2023 will be an interesting year as it precedes 2024. Although that sounds obvious, 2024 will see a new European Parliament and Commission and, in all likelihood, a general election in the UK (not to mention a Presidential election in the US). In Brussels, there will be a focus on getting the programme of the current Commission finalised as far as possible and, in the UK, the current Government will be pushing to demonstrate it should be given an extended mandate.
Pressure will be building on policymakers to act, and this will need close attention. Companies should be ready to act to influence the process, whether directly or indirectly (for example through the media).
David Cook, Partner at Penta, sets out the drivers for those of us watching closely where the EU and UK are going.
Competitiveness
Despite some thawing in relations in 2022, the shadow of Brexit continues to loom over both the UK and EU and competitiveness between jurisdictions has become a key concern. In the UK, the Financial Services and Markets Bill will provide regulators with a secondary objective to consider the UK’s competitiveness. The UK government has also set out its strategy for regulation in the form of the Edinburgh reforms. These focus mainly on reform to parts of the UK system that have proven unpopular and have been badged as using Brexit freedoms. Ironically, some of the highest profile reforms are in areas, like ringfencing and the senior managers’ regime, that were not actually related to EU law.
In the EU regulation aims to provide the single market with ‘open strategic autonomy’. This nebulous label intends to boost the efficiency of the single market and the competitiveness of EU firms while not relying on ‘third countries’ such as the UK. The EU is looking to make tangible progress on its Capital Markets Union agenda, and tech and data will be important features in the regulatory work of the EU in 2023.
A regulatory focus on competitiveness might sound attractive, but memories remain of the financial crisis, before which competitiveness was a regulatory objective, so there may be reluctance to embrace it. Also, regulators do not have a great record of promoting innovation and data-driven change in Europe, so a close eye will need to be kept on this.
Crypto
2022 has been dubbed the crypto winter with huge falls in the value of cryptocurrencies and some high-profile failures in the sector, including FTX and Terra. This has led to a dilemma for policymakers in Europe. The focus on competitiveness means some want to welcome this innovative technology that many people continue to believe has an exciting future. However, the risk to investors, financial stability and even the ability to police and control the supply of money is causing sleepless nights in some institutions.
The EU is, as usual, ahead of the international game when it comes to producing regulation. Its flagship regulation, MICA, is agreed and ready to pass into law (although it will be some time before it needs to be adhered to). The EU has also advanced its work on digital currencies and the ECB is currently pulling together a group on rulebook development.
Similarly, the UK is preparing consultations on crypto asset regulation and digital currency. Except for new powers around financial promotions, new regulation is not expected in 2023. However, the direction will be set in 2023.
Whether the UK and EU adopt similar approaches remains to be seen. A competitive environment could emerge where each jurisdiction seeks to be at the forefront around, for example, blockchain adoption or central bank digital currency. This might introduce risks around intended consequences, where regulatory approaches are not properly analysed in a rush to move forward. Equally, there could be excessive caution that limits the development of the sector in Europe. It will also be interesting to see how the UK and EU overcome the dichotomy of regulators, who will be very concerned about the risks, versus those who want an environment focused on innovation.
Sustainability and productive finance
In an environment where public finances are suffering from severe stress, governments have been focussed on how private sector finance can be used for public policy purposes and how investors can be sure their money is used for such purposes. This is most apparently seen in the regulation around climate change where the EU’s impressive array of rules, including the Taxonomy and disclosure requirements, are becoming a huge compliance challenge for many firms operating in the EU. The UK is pursuing its own agenda and there’s an ambitious approach being developed where the divergence from EU rules is creating its own challenge.
There are also plans to consider how changes in regulation can increase sustainable investment and, in the UK, other policy objectives such as levelling up and promoting innovation. Last year saw the candidates to become UK Prime Minister talking in public debates about how changes to regulation such as Solvency II could be used to promote more of this type of investment in the UK.
Changing regulation in the EU and UK will create risks, burdens and opportunities for the firms that fall into scope. New disclosure requirements are likely to be hard to meet but changing investment rules could play to particular businesses’ strengths. Firms should ensure policymakers understand what’s practical and effective.
Energy
The events of 2022 mean that energy security and cost are a top priority in Europe and politicians have been quick to act to support markets and consumers. When it comes to financial services, there are three main concerns. First, can investment be increased to help reduce the reliance on fossil fuels generally, and Russian gas specifically? Second, have markets delivered efficiently for European consumers. Third, could energy market turbulence lead to turbulence on financial markets, as seen in markets such as the London Metal Exchange.
