In your view, what are the recent trends in bank regulation?
Banking & Finance
The recent trends in banking regulation in Israel include the reforms already legislated like the "Shtrum Reform" which will separate between the two leading Israeli banks and their controlled credit card companies. The reform shall change the credit card industry in Israel and shall force these banks to issue new credit cards through other companies and to execute new credit card issuance agreements with the other credit card companies. We shall face also other reform announced recently which shall aim to lead to more competition in the banking sector, the adoption of new fintech technologies and also the competition from new fintech companies.
The Israeli banks are implementing efficiency plans which shall be resulted in lowering their numbers of employees and branches.
The banks will have also to implement the CRS regulation to check and report the tax status of their clients, which shall continue the efforts and investments they made as to FATCA regulations.
In line with the European trends, Hungarian regulatory changes focus mainly on consumer protection, security and enhanced service provision. While digitalization and the introduction of open banking offers new business opportunities in addition to compliance requirements, new regulation of 2018 around data protection (GDPR) and investment banking (MiFID 2) are more of pure constraints for market players. One of the biggest change in local bank regulation, on the other hand, has no roots in EU legislation: Hungarian payment service providers are preparing for the mandatory application of the new instant payment system to be operating as from July 2019.
The volume of regulation applicable to banks is increasing every year on both the national and EU level. On the national level, the FCMC has been particularly active in the recent years, especially, in the field of AML. Banks have dedicated considerable financial and staff resources to ensure implementation of the new FCMC requirements. AML has been the biggest trend in banking regulation also in 2017 when EU’s 2017 AML IV Directive became applicable and was transposed to the Latvian law, encouraging banks to take further steps at improving their AML internal control systems.
It is certain that 2018 will bring a lot of new regulation on implementation of which Latvian banks have already been working for some time. Several EU legislative acts will become effective in 2018, namely:
- Revised Payment services directive (PSD 2) that will require the banks to share information on their customers with certain third parties;
- General data protection regulation (GDPR) that will require banks to review and amend their customer data protection processes;
- Revised Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) that will affect financial instrument markets;
- Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs) that seeks to implement uniform rules on the transparency of packaged retail and insurance based investment products.
We see the following trends in the Lithuanian market:
- Credit union reform was finalised by the end of 2017 which results to more stable and secure environment;
- A growing number of application for specialised banks and other FinTech licences (e.money institutions, e.payment institutions);
- Challenges to meet deadlines in implementing new EU requirements: GDPR, PSD2, AML IV etc.
- New requirement to have additional countercyclical capital buffer of 0.5% by the end of 2018. This measure, to be applied for the first time in the history of Lithuania, will help strengthen the resilience of the financial system against potential shocks.
- Real estate is still named by residents as the most attractive investment and bank loan portfolio value is mainly boosted by housing loans.
- Success FinTech Hub initiatives. A huge work done within a year by regulatory bodies and the market itself.
- RegTech solutions and implementation as one the strategic goals of the Bank of Lithuania.
- LoB initiative to launch blockchain-based solutions to help FinTech players to operate in the regulatory and technological sandbox platform-service.
- Launch of CENTROlink – an instant payment system operated by the Bank of Lithuania.
- Issue of BoL position on virtual currencies and ICO. According to BoL, financial services must be clearly dissociated from activities related with virtual currencies. Banks, payment institutions and other financial market participants should not provide services associated with virtual currencies or participate in their issue.
Since Poland is EU Member State the bank regulations in Poland follow those of the EU. 2018 is a year with multiple regulatory deadlines, including MiFID II, PSD II and GDPR.
The local authority priority is to ensure financial stability. The requirements are towards endorsing the banking system profitability by cleaning the non-performing portfolios, reducing the risk from variable interest rates and the risk of the over-indebtedness of the population. There is a clear encouragement to use capital resource for healthy lending to the real sector. Romania decided to deactivate the systemic risk buffer from 1 March 2017 onwards. The deactivation is related to the perceived reduction in the contagion risk, the activation of the O-SII buffer and legislative developments at the national level that may lower the capital adequacy of banks (changes in debtor rights and the conversion of foreign currency loans into local currency against a discount). In addition, in May 2017, the Mandatory Minimum Reserves in foreign currency were lowered from 10% to 8%.
