Eva Dauberton
News Editor
UK regulators issue annual report on collaborating efforts
The Financial Conduct Authority (FCA), Financial Ombudsman Service (FOS), Financial Services Compensation Scheme (FSCS), the Money and Pensions Service (MaPS), and the Pensions Regulator (tPR) have published the second Wider Implications Framework Annual Report.
Some context
The Wider Implications Framework (the Framework) is a structure that enables members - the FCA, FOS, FSCS, MaPS and tPR - to work together on opportunities and risks to achieve positive outcomes for consumers and other participants in the financial services industry.
The Framework is in addition to other regular collaborations, such as sharing information, which members already undertake in accordance with applicable statutory provisions and arrangements, such as bilateral Memoranda of Understanding (MoU). In the report, members evaluate at the end of each financial year if the Framework is achieving its purpose.
Key takeaways
Over the last year, the group has made significant progress and identified various issues through structured collaboration.
Achievements span across key workstreams, which cover the following:
- Collaboration between the FCA and the FOS on Mortgage Standard Variable Rates (SVR) complaints.
- FCA and FOS intervention motor finance commission.
- FCA, the FOS, FSCS, and MaPS engagement with former members of the British Steel Pension Scheme (BSPS).
- FCA and FOS work on consumer duty implementation ahead of the 31 July 2024 deadline.
- FCA, the FOS, and the FSCS collaboration to ensure consumers owed redress due to failings by Self-Invested Personal Pensions (SIPPs) operators are promptly compensated.
- Addressing the cost-of-living crisis through joint communications to firms about debt collection practices and the treatment of customers in financial difficulty.
The group intends to refocus on APP fraud and scams in light of significant regulatory changes affecting the payments market.
Next steps
During the period covered in the report, section 415C of the Financial Services and Markets Act 2023 came into force, introducing a new duty for the FCA, the FOS, and the FSCS to cooperate on issues that have significant implications for each other or the wider financial services market. As the report outlines actions taken to comply with this duty, the FCA, FOS, and FSCS are eager to obtain feedback from stakeholders on their compliance.
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AMF releases updated AML/CTF risk analysis for financial firms
The French regulator, the “Autorité des marchés financiers” (AMF), has released an updated version of the sector-specific analysis on Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) risks. The initial version was published in 2019.
This document provides entities supervised by the AMF with an assessment of the different AML/CTF risks they are exposed to, based on a 4-level scale from very high to low risk. This sector-specific analysis aims to help firms identify and map their risks. The analysis also informs the AMF's supervisory and monitoring approach.
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Australian Government consults on financial advice reforms
The Australian Government has released a consultation on the draft Treasury Laws Amendment (Delivering Better Financial Outcomes) Regulations 2024. These regulations are part of the 'Delivering Better Financial Outcomes reform package' announced on 13 June 2023 in response to the Quality of Advice Review.
Some context
The 'Delivering Better Financial Outcomes reform package' aims to expand the supply of financial advice under a new model and will be progressed in three streams:
- Stream one - removing unnecessary red tape that increases the cost of advice without benefiting consumers.
- Stream two - expanding access to retirement income advice.
- Stream three - exploring new channels for advice.
The draft regulations represent the first part of this package.
Key takeaways
Key points in the draft regulations include proposals to:
- Continue meeting written information or documentation requirements for the purposes of section 99FA of the Superannuation Industry (Supervision) Act 1993 electronically.
- Remove requirements related to Fee Disclosure Statements, update record-keeping obligations for new consent requirements, and remove references to civil penalties that are being removed in the Amending Bill.
- Align requirements for Financial Services Guides and Website Disclosure Information, and make other consequential amendments.
- Streamline the regulations for conflicted remuneration in line with the changes to the Amending Bill.
- Ensure informed consent requirements apply for benefits given in relation to a general insurance product where personal advice is provided.
Next steps
The deadline for comments is 8 July 2024. Legislation delivering the package is expected to be progressed to the Parliament for consideration before the end of 2024, pending other government priorities.
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ECB’s Claudia Buch on the role of research in supervision
In a speech at the 2024 Annual ECB Banking Supervision Research Conference, Claudia Buch, Chair of the Supervisory Board of the European Central Bank (ECB), addressed the challenges faced by banking supervisors and how the work of researchers can help with those challenges.
Buch noted that banking today requires robust governance and risk control mechanisms to manage emerging risks. Adequate capitalisation, sufficient liquidity, and strong operational resilience are essential for maintaining stability in turbulent times.
