The “Regulatory Reform” newsletter is the monthly initiative aimed at updating the Finance and Risk community with the most recent regulatory changes impacting banks and capital markets firms. We update our regulatory database every month by tracking more than 40 regulatory and industry bodies covering North America, Europe and Asia Pacific. Every month, we will seek to highlight approximately 10 regulations shortlisted on the basis of geographic coverage and anticipated business impacts. Our summaries will seek to highlight the risks covered and business processes affected by the regulatory reforms. This newsletter is planned to supplement the existing newsletter “Regulatory Insights” which provides a deeper analysis of business implications and Accenture’s point of view on a single or much smaller set of regulatory changes.

Edition Highlights:

  • 2015 Comprehensive Capital Analysis and Review (CCAR) results7 reveal US bank holding companies have substantially increased their capital since the first round of stress tests in 2009.
  • The European Banking Authority (EBA)’s discussion paper9 sets out regulatory measures required to monitor a robust and clear framework for an advanced approach to capital computation for credit risk.
  • The Financial Conduct Authority (FCA) proposes guidance consultation6 on the risks that are posed to consumers by inappropriate financial incentive structures and performance practices.

Current coverage period: Through March 31st, 2015
Note: Anticipated business impact for covered regulations is shown using the following rating legend:       (*Low) (** Medium) (*** High)

CURRENT REGULATIONS:

Federal Deposit Insurance Corporation (FDIC), Federal Financial Institutions Examination Council, Office of the Comptroller of the Currency (OCC)(**):
Destructive Malware
Publication Date: Mar 30th 2015
Risks Covered: Operational Risk, Fraud Risk, Cybersecurity Risk
Business Processes Impacted: Fraud and Financial Crime, Information
Technology, Risk Management and Stress Testing
The Federal Financial Institutions Examination Council (FFIEC)’s guidance1, issued on behalf of its members, notifies financial institutions of increasing threat of cyber-attacks involving destructive malware. Key risk mitigation techniques recommended by FFIEC include: a) review, update, and test incident response and business continuity plans; b) conduct ongoing information security risk assessments; c) implement and test controls around critical systems regularly; and d) enhance information security awareness and training programs.

HM Treasury (UK)(**):
Transposition of the Markets in Financial Instruments Directive II
Publication Date: Mar 27th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing, Consumer and Investor Protection

The consultation2 sets out the technical drafting of the secondary legislation required to implement Markets in Financial Instruments Directive II (MiFID II) in the UK. Key provisions giving effect to the transposition include: a) designation of competent authorities for MiFID II and Markets in Financial Instruments Regulation; b) creation of the position limit regime; c) imposition of obligations on certain persons in relation to algorithmic trading; and d) amendment to various segments of Financial Services and Markets Act 2000.

European Securities and Markets Authority (ESMA)(**):
Draft guidelines on complex debt instruments and structured deposits
Publication Date: Mar 24th 2015
Risks Covered: Compliance Risk, Conduct Risk, Operational Risk
Business Processes Impacted: Consumer and Investor Protection, Sales Processes

The consultation3 from ESMA deals with a requirement in MIFID II that calls for guidelines for the assessment of bonds, money market instruments, and structured deposits. These allow investors to better understand risk, return potential, and cost of exiting before the end of the term. It also sets out guidance on related issues that are important for the correct classification of debt instruments as either “complex” or “non-complex”, specifically, the concept of embedded derivative for debt instruments.

Board of Governors of the Federal Reserve System (the Fed)(*):
Proposed Agency Information Collection Activities; Comment Request
Publication Date: Mar 16th 2015
Risks Covered: Compliance Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Reporting
The Fed’s proposal4 builds on the global Legal Entity Identifier (LEI) framework initiated by the Financial Stability Board. The LEI, a 20-character alphanumeric code assigned to a legal entity of a financial or non-financial firm, is meant to uniquely identify parties to financial transactions and to establish effective measurement and monitoring of exposures. This proposal would require banking organizations to include LEI for its relevant units on certain regulatory reporting forms.

Financial Conduct Authority (FCA)(***):
Strengthening accountability in banking: a new regulatory framework for individuals
Publication Date: Mar 16th 2015
Risks Covered: Compliance Risk, Conduct Risk, Operational Risk
Business Processes Impacted: Audit, Legal and Compliance, Risk Management and Stress Testing

The FCA’s consultation5 provides a set of near-final rules on its new Senior Manages’ regime with a guidance on its policy intentions for Certification Regime and the application of Conduct Rules. In addition, the consultation covers more detailed guidance on presumption of responsibility, which was introduced by the Financial Services (Banking Reform) Act 2013. These are aimed at improving the behavior and culture within banks that played a major role in the 2008-09 financial crisis.

