Spurring a seismic shift in the way financial services operate and are supervised, the pandemic forced regulators to reassess strategy and increasingly adopt new technologies to modernise their processes.
Paul Thomalla, global head of payments at Finastra writes that “regulatory change is firmly on the agenda for 2021 particularly, in the UK, EU, Middle East and Asia.”
Noting the push toward combatting fraud and driving change through real time payments, Thomalla furthers that the European Retail Payments Strategy is core to this moment, aiming to drive innovation in payments systems and the roll-out of instant payments by the end of 2021.
Brexit and Covid-19 operational requirements underscore an already intricate weave of regulations across the EU, not least of which being the MiFID II review and finalisation of Basel III. This positions 2021 as a busy year for regulatory updates across the financial services sector. Fintech is also due to experience a host of updates throughout the year, culminating in Q4 with the European Commission’s first interpretive communication on the treatment of crypto assets following 2020’s Digital Finance Strategy. These updates come with strategic and operational challenges.
In its 2021 Banking Regulatory Outlook, Deloitte explains that despite the common strategic and regulatory challenges facing banks worldwide, regulatory divergence is increasingly common as individual jurisdictions struggle with the diverse impacts of COVID-19.
The report continues that instead of being able to quickly put the pandemic behind them, affected banks could face higher compliance costs and greater regulatory uncertainty, as individual jurisdictions have protectionist views.
Some banks may suffer from “strategic paralysis” as diverging regulations collectively lead to a complex set of binding constraints that is hard to understand—and even harder to satisfy. “As such, the pandemic is essentially serving as an ongoing stress test of the regulatory framework that arose from the global financial crisis.”
However, regulatory pressures stretch far beyond the need to juggle multiple converging deadlines. An undercurrent of more deep-set evolution is emerging from the way regulators themselves are finding agility and making regulatory change more reflective of the nimble markets they supervise.
A joint report from the World Bank and Cambridge Centre for Alternative Finance found that the pandemic of 2020 has driven the urgency to prioritise and actively deploy fintech initiatives by regulators.
Speaking to the findings, Philip Rowan, co-author and lead in regulatory innovation, Cambridge Centre for Alternative Finance (CCAF) explained that the report found up to 80% of regulatory innovation initiatives have been impacted in some way by Covid-19. Typically, but not always, resulting in the acceleration of these initiatives.
The report titled ‘2020 Global Covid-19 Fintech Regulatory Rapid Assessment Study,’ found that while no regulator cited the cancellation of an innovation office in light of Covid-19, 19% of respondents recorded a delay.
Communication and coordination were also raised as hindrances to the planning and implementation of regulatory initiatives with 39% of respondents noting challenges regarding difficulty with external communications and coordination with other domestic agencies. The prioritisation of funding and resources and speed of delivery also beleaguered initiative projects. 28% of respondents also cited that restricted access to and availability to necessary technology was proving to be prohibitive.
Despite these challenges, the pressure of the pandemic has sparked a surge in pace and progress for existing and new regulatory initiatives. Rowan furthers that “the report found up to 80% of regulatory innovation initiatives have been impacted in some way by Covid-19. Typically, but not always, resulting in the acceleration of these initiatives.”
For instance, around one in three respondents say that Covid-19 has accelerated their regulatory sandbox initiatives.
The use of regtech and suptech by regulators were also seen to have surged - especially so in developing markets where the importance of digital infrastructure around delivery of financial services remains key for those living in remote or rural areas.
“We’re seeing regulators and other authorities accelerate initiatives to put things like digital identity initiatives or permitting electronic onboarding processes for customers.”
Optimistically, Rowan concluded that in key sectors such as digital payments, savings, and lending, the momentum built throughout 2020 is likely going to have a lasting impact and will ensure that digital services are kept front of mind for regulators.
Innovation and modernisation of regulation will be a core topic discussed at the Euro Banking Association and Finextra’s EBAday 2021. Running in digital format on 28-30 June for its sixteenth year, the event will welcome a host of board directors, chief executive officers and payments and technology heads from Europe’s leading banks, as well as selected fintechs and registration is now open.