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An overview of the London's changing regulatory landscape in Financial Services

Posted by: Clare Butler 14/06/16
The global economic crisis highlighted the need for a fundamental change of approach to risk and regulation in financial services, and as the sector continues to rebound and evolve, regulatory standards must undergo continual review. Revisions to existing legislative frameworks and, in some cases, their transposition into law, aim to promote greater resilience in the financial services sector. This has, somewhat unsurprisingly, resulted in a drastic increase in demand for compliance professionals and a boom for compliance recruitment.

London’s G-20 summit acted as a lynchpin in the effort to improve financial regulation, reaffirming its member states’ commitment to addressing the flaws in the global financial and supervisory architecture exposed by the crisis. The summit was key in reiterating the need for a more stringent regulatory environment and the UK financial services sector has continued to implement and champion compliance since the pivotal conference.

Capital Requirements Directive IV, the EU implementation of Basel III, was written into UK law in 2014 under EU requirements. The CRD IV includes enhanced requirements for the quality and quantity of capital; a basis for new liquidity and leverage requirements; new rules for counterparty risk; and new macroprudential standards including a countercyclical capital buffer and capital buffers for systemically important institutions.

The second iteration of the Basel Accord only required banks to hold enough capital to cover 2.5% of risk weighted assets, whereas Basel III stipulates that banks must hold a minimum of 7% of risk weighted assets. The Third Accord also imposes 30 day standardised stress tests and stipulates minimum liquid coverage ratio (LCR). The LCR refers to an institution’s highly liquid assets which could be used to meet short term obligations, by 2019 institutions will be required to hold liquid assets equal to 100% of their net outflow over a 30-day stress period. The updated Basel III framework which was published in July 2013 will become fully effective on 1st January 2019.

CRD IV remains under continual review and the Financial Policy Committee at the Bank of England recently announced that they will raise the UK’s ‘add on’ countercyclical capital buffer from 0.0% to 0.5% of risk-weighted assets from 29th March 2017.

The UK is also subject to EU specific regulatory frameworks such as Alternative Investment Fund Managers Directive (AIFMD) which was published by the European Union on 1 July 2011 and transposed into UK law on 22 July 2013. The regulation has a broad scope, but covers the management, administration and marketing of alternative investment funds (AIFs), by regulating fund managers (AIFMs), rather than the fund itself. The framework covers business conduct, the safekeeping of investments, and imposes controls over task delegations. For further reading I recommend the two blogs recently published by my colleague Sershen Ingram which cover the potential impacts of Brexit on investment banking and compliance

In addition to the AIFMD, the UK is subject to the European Market Infrastructure Regulation (EMIR) framework, which came into force on 12th August 2012. The EMIR introduced new requirements to improve transparency and manage risk within the derivatives market. Under the EU enforced regulation, entities that enter into any form of derivative contract must report every derivative contract that they enter into to a trade repository; implement new risk management standards, including operational processes and margining; and ensure they clear all derivatives subject to a mandatory clearing obligation.

This ever shifting regulatory environment continues to bolster the need to fill jobs in compliance within the financial services sector. Demand increased significantly in the years following the crisis, sparking bidding wars over candidates, and the re-emergence of ‘buy-backs’, when candidates receive counter offers from their firm to stop individuals from leaving. Though the sector has stabilised considerably since then, the increasingly stringent regulatory landscape, means that compliance remains a top priority for organisations within the financial services sector. Subsequently, compliance professionals, particularly those with an in-depth knowledge of both current and forthcoming developments to the regulatory landscape are likely to continue to find themselves in exceptionally high demand.
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