Banking supervision remains challenging. Recent turmoil in international banking markets exposed fragilities in banks’ risk management and governance. Supervisors must act swiftly and effectively to prevent crises, despite significant progress in enhancing banks’ resilience and resolution frameworks.
Supervision challenges
Supervision requires a deep understanding of specific risks faced by individual banks, the macroeconomic environment, and the impact of unpredictable future events. Cyber risks, climate-related risks, and geopolitical risks are not new, but their intensity has increased, making forward-looking risk assessments crucial.
Supervisors need the right skills and mindsets to address these challenges, despite limited resources. The ECB Supervisory Board has initiated significant reforms to enhance European banking supervision's effectiveness and efficiency.
The Role of research in supervision
Buch suggested that the power of analytical work can provide clear, data-driven insights for supervisory decision-making. Two main areas where analytical tools are essential are assessing supervisory effectiveness and improving forward-looking risk assessments.
How the ECB assesses supervisory effectiveness
Evaluating supervisory effectiveness requires a structured process, said Buch, starting with defining strategic objectives and translating them into measurable indicators. These indicators must capture both intended and unintended consequences of supervision. Research can support this process by providing frameworks to analyse how supervisory measures affect outcomes.
Supervision aims to identify risks in banks and ensure they address weaknesses promptly. The ECB’s Supervisory Review and Evaluation Process (SREP) is focused on four main areas:
- Capitalisation: assessing whether banks are sufficiently capitalised to withstand credit, market, interest rate, and operational risks in a forward-looking manner.
- Liquidity: ensuring banks maintain sufficient liquidity, especially in the current environment of quantitative tightening and reduced central bank liquidity provision.
- Business model viability: Evaluating the sustainability of banks’ ability to generate returns over different time horizons.
- Risk management and governance: Assessing banks’ organisational competence, decision-making structures, risk appetite frameworks, risk culture, and information aggregation infrastructure.
SREP scores are assigned in these categories and supervisory measures are then applied to banks to address deficiencies, such as higher capital requirements, capital restoration plans, increased liquidity buffers, strategic adjustments, or improvements in governance and risk management.
Measuring effectiveness of supervisory measures
Buch said that measuring supervisory effectiveness can be challenging because of difficulties in establishing causality, time lags between actions and effects, and the limitations of quantitative metrics. However, various research has shown that:
- Intense supervisory action correlates with better asset quality, less volatility, and less sensitivity to downturns.
- Frequent on-site inspections lead to more conservative risk management.
- Stress tests and increased supervisory scrutiny decrease risk levels.
- Powers to change bank managers and organisational setups reduce riskiness.
- Dividend recommendations during the pandemic supported lending without increasing risk.
Structured approaches to assessing supervisory effectiveness can be improved by aligning the incentives of researchers and supervisors and incorporating assessments into routine supervisory work, said Buch.
Improving forward-looking risk assessments
The risk environment for banks has evolved, with structural shifts and external shocks complicating risk assessments. Geopolitical risks, climate change, digitalisation, and other novel risks challenge traditional risk assessment models.
Buch noted that many banks use overlays in their expected loan loss provisioning models to account for emerging risks. While progress has been made in this approach, especially in climate risk management, some banks still fall short of expectations. Effective risk management requires precise overlays, simulations, scenarios, and improved stage transfers.
Supervisors face similar uncertainty in assessing future risks to banks, however combining macro and micro perspectives can provide valuable insights. Central banks, with their dual mandates and access to aggregate and granular data, are well-positioned to do this.
Infrastructure and tools for risk assessment
Effective risk assessment requires common data, such as the ECB’s Analytical Credit Dataset (AnaCredit), which provides detailed information on individual bank loans. Analytical tools like Factor-Augmented Vector Autoregressions (FAVAR) models can integrate micro and macro data to understand economic dynamics and anticipate financial instability.
Model repositories store validated models and analytical methods, ensuring best practices are shared and promoting transparency.
Cooperation between supervisors and researchers
Supervisors and researchers both work in the public interest, using critical thinking and analytics to identify and address risks in banking. However, they face different incentives. Supervisors need timely decisions and focus on individual banks, while researchers analyse patterns across banks over longer periods.
To foster cooperation, investment in infrastructure is essential. This includes repositories of replication studies and models, evaluation frameworks, and improved data infrastructure. Continuous dialogue can help identify relevant questions and leverage the critical mindset of researchers.
Addressing current supervision challenges requires robust analytical tools, structured processes, and close cooperation between supervisors and researchers. By investing in infrastructure and fostering continuous dialogue, Buch argued that the effectiveness of supervision can be enhanced and forward-looking risk assessments improved.
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