2022 has, by any measure, been a troublesome yr in Europe. Conflict on the continent, runaway inflation, vitality safety and even a corruption scandal within the European Parliament. These issues aren’t going away and can proceed to dominate the political area. Nonetheless, 2023 will be an essential yr for the monetary providers sector and its policymakers. The beginning of the yr is at all times a very good second to think about the important thing themes set to drive coverage within the UK and EU over the subsequent twelve months.
2023 will likely 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 probability, a normal election within the UK (to not point out a Presidential election within the US). In Brussels, there will likely be a give attention to getting the programme of the present Fee finalised so far as doable and, within the UK, the present Authorities will likely be pushing to reveal it must be given an prolonged mandate.
Stress will likely be constructing on policymakers to behave, and this may want shut consideration. Firms must be able to act to affect the method, whether or not immediately or not directly (for instance by means of the media).
Right here I set out just a few drivers for these of us watching carefully 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 elements of the UK system which have confirmed unpopular and have been badged as utilizing Brexit freedoms. Mockingly, 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 supply the only market with ‘open strategic autonomy’. This nebulous label intends to spice up the effectivity of the only market and the competitiveness of EU companies whereas not counting on ‘third nations’ such because the UK. The EU is seeking to make tangible progress on its Capital Markets Union agenda, and tech and knowledge will likely be essential options within the regulatory work of the EU in 2023.
A regulatory give attention to 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 wouldn’t have an incredible document of selling innovation and knowledge pushed change in Europe, so an in depth eye will should be stored on this.
2. Crypto
2022 has been dubbed the crypto winter with big 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 give attention to competitiveness means some wish to welcome this revolutionary expertise that many individuals proceed to consider has an thrilling future. Nonetheless, the danger 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 standard, forward of the worldwide recreation in terms of producing regulation. Its flagship regulation, MICA, is agreed and able to go into legislation (though will probably 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 gaggle on rulebook growth.
Equally, the UK is getting ready consultations on crypto asset regulation and digital foreign money. Besides for brand spanking new powers round monetary promotions, new regulation just isn’t anticipated in 2023. Nonetheless, the path will likely be set in 2023.
Whether or not the UK and EU undertake related approaches stays to be seen. A aggressive surroundings 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 aren’t 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 can even be fascinating to see how the UK and EU overcome the dichotomy of regulators, who will likely be very involved concerning the dangers, versus those that need an surroundings focussed on innovation.
3. Sustainability and productive finance
In an surroundings the place public funds are affected by extreme stress, governments have been targeted on how personal 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 bold 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 enhance sustainable funding and, within the UK, different coverage targets 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 any such 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 prone to be onerous to fulfill however altering funding guidelines may play to specific companies’ strengths. Companies ought to guarantee policymakers perceive what’s sensible and efficient.
4. Vitality
The occasions of 2022 imply that vitality safety and value are a prime precedence in Europe and politicians have been fast to behave to help markets and customers. In relation to monetary providers, there are three most important issues. First, can funding be elevated to assist cut back the reliance on fossil fuels usually, and Russian fuel particularly. Second, have markets delivered effectively for European customers. Third, may vitality market turbulence result in turbulence on monetary markets, as seen in markets such because the London Steel Change.
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 vitality markets the place worth caps and public sector produced monetary devices (like worth benchmarks) are prone to distort markets and will undermine confidence if not correctly calibrated. Policymakers, missing particular experience, are going to wish an excessive amount of help.
Lastly, the third level about threat shifting from vitality markets to monetary markets is prone 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 prone to increase the prices of working on vitality markets and lead, sarcastically, to increased vitality prices.
5. Monetary crime
Lastly, a spotlight for regulators will likely be round the best way to cut back the degrees of economic crime and hold traders protected. The losses to traders brought on by the collapse of crypto-currency costs have been a part of the story, however there have been a variety of mis-selling scandals which have embarrassed regulators and shaken confidence in investing. Within the UK we will anticipate to see the FCA act to strengthen the strategy it’s taking to guard customers. We must also see regulation that helps cut back scams by growing the necessities on banks and social media suppliers.
Within the EU there’s a bundle of measures round anti-money laundering beneath growth to make sure a extra harmonised strategy throughout the only marker and likewise create a brand new EU-wide regulator to reinforce supervision. That is prone to imply elevated compliance and due diligence prices for these introduced into scope.
