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30 Jan 2024
Insight
Global
5m read
Just as the financial services industry is constantly evolving, so too are the expectations around what regulators can and should do. And those expectations arise from a diverse group of stakeholders including governments, the regulated community, and customers. Regulators need to be across a brief which broadens more and more – from the expanding regulatory perimeter bringing more (often novel) business within scope of their remits and a maturing focus on individual accountability over a decade out from the global financial crisis, to becoming more alive to the impact of corporate culture. These are neither simple nor easy to supervise.
Regulators can't regulate in a zero-failure way – that's clear, but this position does not attract much support when such failure occurs. It isn’t realistic, but there is no sign of a change of pace as political scrutiny steps up a notch.
UK
In the UK, recent high-profile issues within the Financial Conduct Authority (FCA) have led to calls for it to lose its indemnity against liability. Perhaps seeking to fill the gap highlighted by the FCA's well publicised resourcing challenges, the PRA is taking a more vocal and vigorous role in both supervision and enforcement outside areas previously thought to be purely 'prudential'.
In a nutshell:
As much as geopolitics, climate change and digitisation are reshaping the landscape for financial services, they are also reshaping the regulators.
Regulators continue to face the challenge of facilitating – or at least not impeding – innovation while maintaining financial stability, consumer protection and market confidence.
Just as the skillsets of strategic leaders within the industry must develop to respond to the evolving landscape, so too must the skillsets of regulators.
The criticisms that the FCA has faced from politicians and consumer groups for not going far enough, and concerns from regulated firms and individuals and the Upper Tribunal for going too far and mishandling regulatory investigations, seems likely to only get more severe as the perimeter expands with resources and budgets being squeezed.
The UK faces a general election this year, and the prospect of a new Labour government creating a degree of uncertainty for both the industry and the regulators. Should it happen, areas of potential change or evolution include around the degree of closeness of the relationship with the EU, and expectations around the regulators' roles in promoting international competitiveness and growth. And while we do not expect an immediate overhaul of the UK regulatory structure or the loss of the independence of the Bank of England, new governments have form in tinkering.
The regulators really can't afford to stand still…in fact, they need to pick up speed if they want to catch up with how the sector is evolving.
John O'Donnell
New York
Australia
In Australia, the Australian Securities and Investments Commission (ASIC) is facing a similar tension. ASIC has a very broad remit and, with a number of priorities demanding its focus, is looking at uplifting its technology systems and data capabilities. The regulator has also launched regulatory efficiency initiatives to make it easier for stakeholders to interact with ASIC. Forthcoming changes to the Australian individual accountability regime will see ASIC take on a greater role in collaboration with the Australian Prudential Regulation Authority (APRA).
Australia's previous government last issued a Statement of Expectations to ASIC in August 2021, and this will shortly be refreshed by the current government. During the pandemic there was a political expectation that ASIC would support Australia’s economic recovery. To some extent the cost-of-living crisis has replaced Covid as a political imperative, and we expect additional strain if the crisis does not ease. Additionally, and unconstructively, a sustained political campaign challenging particular ASIC enforcement decisions seeks to undermine the laudable achievements of ASIC and its current leadership.
Regulators face an unenviable task of balancing the public's expectations with what they can actually achieve through regulation.
Chris Ninan
London
Hong Kong
The Hong Kong Securities and Futures Commission (SFC) has seen a number of changes in leadership. The new leadership is focused on crypto regulation and enforcement. This is a key part of the broadening regulatory perimeter – with the case against JPEX, an unlicensed trading platform, looking to be one of Hong Kong's biggest fraud cases. The SFC is also facing resourcing challenges, as the bulk of the cases it investigates involve cross-border elements. There are also practical challenges when the evidence and suspects are subject to the different legal system in Mainland China. Each year, an independent panel established by the Chief Executive of Hong Kong reviews the operational procedures of the SFC. A 'heavy workload' is a constant refrain, and this results in prolonged investigations.
Political influence is less overt, but we do see a closer partnership with Mainland Chinese regulators in terms of more frequent dialogue, information sharing and investigation assistance. The new head of enforcement has explained that the primary focus remains on corporate fraud and misfeasance and market manipulation schemes, which has been on the SFC's agenda in the past few years. However, economic troubles and the property bubble in Mainland China will also have an impact on those priorities where companies listed in Hong Kong are concerned.
For regulators, navigating the landscape is increasingly complex…AI and ESG are more than bumps in the road, they are entirely new layers.
Luke Hastings
Sydney
The US
The US SEC's regulatory perimeter has also been expanding and over the course of 2024 we can likely expect a continued focus on areas of emerging technology like crypto as well as ESG disclosures. The SEC also continues to trend towards awarding co-operation credit when firms engage in the bulk of the investigative work themselves. Despite the unpredictability of how the SEC weighs co-operation credit, it is expected to continue to tout self-reporting and co-operation credit over 2024, not least as it also faces stretched resources.
In the US, the political priorities will likely remain stable over the course of 2024. Under the Biden Administration, there have been more aggressive enforcement policies than under the previous Trump Administration and we can likely expect a continued aggressive enforcement posture from agencies like the SEC and Commodity Futures Trading Commission (CFTC), especially if economic conditions continue to be difficult in the US and inflation persists. However, the US presidential election will take place in November 2024 and, if there is a party administration change in 2025, these interests may shift.
In conclusion
Across jurisdictions, similar pressures are likely to lead to, at least in some cases, more erratic and unpredictable behaviour as regulators cope with new and competing priorities, while managing with restrained budgets and resource. Firms look set for more uncertainty from their supervisors over 2024.
Key contacts
Chapters
- FSR Outlook 2024: Finding solid ground as the bedrock shifts
- Taming the machine – AI and the role of senior managers
- Spinning plates – Can financial services be regulated efficiently, competitively, innovatively and prudently?
- ESG – Disclosure, reporting, labelling, anti-greenwashing requirements and beyond
- 'Do the right thing' – Easier said than done
- The future of securities tokenisation and crypto regulation – What you need to know
- Operational resilience – Predicting the unpredictable
- The evolution of individual accountability regimes
- Fit to fight financial crime
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The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024