What Now For The Regulators In The Nordic Financial Services Sector?

Financial institutions have been under pressure for some years now and those in the Nordic region are no exception. There is also an expectation directed at the regulators that they will soon change roles from policing the sector, to acting as consultants. But, how close are we to this happening?  Ahead of the Misys Nordics Outlook event in Stockholm on September 14 2016, Esge Birkkjær Räder, Regional Director - Nordics & Baltics, Misys, asks if the regulators are adapting to the rapidly changing environment in the Nordic financial services sector.

There’s no doubt that just like the rest of Europe, the Nordic financial services sector has undergone some traumatic changes and that the regulators have been forced to keep pace. But, the big question is, are we about to see the regulators change from the policing role, to the role of proactive consultant?

Recent research has shown that when it comes to what worries institutions most about this new age of finance, regulation is top of the pile. 

Financial institutions are understandably nervous about the volume of new regulations which are already out there and which are expected in the near future. Achieving compliance is a very complex requirement these days and an added worry is that one regulator might say, for example, data should be kept for ten years, whereas another might say for as long as a relationship exists, causing conflict and grey areas.

But it’s not only the direct impact of regulation upon their businesses,  that concern the institutions. Regulators are increasingly concerned with the institutional client relationship and this may end up breaking traditional value chains, allowing the entrance of aggregators and other organisations happy for a share of the action. Take for example MIFID 2, which has been created to not only protect customers from poor advice, but delineate advice and sales.

Yet as we move towards a digitization of the customer relationship, the concern is that many of those customers are going to become disenfranchised, as institutions seek to build relationships only with the most profitable customers. Advice for them remains human-to-human, while many customers are switched towards robo-advice. This development worries the regulators who have yet to create a policy for handling how things might progress in the future. In the eyes of many, today’s regulators are not set up to cope with the demands made by modern institutions.

Are regulators moving with the tide?

The challenge is: are regulators ready for the next step? Are they now set-up to work more closely with institutions and fulfil the more proactive role of consultant – to move beyond policing. And this is the same question being asked across the whole of Europe, not just the Nordic region. It’s a great ideal, but what we hear from Finland and Iceland, is that there is no chance for the regulator in the foreseeable future to take up that role. This might impact upon future regulations and decisions. Today, regulators are not able to work with institutions in a way that they would like, especially the smaller players.  

And if that advisory role is not being provided by the regulators, financial institutions will turn to their banking associations, or the large accountancy/advisory firms, who often have a stronger dialogue with the regulators. But even they are not totally engaged, and everyone would like more oversight.

Keeping up with new technologies

From a technology perspective also inflecting broader compliance guidelines, Blockchain is a new technology being invested in by the biggest players in the market, allowing them to streamline operations, drive down their cost base and improve competitiveness, however the smaller institutions don’t have capacity and resources to participate and this may put further pressure and skew the market. The smaller players will have to streamline costs by increasingly turning to their data centers, becoming more dependent on standardized solutions and arguably less competitive services or entirely consolidate and merge their businesses subject to regulatory restrictions i.e. competition clauses. Many are questioning whether the regulators will intervene and relax current regulation and compliance guidelines imposed on the lower tier market to keep some dynamics and balancing effects.

A trend might be emerging, which sees smaller players coming together and collaborating as a unified entity i.e.  use the same operations platform, which is a positive trend for the many regional data-centrals (SDC, BEC, Bankdata, Crosskey etc.) but perhaps more so for service providers who have invested in cloud technology and X-aaS (SaaS, IaaS, PaaS etc.).

It’s a way of admitting that the regulators can’t help them, but in order to bring down costs, they can use technology to combine and help their situation.

Regulations looming: SA-CCR, FRTB…

There is an inundation of regulations scheduled, with deadlines looming. The regulators have not slackened the pace and, for example, the standardised approach for measuring counterparty credit risk exposures (SA-CCR), which replaces both the Current Exposure Method (CEM) and the Standardised Method (SM) in the capital adequacy area, is also to be scheduled for 2017.

This date can become a pressure point for many of the lower tier institutions in the Nordics. The larger institutions appear to have a plan in place and are fully engaged. However, the smaller firms are still looking at the market and wondering if they have the investment for it and worse, some are simply not ready, and have yet to conduct analysis.

Further, there is the introduction of FRTB in force from January 2019 for parallel run, which fundamentally changes the way market risk is measured and reported. Oliver Wyman/Morgan Stanley state that the adoption of FRTB will ‘nudge capital requirements yet higher’, estimating that moving to FRTB will ‘push RWA (risk-weighted assets) for wholesale divisions up 25% before mitigating actions.

In a recent Misys survey, with the British Bankers’ Association, 40% of bankers did not know the FRTB deadline; while a staggering 75% admitted that so far they had done little more than acknowledge that this important piece of regulation was heading towards them! Only 14% are currently implementing their FRTB solution.

As the year ticks by, it will be interesting to see who is ready and who might be caught out. And, institutions shouldn’t wait too long for the regulators to change their stripes, because it might happen that quickly. We will discuss this topic in a speed panel, at the Misys Nordics Outlook: Banking Interrupted, at Fotografiska, Stockholm on September 14th 2016. If you would like to attend, space is very limited, so please register your interest here.