2011 promises to be the year that European regulators get more rigorous as well as heralding the beginning of a new era in UK regulation.
In the UK, the RDR will continue to take central stage and the Independent Banking Commission’s probe into structural reform is due.
At European level, the Committee of European Banking Supervisors is to be replaced by the more aggressive European Banking Authority and updates to the markets in financial instruments directive and European Commission proposals on distribution of packaged retail investment products will all be taking place.
Cicero Consulting director and chief corporate counsel Iain Anderson thinks “the big show in town” will be the creation of the PRA and CPMA in the first half of the year.
He says: “The key question will be how these bodies interact with the Bank of England and with firms. There will be lots of potential for Parliamentary amendment, so this year is critical.”
The new UK regulatory structure is unlikely to lead to a let-up in what many IFAs see as heavy-handed regulation of the sector. Foot Anstey Solicitors associate Alan Hughes says the consumer arm of the regulator will be “more intrusive”.
Wolters Klower managing director Dean Curtis says: “The policing of financial crime as a whole will increase this year. Smaller organisations will definitely be under more scrutiny and the effects of sanctions on small firms can be pretty frightening.”
The first quarter of next year will see the release of the FSA’s policy statement on aligning platform services with the RDR.
Key proposals include the restriction of cash rebates and rules that require platforms to tell customers how much they will receive in fees. With over three-quarters of IFAs intending to increase their use of platforms usage, according to research by Skandia Investment Group, this could have far-reaching effects.
The House of Commons’ debate on the RDR last November raised questions that will need answering in 2011. MP Harriett Baldwin has challenged Chancellor George Osborne to produce more substantial evidence to support the case for the RDR. She called for “irrefutable evidence that qual-ifications prevent misselling”.
Anderson says: “I think we will know by Easter if there is sufficient political pressure to affect the Treasury select committee’s decision on the RDR.”
Increasing concern about the cliff-edge deadline and age discrimination legislation hampering prospects of automatic grandfathering means other concessions may need to be found. The concept of regulatory dividends could be back on the table and a sunset clause allowing IFAs to leave the business in a gradual timeframe has also been proposed.
But Hughes says: “We will see no shift in the RDR. The FSA is so entrenched in its position that significant concessions would seem like a sign of weakness.”
However, he believes Aifa director general Stephen Gay’s call for flexibility on the RDR deadline is a possibility and says: “We are more likely to see success in tweaking around the edges.”
September will see the outcome of the IBC’s investigation into the UK banking structure, which is looking at ways to reduce consumer risk and increase competition. KPMG regulatory services partner Giles Williams has said it could bring about the biggest regulatory changes for a decade.
Treasury select committee chairman Andrew Tyrie’s opinion that consumers are suffering from a lack of choice is shared by the IBC and has led to speculation that market domination by the big four of HSBC, Barclays, RBS and Lloyds may come to an end.
“I think we will know by Easter if there is sufficient political pressure to affect the Treasury select committee’s decision on the RDR”
The commission’s radical proposal of reducing consumer risk by separating the retail and investment arms of “casino banks” has provoked indignation from the bigger banks, as has the suggestion of cutting bonuses to meet requirements of bolstering capital to cushion against risk.
But Hughes does not believe these measures will come into force. He says: “The big banks will do everything they can dig their heels in and avoid splitting. Even if it is proposed, it will take so long and probably end up being watered down.”
Former City minister Lord Myners has suggested undoing the Lloyds-RBS merger to increase competition and Metro Bank co-founder Vernon Hill recently said that breaking up the big banks is not enough as the UK needs new players and the Government needs to make switching to these new players easier.
On the European side, updates to Mifid are expected in May. EC head of securities markets Maria Velentza initially promised a slightly tweaked Mifid II but the focus on transparency may hit investment services.
It will keep the EU trading passport introduced by the investment services directive and continue to aim for a single market but Mifid’s new target is greater home supervision as well as a more competitive EU market.
Further regulation on consumer transparency will come with the Prips proposals in the first quarter. The plans have been designed to reduce the risk of regulatory arbitrage caused by the inconsistency of existing directives and to increase clarity of investor information. This will mainly be done through the new key investor information documents, which will detail pre-contractual product information and sales processes.
The Prips plans will have a considerable effect on the investment market. Essentially applying existing regulation more widely, they will place structured products under the Ucits regime.
Once the EC’s work on Prips is finalised, it may lead to alterations in the RDR. Anderson says: “The debate on aligning Prips with the RDR has got more traction now than ever. The impact of Prips will be felt firmly throughout 2011 and the EC will continue to take an interest in the FSA’s stance.”