Treatment of distressed assets
Recently, the RBI along with the Ministry of Finance and other financial regulators have been taken serious steps towards resolving the increasing volume of distressed assets. These measures include identification and categorisation of sustainable and unsustainable distressed assets, setting up of mechanisms that allow creditors to restructure the debt in an effective manner, faster and more efficient insolvency resolution process under the IBC framework, and more accurate and streamlined measures to monitor the financial health and soundness of banks at an earlier stage.
The year 2018 is likely to see further regulatory steps being taken to tackle the issue. The proposed FRDI Bill will also support this endeavour and harmonise to the extent possible insolvency proceedings for financial firms, banks and insurance firms.
Merger of public sector banks
The RBI is also at present, considering the merger of various public sector banks into a few global sized banks. Emboldened by the success of the merger of various state bank entities into the State Bank of India, news reports suggest that the RBI is currently identifying potential banks that could be amalgamated in order to tackle the issue of distressed assets.
100% FDI in private banks
RBI is also considering the opening up of the banking sector to FDI from 74 per cent to 100 per cent. It however, remains to be seen, the regulatory changes that will need to made in case there is a change in the ratio of public and private sector banks in India with the added value of increased foreign investment.
Recognition of peer to peer lending
The RBI has also recently accorded recognition to non-banking institutions that operate peer to peer lending business as non-banking financial companies (NBFC-P2P) and has issued directions for governing the establishment and operation of NBFC-P2P. Each NBFC-P2P is required to obtain a fresh certificate of registration from the RBI and maintain a net owned fund requirement of INR 20 million.
Shift towards a cashless economy
A shift towards a cashless economy has been observed post the demonetisation measures undertaken in late 2016 and an increase in use of e-wallets, electronic payment gateways and other such internet based payment systems has been noted. The Ministry of Finance and the RBI are gearing towards amending existing procedures to accommodate such electronic mediums of payment and exchange in the regulatory fold.
The FSA is reforming its supervisory and monitoring approaches from a rule-based approach, which was formed after the financial crisis of the 1990s, to a principle-based, forward-looking approach more suitable for the recent environment of Japanese banks. The FSA plans to change its organisational structures in 2018 and overhaul the FSA’s Supervisory Guidelines and Inspection Manuals to suit the new approach. These dramatic reforms would require supervised banks to change their mindset towards, and adopt a new relationship with, the FSA.
In November 2017, the FSA set up a study group to consider the fundamental change of financial regulatory frameworks from the current industry-by-industry approach (e.g., banks, broker-dealers, fund transfer service providers and money lending business providers) to a functional or service-by-service approach (e.g., lending, deposit taking, securities businesses and fund transfers) to further facilitate FinTech innovations. This overhaul of Japanese financial regulations may accelerate the unbundling and re-bundling of financial services, leading the banking industry to an entirely new world.
The MFSA closely follows EU banking regulation and strives to implement this locally in a timely manner. All Maltese banks are expected to comply with guidelines and standards issued by EU bodies, which are generally endorsed by the MFSA as soon as they are issued. From a practical perspective, the MFSA is mindful to deploy its supervision and enforcement strategy in a manner which is proportionate to the nature, scale and complexity of Maltese banks.
As the regulatory landscape remains in a state of flux, institutions are likely to retain their focus on risk and compliance initiatives specific to the banking regulatory framework but also pay close attention to data protection issues (including data quality and automation) as well as cyber threats, in light of the incumbent general data protection regulation. Similarly, banks in Malta are currently adapting to the new anti-money laundering framework which requires a novel risk-based approach to customer due diligence.
The CBN in January 2018 announced its plans to impose sanctions on licensed operators in the National Payments System by imposing a penalty of N10,000 per day for failure to apply for the renewal of an operating license within three (3) months before the date of expiration of the existing license or failure to regularize and respond to observations/exceptions noted by the CBN in the course of processing an application for the renewal of an operating license within three (3) weeks. This policy is to come into effect from 1 April, 2018.
The trends in bank regulation in Norway are predominantly influenced by EU regulatory initiatives. The Norwegian banking legislation has recently undergone a modernization and clean-up of the old banking laws from 1960s (albeit amended several times since then). However, there are still some deviations between the Norwegian banking laws and EU banking laws i.a. when it comes to deposit guarantee schemes and ownership rules for banks, see details under questions 15 and 21.
