"You don't need to have 20/20 vision to see that the year ahead will be challenging…"
We wrote those words just 12 short months ago. Of course, none of us knew that a public health tragedy and related economic crisis was just a few months away, and challenges came in abundance and from all directions.
However, it is striking how relatively resilient the financial services industry has proved to be; firms have managed to conduct some semblance of "business as usual" and worked with investors and other stakeholders to solve many of the most urgent issues. But, as we look ahead to 2021 – with the pandemic continuing to disrupt lives and businesses – most of the challenges we trailed last year are still on the agenda, and we re-focus on those in this year's new year briefing.
For the financial services sector, the UK/EU Trade and Cooperation Agreement that was agreed on Christmas Eve 2020 might be called the "no deal deal", given how little space was dedicated to the sector. As we describe in Part 1 below, the focus for most UK-based and international firms will be on the Commission's equivalence assessments and a UK/EU MoU that are expected in the coming months (while, for some firms, the access arrangements that have been adopted in a few EU Member States are also of interest).
Meanwhile, the UK's domestic financial services rulebook is largely unchanged. As we also explain in Part 1 below, the substance of what firms need to comply with looks very much the same as before, although there are some transitional arrangements that may assist some. Meanwhile, some indications of how the UK might adapt its rules are beginning to emerge. See Part 2.
One forthcoming EU law that the UK will adopt (at least in amended form) is the Investment Firm Prudential Regime, included in the recently published Financial Services Bill. However, a huge amount of detail regarding the implementation of the regime will be the preserve of the FCA and its rules. The government's current target date for application of the new regime in the UK is January 2022 – i.e. only a year away – so in-scope firms will have much to do in a relatively short space of time. See Part 3.
Climate change and sustainability will continue to dominate the legislative and regulatory agenda in the UK, the EU and globally. Although the UK will not be implementing the EU Sustainable Finance Disclosure Regime (which will apply to EU27 countries on 10 March 2021), the latest intelligence suggests that the government will nonetheless look to introduce a domestic version of that legislation, together with a UK version of the EU's Taxonomy Regulation, in due course. Initially, however, it has focused more narrowly on making the Taskforce on Climate-related Financial Disclosures (TCFD) mandatory for certain sectors. See Part 4.
Notable changes to EU law that are in the works are also covered in this bulletin, for example the Commission's ongoing review of AIFMD, the application of the EU legislation on cross-border fund distribution and ESMA's consultative guidance on fund marketing communications. UK and international firms are likely to be affected – directly or indirectly - by the outcomes. See Part 5.
Aside from the above, the next year and beyond will bring yet further initiatives. For instance, the Treasury is currently reviewing responses to its July 2020 call for evidence on its Payments Landscape Review, which it will use to develop evidence to feed into its longer-term legislative work on the UK payments industry. While there are no concrete proposals on which to report at this early stage, it is unlikely that the government will conclude that no changes are required.
More broadly in relation to payments and Fintech, the idea of central bank digital currencies (CBDC) is gaining traction. The European Central Bank (ECB) is actively considering the possibility of issuing a digital euro for retail payments in the Eurosystem and in October 2020 it published a Report on digital euro together with a consultative questionnaire. Also in October, a group of seven central banks (including the Bank of England and the ECB) together with the Bank for International Settlements (BIS) published a report identifying the principles necessary for any publicly available CBDCs: Central bank digital currencies: foundational principles and core features.
Another recently-launched initiative likely to result in legislative proposals at some stage concerns "productive finance" - funding for investment that has the potential to expand the productive capacity of the economy, including R&D, technologies (including, for example, green technology) and infrastructure. The working group established by the government will, among other things, consider whether Long Term Asset Funds and other potential fund structures may provide the means by which a wide range of investors – including UK defined contribution pension schemes – are able to and can be encouraged to invest in long-term assets.
2021 will certainly be a busy year for financial services firms, and adapting to regulatory developments – perhaps especially the reality of a post-Brexit landscape – will continue to occupy a significant amount of time. Of course, there is still much uncertainty to resolve. On that point - and after the last few years when unexpected, unpredictable and even unimaginable events became reality - it is perhaps best, in looking forward to the year ahead and beyond, to adopt Winston Churchill's philosophy:
"I always avoid prophesying beforehand because it is much better to prophesy after the event has already taken place."