In order to succeed in 2017, financial services companies operating in Asia Pacific will need to disrupt themselves according to Deloitte’s 2017 Asia Pacific Financial Services Regulatory Outlook. Kevin Nixon outlines what this means for the sector.
The focus this year will turn from developing and finalising prescriptive regulation, to intensified supervision, and continuous planning and testing; as well as dealing with emerging risks such as disruptive innovation and cybersecurity.
So even though the post-crisis period of rule making may appear to be slowing, the regulatory environment will continue to evolve and drive change. This means the policy agenda will remain full in the coming years, and financial services firms operating in the Asia Pacific region will need to respond to the changing regulatory landscape in an agile way.
Political developments and trends outside the region are significant and are adding a layer of uncertainty to the year. One clear trend is the rise of nationalism vs regionalism or globalism. But it is far from certain to what extent there will be a move to dismantle efforts aimed at global development and harmonisation of regulation, and to what extent existing momentum will pre-empt that.
Nevertheless financial services firms are needing to take decisive and, in some cases, bold actions in response to this current period. To help to clarify the way forward our Deloitte Centre for Regulatory Strategy in Asia Pacific has developed a report that outlines the four major regulatory themes that need to be considered, and that are already dominating the outlook for Asia Pacific financial services firms.
Since the financial crisis, much of the focus for regulators has been on ensuring the resilience of financial institutions and the financial system. This will continue into 2017, with a particular emphasis on domestic implementation.
Although resilience is a key pillar, agreeing on the final form of regulations has been challenging. This is underlined by the fact that the commonly termed ‘Basel IV’ rules for banks which were due to be finalised by the end of 2016, have just been delayed, as it has not been possible to reach international consensus.
Outside of the banking sector the first iteration of the global capital standards for insurers will be released this year, and the resilience of the asset management industry is also being investigated. These latter reforms may well face increasing headwinds under the current political environment.
Regulatory expectations around stress testing will also increase in 2017, with more intricate and diverse scenarios.
In the US and EU in particular, stress testing has become a major, if not the major, pillar of resilience regulation.
While this trend has been somewhat evident in this region, local regimes will further align with international benchmarks. This also applies in the field of recovery and resolution planning.
Organisations may need to devote significant energy and resources to meet new sets of rules and improve capabilities in these resilience building areas.
Recent examples of governance and conduct failings mean that there will be a sharpened regulatory focus in 2017 on ensuring firms have robust governance frameworks throughout the entirety of their organisation.
There is no question that there will continue to be an increasing focus on and priority given to organisational culture. In response organisations should start reviewing existing governance frameworks and tackling practices that could signal problematic culture.
The November 2016 Australian Prudential Regulation Authority (APRA) information paper on risk culture (see footnote below), warns Australian institutions not to be complacent about culture and announces that it is commencing a concerted, consistent and sustained effort to strengthen risk culture within Australia’s financial intuitions.
In 2017, Asia Pacific regulators will move beyond concern about compliance with explicit rules, to adopt a more dynamic and forward looking supervisory approach that will involve continual engagement and requests for granular data on a greater variety of matters.
This requires firms to then have developed the capability to clearly articulate their business strategy and to do so they may well need to invest in advanced data and analytics technologies. Players should also expect more intense engagement with regulators, involving ongoing discussion, reviews, testing, guidance and challenge at the highest levels, covering all aspects of the business.
Regulators will continue to nurture financial technology (FinTech) in 2017 and will investigate regulatory technology (RegTech) uses. In hand with this will be enhanced expectations around the strength of cybersecurity measures.
Organisations wishing to maintain a competitive edge will need to invest in innovative technology, retain ongoing engagement on RegTech and take an integrated cross-functional cyber resilience approach. Technological innovations, while posing a threat to the established way of doing things, will also provide firms with the best ways to manage the range of stresses arising from the regulatory expectations explored in the report.
Firms are doing business in a more constraining regulatory, economic and political environment, so they need to refresh their strategies to best respond to this environment. Not all organisations will succeed in doing this in the year ahead, however those that do will be the ones that find ways of making this new environment work for them. They will be able to capitalise on their resilience, their agility and efficiency.For more analysis and details visit Deloitte Centre for Regulatory Strategy.
Kevin Nixon is a well-known and respected voice globally on regulation of the financial system. Recently he was appointed to the role of Global as well as Asia-Pacific Leader of Deloitte’s Centre for Regulatory Strategy. The focus of the Centre is in assisting senior executives of firms navigate regulatory trends and their strategic implication through deep insight and promoting dialogue.