Interim Regulatory Outlook 2022 - Highlights

As we enter July, we are delighted to present our Interim Regulatory Outlook for 2022 (IRO22). The IRO22 provides a mid-year update to our Financial Markets Regulatory Outlook 2022 (RO22) and analyses the major political, regulatory and economic developments since the beginning of the year and their impact on financial markets and regulation.

The first six months of the year have been dominated by a number of global shocks, most notably Russia’s invasion of Ukraine, which have had a huge impact on the economic outlook and on financial markets. This has in turn required a rapid and far-reaching response from governments, central banks and regulators. We have structured this year’s IRO to reflect these developments, dividing it into two sections.

The first examines the major market developments since our RO22 publication, their implications for financial services regulation and supervision and what this means for regulated firms. These are:

Russia’s invasion of Ukraine. The war has already had, and will continue to have, a series of direct and indirect consequences for financial services firms. Firms have to adjust their operations, systems, assets and infrastructures to respond to sanctions, cyber threats and exposure to Russian and Belarusian markets and clients.

Balancing energy security with the regulatory focus on sustainability. Policymakers in the EU and the UK have to balance their net zero ambitions and the energy transformation of their economies with the disruption of oil and gas supplies due to Russia’s invasion of Ukraine. In some countries this is likely to mean that use of coal and nuclear power will increase in the short term. Firms will have to consider their appetite for financing this increase and its impact on their own net zero commitments.

Inflation and the cost of living. Inflation has increased markedly and is now well above policymakers’ targets. Central banks have begun to tighten monetary policy, increasing debt servicing costs for businesses and consumers and creating second and third round effects for firms.

Market volatility. Commodity, equity and crypto markets have all faced significant market volatility. Regulators are increasingly concerned with firms’ ability to make payments, meet margin calls, and protect consumers, and should expect increasing supervisory scrutiny across these fronts.

The second analyses the most important regulatory trends that have emerged in the first half of the year, trends that are distinct from those discussed earlier in the year in the RO22. They include:

Moving, fast and slow. As policymakers have had to deal with various fast-moving market developments, the UK and EU have both been slower to implement and progress important aspects of their regulatory reforms than we anticipated. However, in others the pace has picked up. Some firms may welcome this deceleration in some aspects of regulatory reform given the sheer volume of regulatory change currently taking place. Others may find that the uncertainty over when and how these reforms will be delivered complicates their strategic planning and, in some cases, limits their opportunities to access new markets (such as digital assets or green finance).

Competing on competitiveness. Competitiveness concerns are becoming an important part of regulatory policy making. The UK’s regulators look set to gain a secondary competitiveness objective, whilst the EU is adapting its reforms to respond to the UK’s regulatory divergence. This approach may create tensions between governments and regulators.

Evolving supervisory expectations. Supervisory approaches are evolving. The FCA’s is adopting a data-driven supervisory strategy and promises to take a more assertive approach. Sustainability issues have also risen up the agenda, with the BoE’s climate stress tests have identified general weaknesses in firms’ capabilities and a number of greenwashing regulatory investigations being launched. Firms will need to engage with the FCA’s choice of supervisory metrics to understand how this will affect them and should ensure undertake suitable due diligence on their climate models and ESG related claims.

To read more about all these issues, please click here to read or download a full copy of our IRO22.