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Over the last year, UK firms are facing much greater challenges, both on an international scale and closer to home. From global uncertainties, the impact of global warming to the divergence of regulatory requirements between the UK and its neighbours, and a change in UK government priorities. These effects, coupled with the emergence of artificial intelligence, mean it’s important to show you’re financially and operationally resilient to withstand these future challenges.
Identifying and quantifying what the FCA calls the future ‘risks of harm’ is difficult because these risks are increasingly tough to predict or quantify. And past experience may not be enough because of the significant macro-level changes.
Wind-down planning
While many are reluctant to think about winding-down their businesses and hence don’t place sufficient emphasis on the wind-down plan, the FCA is keen to ensure there’s one in place. It will be an area that the FCA will assess when reviewing firms’ ICARAs. This would ensure that firms could collapse without adversely affecting clients or the market.
Stress scenarios are becoming more difficult to generate, as numerous disconnected factors need to be taken into account. This is further complicated by the challenge of having to put numbers against the underlying factors or drivers.
Group factors
The FCA has noted that some firms have ignored the “group factor” and are now realising that reliance on group raises more hazards that can be controlled by them. The risks start with relying on group infrastructure for critical processes such as on-boarding and trade processing to relying on the group to bail them out.
When it comes to capital requirements, regulatory, and remuneration reporting, there’s pressure from the market for the UK regulators to keep an eye on changes to offshore regulations. Many believe that this will ensure these regulatory bodies can keep pace to avoid global divergences increasing.
FCA liquidity survey
The UK regulator recently conducted a survey with a sub-set of wholesale brokers on liquidity, with a report expected soon. It’s useful to remember that liquidity thresholds are dynamic and shouldn’t only be reviewed when the ICARA is being prepared. Make sure your wind-down plans consider your group’s approach to winding-down and aren’t prepared in isolation.
The FCA has reminded firms that there’s a difference between group and consolidated ICARA processes; if a group wants to operate an ICARA process on a consolidated basis, it may submit a voluntary requirement request (VREQ) with the regulator.
There are also likely to be changes in the MIFIDPRU rules to clarify liquidity requirements and incorporate capital requirements regulation and market risk.
Horizon scanning
At this stage, you should be considering the impact of the following priorities on your capital and liquidity planning:
- ESG and climate change
- New products
- Consumer Duty
- Critical third parties
- Artificial intelligence
- Crypto assets
Other global regulatory developments that are worth considering include:
- DORA RTS and ITS and feasibility study
- EMIR RTS
- MiFIR reviews
- UK EMIR Refit reporting
- initial margin requirements – these apply to counterparties with an average (month-end) aggregate notional amount from March, April, and May 2024 exceeding EUR 8 billion
- CFTC rules on initial margin requirements, applying to covered swap entities with material swaps exposure
- the FCA’s direction under the temporary transitional powers allowing UK firms to execute certain trades with EU clients on EU venues (even though there’s no UK equivalent decision in respect of those venues) expires at the end of 2024. This is due to be replaced by a more permanent piece of legislation
- the PRA’s new recovery plan requirements – while these don’t directly affect FCA-regulated firms, there are several takeaways that should be considered.
How can Bovill Newgate help you make sure you’re operationally resilient?
We regularly review forecasts across many industry participants and advise on future risks across the industry. Our specialist team uses horizon scanning to stay ahead of the latest and expected regulatory developments, making sure your business remains operationally resilient and meets expectations.
We update our extensive library of potential future scenarios consistently, using this resource to help create realistic and relevant scenarios which feed into your personal forecasts and ICARAs.
First published by Compliance Monitor and i-Law.
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