Financial Conduct Authority (FCA)(***):
Risks to customers from performance management at firms
Publication Date: Mar 16th 2015
Risks Covered: Conduct Risk, Compliance Risk

Business Processes Impacted: Finance and Performance Management, Sales
Processes, Consumer and Investor Protection

The FCA has issued a consultation6 paper to provide guidance on how firms could better manage risks to customers arising out of poor performance management practices. This is relevant to all firms that deal directly with retail customers, and trade associations. The guidance may help firms identify areas where poor performance management practices could lead to undue pressure on the staff and result in mis-selling.

Board of Governors of the Federal Reserve System (the Fed)(**):
Comprehensive Capital Analysis and Review 2015: Assessment Framework and Results – March 2015
Publication Date: Mar 11th 2015
Risks Covered: Credit Risk, Market Risk, Liquidity Risk
Business Processes Impacted: Risk Management and Stress Testing,
Capital Adequacy and Capital Planning

The Fed published the results7 of the latest CCAR conducted to test the capital planning process and capital adequacy of the largest US-based bank holding companies. Collectively, these 31 firms represent more than 80% of assets held by domestic bank holding companies. In terms of the assessment results, 28 firms did not receive any objection to their capital plans, 1 firm received a conditional non-objection and 2 firms received objections on qualitative grounds.

European Banking Authority (EBA)(**):
Draft Regulatory Technical Standards and guidelines on Business Reorganisation Plans under Directive 2014/59/EU (BRRD)
Publication Date: Mar 9th 2015
Risks Covered: Compliance Risk, Operational Risk

Business Processes Impacted: Recovery and Resolution planning,
Risk Management and Stress Testing
The EBA has issued a consultation8 on draft regulatory technical standards for business reorganization plans and the guidelines for the assessment of these plans. These are set within the framework established by the Bank Recovery and Resolution Directive, and aim to restore confidence in the long-term viability of an institution when implemented.

European Banking Authority (EBA)(***):
Discussion Paper – Future of the IRB Approach
Publication Date: Mar 4th 2015
Risks Covered: Credit Risk
Business Processes Impacted: Risk Management and Stress Testing, Reporting
The EBA has issued a discussion paper9 with preliminary proposals to improve the Internal Ratings Based (IRB) regulatory framework. The focus is to improve the comparability of IRB models, across institutions, on three key areas: a) review of the IRB regulatory framework; b) supervisory consistency, including annual benchmarking exercises; and c) increased transparency based on standardized comparable templates. In addition, an overview of the regulatory measures in progress is provided.

Bank for International Settlements (BIS)(*):
Basel III Monitoring Report
Publication Date: Mar 3rd 2015
Risks Covered: Credit Risk, Market Risk, Liquidity Risk
Business Processes Impacted: Capital Adequacy and Capital Planning, Funding and Liquidity Management
The Basel committee has published the results10 of the latest Basel III monitoring exercise conducted with 224 banks, meant to review the implications of the Basel III standards for banks. As per the findings, all large internationally active banks now meet the Basel III risk-based capital minimum requirements. In addition, capital shortfalls relative to the higher target levels have been further reduced.

FORTHCOMING REGULATIONS:

Office of the Superintendent of Financial Institutions (OSFI)
2015-16 Report on Plans and Priorities
Anticipating and responding to risks, with specific focus on assessing operational risks in financial institutions, including those related to cyber security and outsourcing risk will remain one of OSFI’s key priorities11. In completing post-crisis reform agenda, OSFI will: a) monitor implementation of international regulatory reforms and consider appropriate actions for Canada; and b) work with federally regulated financial institutions in implementing accounting, auditing, and information disclosure reforms.

Footnotes:

  1. Federal Deposit Insurance Corporation (FDIC), Federal Financial Institutions Examination Council, Office of the Comptroller of the Currency (OCC)(**):
    Destructive Malware
  2. HM Treasury (UK)(**):
    Transposition of the Markets in Financial Instruments Directive II
  3. European Securities and Markets Authority (ESMA)(**):
    Draft guidelines on complex debt instruments and structured deposits
  4. Board of Governors of the Federal Reserve System (the Fed)(*):
    Proposed Agency Information Collection Activities; Comment Request
  5. Financial Conduct Authority (FCA)(***):
    Strengthening accountability in banking: a new regulatory framework for individuals
  6. Financial Conduct Authority (FCA)(***):
    Risks to customers from performance management at firms
  7. Board of Governors of the Federal Reserve System (the Fed)(**):
    Comprehensive Capital Analysis and Review 2015: Assessment Framework and Results – March 2015
  8. European Banking Authority (EBA)(**):
    Draft Regulatory Technical Standards and guidelines on Business Reorganisation Plans under Directive 2014/59/EU (BRRD)
  9. European Banking Authority (EBA)(***):
    Discussion Paper – Future of the IRB Approach
  10. Bank for International Settlements (BIS)(*):
    Basel III Monitoring Report
  11. Office of the Superintendent of Financial Institutions (OSFI)
    2015-16 Report on Plans and Priorities

DISCLAIMER: This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

About Accenture

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