Since Portugal is Member of the European Union and that Banco de Portugal is part of the Eurosystem and the European System of Central Banks, there is no room left for innovation by the Portuguese Legislator (as well as Banco de Portugal) for establishing new trends. Portuguese banking regulation only imitates, reflects, absorbs or mimics European legislation and instructions from the European Banking Authority.
QCB keeps working on harmonising and strengthening regulatory oversight and safeguard consumer and investor protection.
It has been very recently reported, that the Qatar Central Bank is seeking to establish a deposit protection framework as well as develop a cybersecurity lab as part of efforts to ensure sound and resilient ﬁnancial sector. These action points form part of the strategic goal of maintaining the integrity of and conﬁdence in the ﬁnancial system.
Qatar is committed to combating illicit ﬁnancing and ensuring that ﬁnancial sector information and infrastructure are protected and safeguarded from cyber incidents.
We currently see three trends in Swiss bank regulation:
- Changes in, or amendment of, capital and liquidity requirements in line with international developments (Basel IV, NSFR, etc.);
- the implementation of TLAC requirements for domestic systemically important banks and other requirements relating to recovery and resolution planning (e.g., ring-fencing of certain core activities); and
- the (de)regulation in the area of FinTech to allow innovation, disintermediation, and technological developments.
In line with the ongoing efforts to render the Turkish banking legislation compliant with the Basel requirements within the last decade, the BRSA continues to reflect the Basel requirements in local banking legislation by enacting new regulations or amending the currently in-effect legislation in order to harmonize the Turkish banking system with international banking standards and trends. The BRSA is expected to continue its efforts to implement increasingly stricter regimes in the Turkish banking sector to increase the profitability of Turkish banks and reduce the risks that the same may encounter with the aim of establishing a stronger banking system. For these purposes, the BRSA has recently published draft regulations on the amendment of capital adequacy requirements, risk management techniques and restructuring of banks, together with a new regulation on the determination of NSFR, in accordance with the Basel III requirements on the same which have entered into force as of January 2018.
In addition, one of the main focus points of the recently enacted banking regulations is the protection of financial consumers. The BRSA strictly regulates the terms and conditions of the financial products and services (especially regarding consumer loans, vehicle loans and housing finance loans) to be extended to consumers by Turkish banks and the fees and expenses to be charged in relation to financial transactions conducted by consumers, with a view to protect the financial consumers against unjust banking practices that have been imposed on financial consumers through contractual terms of the financial agreements concluded between Turkish banks and financial consumers.
Furthermore, upon the BRSA’s recently adopted conservative approach, there is a restrictive trend in the factoring sector with respect to cross-border factoring transactions to be conducted between foreign factoring institutions and Turkish residents. Although the BRSA’s approach has not been clearly reflected in the relevant legislation and is implemented through administrative letters issued by the BRSA, the restrictions on cross-border factoring transactions and the licensing requirement thereunder have made a significant impact on the ongoing supplier financing programs conducted between non-Turkish resident factoring institutions and Turkish residents.
The proposed amendments of the framework for capital requirements of credit institutions and investment firms by the European Commission shall strengthen the resilience of the banking sector by introducing more risk-sensitive capital requirements. Challenges arise in particular from the fact that these concepts designed for large institutions (“big players” and global systemically important banks e.g., TLAC and MREL) may not be applied to small institutes without making adaptations, as Austria has a particularly large number of small and medium-sized banks.
Following the Asset Quality Review (AQR) and stress test (ST) of all 22 Bulgarian banks in 2016, BNB announced that Bulgarian banks have passed these tests successfully. According to the BNB report, the banking system remains well capitalized, with a CET1 capital ratio after the AQR of 18.9%, well above the 4.5% regulatory minimum. The individual bank results indicate that the capital adequacy of all banks remains above the required regulatory minimum.
The trend of discipline and reforms in the banking sector is confirmed by BNB to continue, with primary core focus on successful meeting the future challenges related to maintenance of financial stability in the country and its full integration into the European financial infrastructure.
