted adjustments are required. With no large-scale deregulation or any “mega-regulations” slated for 2018, we expect “fine tuning” of the regulatory machine to keep regulators and market participants busy. Let’s have a closer look at the areas likely to shape the upcoming regulatory year.
MiFID 2, Gone but Not Forgotten
Nearly a decade in the making, MiFID 2 is finally here. But the book is not closed on this mega-regulation. Some implementation elements were delayed in late 2017 which will need to be revisited this year. Meanwhile, cost transparency, client categorization, suitability assessments, research unbundling, and higher best execution standards will have significant impacts on the business models of global asset managers. How will the capital markets change as a result? Did someone whisper MiFID 3?
Finally, a Fiduciary Rule?
Yes, we posed the same question this time last year. However, now that the SEC is involved, the Fiduciary Rule’s lengthy voyage may be nearing its end in 2018. Most contentious has been the “best interest clause,” but the SEC is expected to arrive at a balanced approach that gets this rule over the line. If the SEC’s efforts are not effective in 2018, at a minimum we expect a final agreed ruleset for all financial professionals working with retirement plans or providing retirement advice.
Ding, Ding! Brexit – Round Two
When the EU and UK negotiating teams sit down for phase two talks in the coming weeks, they will be acutely aware of the rapidly approaching March 2019 deadline. Therefore, it is increasingly likely that both sides will agree to an extended transition period. The industry is anxiously awaiting such an announcement as the decision and its timing will dictate UK firms’ ability to alter their current Brexit contingency plans. If prolonged uncertainty continues through 2018, more UK-based firms will likely set up EU locations in order to ensure their businesses will continue uninterrupted.
Getting Data Protection Right
GDPR heralds a new dawn for data protection in the EU and beyond. Effective May 2018, GDPR harmonizes data usage and protection standards across all EU member states, but applies even if the data processing takes place in another part of the world. Hence, global asset managers, UCITS, and AIFMs each fall within the scope of GDPR. The global asset management industry already complies with a raft of data protection regimes but GDPR focuses on data retention and usage and will be a priority for regulators both leading up to and following implementation.
Review of European Supervisory Authorities
The European Commission has requested a review of the role of the three European Supervisory Authorities (ESAs) in 2018. The objective is to enhance regulatory and supervisory convergence between the ESAs and each of the national competent authorities. The review is largely triggered by Brexit and a general heightened focus on the approval and oversight of concepts such as delegation and equivalence. The review will look at the level of powers at the ESA, governance structures, and how each ESA is funded.
Both market participants and national regulators will be watching closely. Not everyone is excited about centralizing powers among pan-European bodies: the proposals will likely face pockets of resistance as the review progresses.
Fostering Cross-border Investment
The European Commission, as part of its Capital Markets Union Action Plan, has prioritized improving efficiency, safety, and lowering costs of investment across the EU. The Commission outlined an ambitious list of priorities for 2018, including two that are particularly relevant to asset managers. Their investment funds initiative contains legislative proposals to facilitate easier and cost-effective cross-border distribution of UCITS and AIFs. Second, the Commission detailed plans to improve the general functioning of the post-trade market infrastructure within the EU to reduce costs and improve efficiency of cross-border securities settlement.
ETFs Under the Regulatory Spotlight
In late November, The Central Bank of Ireland (CBI) brought together global regulators and ETF providers to discuss the findings and feedback of a recent CBI consultation on ETFs. Then, the CBI announced that IOSCO, a group of securities regulators from more than 100 countries, planned to pick up the ETF review baton in 2018 and use the CBI’s work as a guide. The review aims to answer several questions including: How should ETFs be approved in the US? Do ETFs represent liquidity risk? What role do Authorized Participants (APs) play and should their ETF activities be regulated?
Regulating the Future
Innovative technology continues to receive significant air time in the regulatory space. Regulators remain in the “analysis phase” as they look to fully understand these advances. While policymakers broadly acknowledge the benefits of technological shifts, there are few regulations that govern them. 2018 is likely to see more explicit road markings set down by global regulators. Some rules will benefit mass usage. Others will try to dampen the riskier end of the technology spectrum, particularly for retail investors.