Of these three, the first concern has increased the urgency around creating a regulatory framework to increase investment in non-fossil fuels (as described above). For the second point, appetite for direct intervention by authorities in markets has been rising, particularly in the EU. This is very uncomfortable for those firms active in energy markets where price caps and public sector produced financial instruments (like price benchmarks) are likely to distort markets and could undermine confidence if not properly calibrated. Policymakers, lacking specific expertise, are going to need a great deal of assistance.
Finally, the third point about risk moving from energy markets to financial markets is likely to be challenging, particularly for those firms who prefer to avoid operating under the burden of financial regulation. Without proper calibration, new measures are likely to raise the costs of operating on energy markets and lead, ironically, to higher energy costs.
Financial Crime
Finally, a focus for regulators will be around how to reduce the levels of financial crime and keep investors safe. The losses to investors caused by the collapse of crypto-currency prices have been part of the story, but there have been a number of misselling scandals that have embarrassed regulators and shaken confidence in investing. In the UK we can expect to see the FCA act to strengthen the approach it is taking to protect consumers. We should also see regulation that helps reduce scams by increasing the requirements on banks and social media providers.
In the EU there is a package of measures around anti-money laundering under development to ensure a more harmonised approach across the single marker and also create a new EU-wide regulator to enhance supervision. This is likely to mean increased compliance and due diligence costs for those brought into scope.
FinTech companies have been the foundation of innovation in the payments and financial services sphere over the past decade, whilst legacy financial institutions, such as banks, have struggled to keep up. Generally considered in competition with one another, what would happen if FinTechs and Banks joined forces? Prabhat Vira, President of Tungsten Network Finance, explains.
Recent research shows that financial institutions are increasingly forming partnerships with fintechs to create products that streamline and improve the customer experience and eliminate inefficiencies. In fact, when questioned by PwC, 82% of banks, insurers and asset managers said they expected to increase the number of fintech providers they work with over the next 3-5 years. So what is driving this trend and how can commercial banks follow the lead of their retail counterparts?
A symbiotic relationship
Over the last few years, fintechs have evolved the customer experience – prioritising the user experience to connect with and empower customers with alternative finance. Many banks are coming to the realisation that if there is a great opportunity to participate in fintech developments.
In light of this, instead of competing with fintechs, some banks are seeing the wisdom of embracing the dynamic nature of fintechs and are actively collaborating with them. It is a very positive step forward as each party has something significant to offer the other. Fintechs require access to capital, and Banks in contras, are looking for ways to innovate more quickly, provide a slicker customer experience and leverage data to mitigate risk. Collaboration with fintechs enables banks to outsource their R&D to them and bring new products to the market much more quickly and for less cost. Ultimately, the partnerships between banks and fintechs are creating a unique opportunity for the expansion of finance solutions, and thereby adding real value for customers.
Commercial banks following retail counterparts
However, this subject is not purely theoretical for us – we have recently teamed up with BNP Paribas, a leading international bank, to offer e-invoicing linked Receivables Purchase and e-invoicing linked Supply Chain Finance (e-SCF) to large corporates in the USA and Canada. Our customers can now obtain an attractive working capital solution through the same technology provider they use for e-invoicing and procurement activities. It is the first partnership of its type and a sign that commercial banks are following the lead of their retail counterparts in collaborating with fintechs.
By linking e-invoicing with supply chain and receivables purchase, customers are offered a one-stop solution that brings together process efficiency and working capital optimisation in a single portal. They are offered attractive rates in a straight-forward, hassle-free way. From the bank’s perspective, a lot of energy can be spent connecting clients and on the payables side, on-boarding suppliers onto the system. This creates friction in the relationship, and inhibits the supply chain. The advantage for a bank and for the customer is that by partnering with a fintech like us, these trade flows are already on our platform. Therefore, both do not have to onboard suppliers twice and deal with complex technology integrations. Ultimately, the partnership helps to make the supply chain process smoother for all.
We believe partnerships such as this are shaping the future for businesses and financial institutions alike. They are enabling us to work more smartly and offer added value to customers. Speed to market is of the essence in our fast-paced, consumer-centric world and fintech providers are agile by nature and best placed to bring innovations to the masses. As retail and commercial banks realise the mutual benefits of partnering with fintechs, we are certain we will see more and more collaborations that will delight customers around the world.
