Brace Yourself for a Regulatory Weather Bomb

Hold onto your hats, baton down the hatches, and brace yourselves…The biggest regulatory storm in recent history is here, and it’s almost guaranteed to deliver difficulties and potential devastation for those who are not prepared!

Ok, maybe that’s all a little bit dramatic, but if you’re still reading this then it obviously grabbed your attention, and that might be a good thing. Why? Because 2018 is unprecedented in its delivery of the perfect regulatory storm.

Let’s take a closer look at the forecast…

MiFID II (Markets in Financial Instruments Directive 2)
Hurricane MiFID made landfall on the 3rd January. For the vast majority of financial adviser practices, preparations started a while ago to prepare for its impact and, as MiFID II now downgrades to the equivalent of a tropical storm, the industry as a whole finds itself coming to terms with the new landscape shaped by its arrival, adapting and adjusting accordingly.

This ‘clean up’ operation may take a little while but, appreciating the significant impact that MiFID II has made, the regulator has stated that they will not be looking to penalise firms who are not fully compliant, at least not initially! So long as a firm can demonstrate it has made sufficient steps to comply, then the FCA will take a proportionate and realistic view. However, despite certain last minute reprieves for trading venues, financial adviser firms find themselves not as fortunate and are therefore minded to ensure that their MiFID II ‘clean up’ operation does not take too long!

ESMA (European Securities and Markets Authority)
Accompanying the arrival of Hurricane MiFID on January 3rd was Storm ESMA. More change to the regulatory landscape has ensued as a result, this time based around improving a firm’s training and competence (T&C) regime, in particular enhancing customer facing staff’s knowledge and awareness in relation to investment products. If your attention was distracted by MiFID II at the eye of the storm, then you will also need to quickly focus on the impact of Storm ESMA.

IDD (Insurance Distribution Directive)
If MiFID II is a hurricane that has been building momentum over several years, then the Insurance Distribution Directive (IDD) is the equivalent of a flash flood. Appearing relatively unannounced, it has drifted in under the radar (at the time of writing, not all the intended IDD Policy Statements had even been issued) and will become law on 23rd February. However, following requests from the European Parliament and Member States, firms will not now be required to implement the IDD until the 1st October 2018.

The IDD will bring with it greater T&C and CPD requirements, increases in PI limits, changes in respect of disclosure, amendments to the product information needed to be supplied to consumers and alterations to the advised sales process (phew)!

Despite the postponement to October, preparation and reaction time allowed for its introduction will still be short. For this reason, firms should be switched on now to the IDD’s impending impact.

GDPR (General Data Protection Regulation)
The GDPR has been brewing and building for a long, long time and is shaping up to be a storm of gargantuan proportions, not least for the fact that the GDPR will not discriminate in respect of what type of business you are. If you hold data, you will be affected. Full stop.

There are twelve key steps that ALL firms must take:
GDPR – 12 Key Steps

Decisions need to be made within firms as to what data is held, where and in what format; systems, policies and procedures all require review and amendment. Fines for non-compliance are significant, with levies starting at 10 million Euros (or up to 2% of the annual worldwide turnover) likely to cause a few sleepless nights.

This storm is so big that it can be seen a long way off, but firms MUST be planning NOW to meet the new requirements which come into force on 25th May 2018.

To help small and medium size businesses to prepare, The Information Commissioner’s Office (ICO) have put in place a dedicated ‘early warning system’ resource, which is on hand to provide practical guidance and support:
GDPR – ICO SME Support

Platform Asset Management Review
It looked like this particular storm was going to hit towards the back end of 2017. Fortunately, it changed course, certainly not a bad thing with everything else going on, and so consequently the Platform Asset Management Review (interim report) is now forecast to arrive in Summer 2018.

The report stems from the Asset Management Market Study in June 2017 and is aimed at:

• exploring whether platforms help investors make good investment decisions, and if their solutions offer investors value for money.

• looking at how platforms compete in practice and whether they use their bargaining power to get investors a good deal.

• assessing whether relationships between investment platforms and other platforms, advisers, asset managers and fund ratings providers work in the interests of investors.

A final report (and resulting rule changes) are expected in late 2018. This storm will impact on Platforms, Intermediaries (including financial advisers and wealth managers), product and wrapper providers, technology providers who are utilised by platforms for outsourcing, and fund ratings and data providers whose information platforms use and distribute. if you’re in its path, you might want to track its progress carefully!

SMCR (Senior Managers and Certification Regime)
The Senior Managers and Certification Regime (SMCR) was also originally expected to hit our shores in Summer 2018. However, this now forms part of a longer-range forecast…

For those of you not already aware of the SMCR’s purpose, the brief synopsis is that, after the financial crisis, Parliament recommended that a new accountability system be put in place to focus on Senior Managers and individual responsibility. The solution created was the SMCR. The SMCR already applies to banks, building societies, credit unions and PRA-designated investment firms, and replaced the FCA’s Approved Persons Regime for these firms from March 2016. The next step is to replace the Approved Persons Regime with the SMCR in almost all other financial services firms, including Financial Adviser practices.

The good news is that, whilst we can expect to see the outcome of consultations turned into final rules during 2018, the date that the Treasury decides to implement the SMCR for firms is not likely to be until mid to late 2019, with bodies such as PIMFA pushing for an extension beyond this. There is some time then to take a deep breath and prepare for this particular weather front.

So, at no risk whatsoever of doing a ‘Michael Fish’, it is fair to say that 2018 will be the year of the regulatory ‘weather bomb’. It is also fair to say that to stand on the shore and defy the oncoming storm surge, like some modern-day King Canute, is most definitely not the best course of action! This weather bomb is going to hit, and hit hard and so the key question is, “How prepared are you?”

The regulatory change we are all facing this year is daunting and, especially for small to medium size financial services businesses, it is going to be a BIG ask to continue with business as usual alongside putting in place sufficient preparations for what is coming.

The good news is that there is guidance and support out there which will help weather you from the storm. Paradigm, for its part, are fully prepared for all conditions, delivering bespoke guidance and assistance to help protect firms from aggressive and ever changing regulatory weather patterns.

If there was ever a time to be engaged with high quality, regulatory consultancy support, that time is now.

Take care out there…

Author: David Ryder

Partner (Technical Services) – David has over 30 years financial services experience and has spent the past ten years building Paradigm Technical Services into a centre of excellence for regulatory consultancy support.

In his spare time, David is a supporter of the arts and is a Member Board of Trustees for Castle Park Arts Centre, a local arts venue with the key aim of enabling the wider community to access a broad range of artistic experiences and learning.