2022 has, by any measure, been a tough yr in Europe. Warfare on the continent, runaway inflation, power safety and even a corruption scandal within the European Parliament. These issues are usually not going away and can proceed to dominate the political area. Nevertheless, 2023 will be an vital yr for the monetary providers sector and its policymakers. The beginning of the yr is at all times second to think about the important thing themes set to drive coverage within the UK and EU over the subsequent twelve months.
2023 will probably be an fascinating yr because it precedes 2024. Though that sounds apparent, 2024 will see a brand new European Parliament and Fee and, in all chance, a basic election within the UK (to not point out a Presidential election within the US). In Brussels, there will probably be a concentrate on getting the programme of the present Fee finalised so far as attainable and, within the UK, the present Authorities will probably be pushing to show it ought to be given an prolonged mandate.
Stress will probably be constructing on policymakers to behave, and it will want shut consideration. Corporations ought to be able to act to affect the method, whether or not instantly or not directly (for instance by way of the media).
Right here I set out a couple of drivers for these of us watching intently the place the EU and UK are going:
1. Competitiveness
Regardless of some thawing in relations in 2022, the shadow of Brexit continues to loom over each the UK and EU and competitiveness between jurisdictions has change into a key concern. Within the UK, the Monetary Providers and Markets Invoice will present regulators with a secondary goal to think about the UK’s competitiveness. The UK authorities has additionally set out its technique for regulation within the type of the Edinburgh reforms. These focus primarily on reform to components of the UK system which have confirmed unpopular and have been badged as utilizing Brexit freedoms. Paradoxically, a number of the highest profile reforms are in areas, like ringfencing and the senior managers’ regime, that weren’t truly associated to EU legislation.
Within the EU regulation goals to offer the one market with ‘open strategic autonomy’. This nebulous label intends to spice up the effectivity of the one market and the competitiveness of EU companies whereas not counting on ‘third nations’ such because the UK. The EU is trying to make tangible progress on its Capital Markets Union agenda, and tech and information will probably be vital options within the regulatory work of the EU in 2023.
A regulatory concentrate on competitiveness may sound enticing, however reminiscences stay of the monetary disaster, earlier than which competitiveness was a regulatory goal, so there could also be reluctance to embrace it. Additionally, regulators do not need an incredible file of selling innovation and information pushed change in Europe, so an in depth eye will must be stored on this.
2. Crypto
2022 has been dubbed the crypto winter with enormous falls within the worth of crypto currencies and a few high-profile failures within the sector, together with FTX and Terra. This has led to a dilemma for policymakers in Europe. The concentrate on competitiveness means some need to welcome this progressive expertise that many individuals proceed to imagine has an thrilling future. Nevertheless, the chance to traders, monetary stability and even the flexibility to police and management the provision of cash is inflicting sleepless nights in some establishments.
The EU is, as traditional, forward of the worldwide recreation on the subject of producing regulation. Its flagship regulation, MICA, is agreed and able to move into legislation (though it will likely be a while earlier than it must be adhered to). The EU has additionally superior its work on digital currencies and the ECB is presently pulling collectively a bunch on rulebook improvement.
Equally, the UK is making ready consultations on crypto asset regulation and digital foreign money. Besides for brand new powers round monetary promotions, new regulation will not be anticipated in 2023. Nevertheless, the course will probably be set in 2023.
Whether or not the UK and EU undertake comparable approaches stays to be seen. A aggressive setting may emerge the place every jurisdiction seeks to be on the forefront round, for instance, blockchain adoption or central financial institution digital foreign money. This may introduce dangers round supposed penalties, the place regulatory approaches are usually not correctly analysed in a rush to maneuver ahead. Equally, there may very well be extreme warning that limits the event of the sector in Europe. It would even be fascinating to see how the UK and EU overcome the dichotomy of regulators, who will probably be very involved concerning the dangers, versus those that need an setting focussed on innovation.
3. Sustainability and productive finance
In an setting the place public funds are affected by extreme stress, governments have been targeted on how non-public sector finance can be utilized for public coverage functions and the way traders could be certain their cash is used for such functions. That is most apparently seen within the regulation round local weather change the place the EU’s spectacular array of guidelines, together with the Taxonomy and disclosure necessities, have gotten an enormous compliance problem for a lot of companies working within the EU. The UK is pursuing its personal agenda and there’s an formidable strategy being developed the place the divergence from EU guidelines is creating its personal problem.
There are additionally plans to think about how adjustments in regulation can improve sustainable funding and, within the UK, different coverage goals similar to levelling up and selling innovation. Final yr noticed the candidates to change into UK Prime Minister speaking in public debates about how adjustments to regulation similar to Solvency II may very well be used to advertise extra of this sort of funding within the UK.
Altering regulation within the EU and UK will create dangers, burdens and alternatives for the companies that fall into scope. New disclosure necessities are more likely to be onerous to satisfy however altering funding guidelines may play to explicit companies’ strengths. Companies ought to guarantee policymakers perceive what’s sensible and efficient.
4. Power
The occasions of 2022 imply that power safety and price are a prime precedence in Europe and politicians have been fast to behave to assist markets and shoppers. In relation to monetary providers, there are three predominant considerations. First, can funding be elevated to assist scale back the reliance on fossil fuels usually, and Russian fuel particularly. Second, have markets delivered effectively for European shoppers. Third, may power market turbulence result in turbulence on monetary markets, as seen in markets such because the London Metallic Alternate.
Of those three, the primary concern has elevated the urgency round making a regulatory framework to extend funding in non-fossil fuels (as described above). For the second level, urge for food for direct intervention by authorities in markets has been rising, notably within the EU. That is very uncomfortable for these companies energetic in power markets the place value caps and public sector produced monetary devices (like value benchmarks) are more likely to distort markets and will undermine confidence if not correctly calibrated. Policymakers, missing particular experience, are going to wish a substantial amount of help.
Lastly, the third level about danger shifting from power markets to monetary markets is more likely to be difficult, notably for these companies preferring to keep away from working beneath the burden of economic regulation. With out correct calibration, new measures are more likely to increase the prices of working on power markets and lead, mockingly, to larger power prices.
5. Monetary crime
Lastly, a spotlight for regulators will probably be round scale back the degrees of economic crime and hold traders protected. The losses to traders attributable to the collapse of crypto-currency costs have been a part of the story, however there have been a lot of mis-selling scandals which have embarrassed regulators and shaken confidence in investing. Within the UK we are able to count on to see the FCA act to strengthen the strategy it’s taking to guard shoppers. We also needs to see regulation that helps scale back scams by rising the necessities on banks and social media suppliers.
Within the EU there’s a package deal of measures round anti-money laundering beneath improvement to make sure a extra harmonised strategy throughout the one marker and likewise create a brand new EU-wide regulator to boost supervision. That is more likely to imply elevated compliance and due diligence prices for these introduced into scope.