Bulgarian banking system is in good condition – it has high capital adequacy and liquidity, there is growth in crediting, which is continuing. The country is benefitting from the opportunities of global economic cycle and growth. The clear indications and timeline for joining the Eurozone also contributes to such good prospects for the economy and the image of the country as a whole.
From regulation perspective, the banking sector is anxiously taking measures for the implementation of the General Data Protection Regulation (GDPR), Payment Services Directive 2 (PSD 2), International Accounting Standard 9 (IAS 9), and Markets in Financial Instrument Directive 2 (MiFID 2) and the related acts in Bulgarian legislation.
During the years 2016 and 2017 the Monetary and Financial Policy and Regulation Board issued several regulations applicable to the general system of digital currency (e-money) administered by the Central Bank of Ecuador, said regulations establish the legal framework in which Ecuadorian financial entities, public and private, shall participate within the digital currency system. The regulations issued by the Monetary and Financial Policy and Regulation Board establish the creation of virtual digital currency accounts to facilitate flows, savings and transfers in real time, between the different economic agents, through the use of: electronic and mobile devices, fixed devices, smart cards, computers and others of similar technologic nature. Digital money accounts will be recorded as a liability in an account in the Central Bank of Ecuador's balance sheet and will be backed 100% in United States dollars, in deposits and international investments in dollars of the United States of America and/or in gold of the International Reserves of the Central Bank of Ecuador.
It is expected that by the end of year 2017, the National Assembly will approve a bill of law by which the private banks would manage the electronic money system (not cryptocurrency), in coordination with the Central Bank.
This electronic money system in intended to reduce the use of cash in daily transactions, by the use of digital wallets through the cellphone network. This project is similar to the adopted in Kenya.
The CBI’s management of bank regulation in Ireland will continue to focus on the implementation of in-creasingly stricter regimes to reduce risk and to protect consumers. The main factors influencing bank regulation are continuing legacy issues from the financial crisis, financial innovation and a changing mac-ro-financial environment with a focus on Brexit.
In the context of legacy issues, as well as dealing with existing regulatory breaches the CBI seeks to bring about cultural changes in the financial sector particularly with regard to appetite for risk.
Bitcoin is the subject of much recent commentary. The CBI’s reported view is that bitcoin/cryptocurrencies may adversely affect control of the banking system and undermine monetary policies used to manage inflation. As it stands there is no regulation of cryptocurrencies and therefore no AML and CTF controls over their users. In relation to Fintech generally, the CBI has established a Fintech group. The CBI’s assessment of innovations will take into account associated risks to ensure that any failures are manageable.
Brexit has sparked significant uncertainty in the Irish financial sector. While it is broadly acknowledged that Brexit will be damaging to the Irish economy, a potential gain is the possibility of relocation of a percentage of financial services firms from London to Dublin to facilitate their passporting of services to other EU member states. The CBI has stressed that transparency and predictability will be prioritised in its assessment of applications from UK firms exploring operational relocation to Ireland. In relation to firms passporting services into the UK, the regulatory landscape remains unclear and the CBI is strongly encouraging firms to review their business models in the context of potential loss of business attached to loss of passporting rights to the UK.
Indisputably, the implementation of the anti-money laundering and counter terrorist financing (AML) regu-lation by entities is the target of numerous inspections by the college of the ACPR which are often fol-lowed by disciplinary procedures in front of the Sanctions Committee.
Bank regulation will mainly remain driven by European initiatives, including the upcoming Basel IV/CRD V package and the further completion of the Banking Union with a European deposit insurance scheme. The Belgian regulator has in the recent years adopted a protective view and implemented European rule on a strict basis (even goldplating in certain instances – see the paragraph on remuneration above). While we expect that this trend will continue as far as consumer protection and rules of conduct are concerned, the Belgian supervisor seems to have adopted a slightly more pragmatic approach over the past months, also in an effort to attract financial institutions looking into onshore certain UK activities after Brexit.
In Estonia, the recent trends in bank regulation are related to preventing money laundering and terrorist financing and implementing General Data Protection Regulations.
Further to the enactment of laws 4261/2014 and 4335/2015, the Greek banking sector has been subject to significant reform. We expect that this 'reform wave' will continue in the upcoming years, having also regard to the trends in international financial regulation: as of 2018, credit institutions are expected to comply with IFRS 9 and the LCR / NSFR liquidity requirements whereas in 2019 the TLAC requirement will enter into force for G-SII.
