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Financiers face a more global regulatory compliance regime

by Alexandra Cain | 14 May 2019

While financial services businesses are already working through a swathe of new global regulations including Basel 3 and MiFID 2, experts says the end of the LIBOR benchmarking tool is what is really keeping them awake at night. 

Moreover, this is taking place at a time when national financial markets regulators are starting to take a more parochial view of the world.

“Global regulators are being less cooperative with each other,” says Deloitte risk advisory partner Mike Ritchie. 

“Basel 1, 2 and 3 was about establishing a global set of regulatory standards. But regulators have become more nationalistic.”

Turning to specific regulations, there’s an expectation final Australian prudential standards related to Basel 3 will be ready around January 2020. 

“Much of this has already been telegraphed and banks are not expecting any surprises and are already building thought processes around those. But the change around the interbank rates and benchmarks does stand out,” says Ritchie.

“There's uncertainty as to how that's going to play out, which creates a challenge, given it's such a fundamental part of how financial products are priced.”

The UK Financial Conduct Authority that oversees the London Interbank Offered Rate (LIBOR) will phase it out by the end of 2021.

Libor is the interest rate banks in the UK and elsewhere use as the basis for lending between themselves, typically adding a spread above the LIBOR rate to arrive at the final interest rate on which they will lend money.

Ritchie says banks are starting to develop a view of what a post-LIBOR world may look like, keeping an eye on developments in Japan, the US and UK, countries that are introducing different benchmark options.

“But there’s no firm date when companies must comply with these developments. So financial services firms have to work out how they're going to address this and develop a blueprint,” he says.

Richie notes all this regulatory change is happening at a time when banks are focused on generating efficiencies and not spending. 

Also, in the past there may have been a degree of inertia when new global regulations were introduced. But banks can't afford to take a watching brief when it comes to LIBOR. 

“It is too fundamental to the way they price and manage their products. So they need to be starting to think about how exposed they are, where the exposures are, what their options are and what they can do about it,” Ritchie advises.

In contrast, Ritchie says financial services businesses are already well across initiatives such as MiFID2 – which unbundles research and brokerage within investment banks – as well as Basel 3 and even Basel 4. 

MiFID2 has extra-territorial powers, which means they apply to Australian firms with customers and operations in the EU. The Basel regulations ensure banks carry enough capital to cover the risks, obligations and liabilities to which they are exposed.

Another key global regulation is the European Union’s (EU’s) General Data Protection Regulation (GDPR),which gives consumers more rights about the data institutions, including financial services businesses, hold on them. Like MiFID2, this law also transcends national borders.

“Data privacy is very well understood by financial institutions and built into their business plans already. There may be a level of uncertainty about how everything is going to land, but they factored this into their thinking some time ago," Ritchie explains.

As ever, global regulations are a moving feast for financial institutions. It’s essential for banks and others to ensure they are always across existing and emerging regulations to ensure the remain compliant here and around the world.

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