With respect to issues of local interest for Greece, we anticipate developments in the framework governing the management of non-performing loans ('NPL') as well as the gradual loosening of the capital control regulations. On another note, the existing trend relating to the sale of non-core banking activities (e.g., leasing and insurance) by local banks, as a result of commitments undertaken in the context of the recent recapitalizations of the latter, is expected to continue to boost M&A activity in Greece in the coming years.
In our view the banking regulatory innovation in Germany is driven by two major topics. One topic is the regulatory handling of new market participants in the FinTech sector and associated phenomena such as crypto currencies and initial coin offerings. In that regard the German legislator and regulator have proven to be acting with a helpful sense of proportion. While BaFin has decided against a “sandboxing” concept, they have repeatedly stated that they are bound by a proportionate regulatory approach, ie the level of regulatory attention increases with the level of risk an undertaking is posing at the financial system and/or customers. The German legislator on the other hand stated several times that Germany is committed to provide the environment to enable the start-up industry (including FinTech) to fully evolve its potential.
The second topic area is Brexit. It appears likely that the importance of Germany as a location for the financial industry will gain importance after Brexit. As a consequence financial institutions will establish or broaden their existing presence in Germany. These movements will create a significant challenge for the German regulatory authorities and the ECB and will necessitate the allocation of significant resources and, thus, may also require changes in the way BaFin approaches processes.
As evidenced with the issuance of Law 1870 of 2017, one of the main trending topics in bank regulation in Colombia is regulating financial conglomerates. The aforementioned law imposes better internal control mechanisms for information exchange, conflict of interest revelation, capital adequacy and limits to risk exposition between the parent company and the subordinated and affiliated companies, as well as the possibility for the Superintendence of Finance to intervene. Such authority can impart instructions to the parent company or subordinated and affiliated companies, requiring changes in the conglomerate structure or capital adequacy, authorize direct and indirect capital investments, require information and carry out on-site visits, or withdrawing the operation authorization of a company that is part of a conglomerate when and if the Superintendence of Finance considers that the provided information no longer permits adequate supervision.
Law 1870 was issued as a response to the need for the Superintendence of Finance to have better control and faculties, with the purpose of carrying out its functions and responsibilities, as stated in question one above. Also, with this recent law, it is expected for the Ministry of Finance and Public Credit to issue a Decree regulating this Law and further mapping out the supervision situation for conglomerates in Colombia.
Another trending topic in Colombia regarding banking regulation is, as stated in previous questions, the implementation of Basel III and Basel Committee on Banking Supervision recommendations. The importance of such implementations is strengthening the financial system’s ability to prevent and endure a crisis.
Recent trends in banking regulation consist of a shift from locally enacted legislation to direct application of EU Level 2 regulations or direct references to EU legislation in national law. Increased cooperation within the SSM and direct reliance on EBA guidance has also increased regulatory harmonization within the EU. The full implementation of the EU banking union, including the proposed common European deposit insurance scheme, will continue to shape the legislation with respect to co-operation in crisis management and the recovery and resolution of credit institutions.
The implementation of MiFID II in January 2018 is likely to result in a myriad of additional regulations and guidance on its application, affecting credit institutions in their investment service activities.
Brexit – the UK’s exit from the European Union – will have an impact on the regulation of local Finnish branches of UK financial institutions. It is likely that the operative functions of EU credit institutions will be under closer scrutiny to prevent excessive outsourcing of functions to non-licenced UK entities.
From a regulatory point of view the possible move of the Nordea group headquarters from Sweden to Finland will result in Nordea becoming the first G-SII in Finland and will increase the banking sector’s exposure to structural vulnerabilities. After the relocation of Nordea, Finland’s banking sector will become one of the largest in Europe relative to the size of the national economy. Danske Bank, on the other hand, is in the process of merging its subsidiary in Finland with the Danish parent company. Danske Bank will operate as a branch in Finland and its supervision will fall largely under the remit of the Danish Financial Supervisory Authority.
There has over recent years been an increase in EU-driven bank regulation as the European response to the financial crisis has been implemented, often by directly effective EU regulation. It remains to be seen what the post-Brexit position will be.