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Risk & Regulation - What does it mean to you?
20 October 2011
The Credit Crunch has breathed fresh life into a number of capital adequacy reforms already on the drawing board.
- The Basel Accords date back to 1988. Basel III was developed in response to the 2008-9 crisis, and is the latest global regulatory standard on bank capital adequacy and liquidity. Its implementation is due to begin on 1 January 2013, and will run through to 2018.
- Solvency II – often referred to as ‘Basel II for insurers’ – is a development of Solvency I, which was introduced in 1973. Solvency II is due to be implemented in 2013, although there is some uncertainty around this at the current time.
- MiFID II is an extensive review and updating of MiFID (Markets in Financial Instruments Directive), which was implemented in 2007 and designed to harmonise regulation for investment services across the European Union. It is possible that the MiFID II regime could come into play in 2013.
It is perhaps no surprise that financial institutions preparing for implementation of the new or modified regulatory regimes have assembled significant programme teams and are leaning heavily on the interim management market to provide the required capability. It is essential that interim managers working in or aspiring to work in this space keep themselves fully up-to-date with fast-moving developments.
Basel III overview
Basel III overview
The Basel Committee’s rule-making process is of paramount importance to the banking sector and the financial system, as well as national economies and society at large. Accordingly, the process has attracted a great deal of attention from an unusually large array of organisations and observers.
The final rules issued in September contain important amendments. In particular, Basel III now includes a timeline to phase in the new regulation. The question now arises as to what extent and how quickly banks will be able to respond given their earnings power, the potential for mitigation and their capital-raising capacity.
Solvency II overview
Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements.
The vast majority of financial executives believe the introduction of Solvency II will reduce choice in the insurance industry, either through withdrawals from the market or M&A activity.
Many practitioners have predicted a wave of consolidation in the insurance market owing to the implementation of the EU-wide regulation.
MiFID II overview
Markets in Financial Instruments Directive II (or MiFID Review) is a potential second version of the MiFID directive. Proposals for the reform were launched by the European Commission on 8 December 2010.
The second version was intended to tackle some of the issues missed by the original document. It also addresses concerns over high frequency trading. MiFID imposed new rules for equity trading across 30 European countries when it became law on 1 November 2007.
MiFID II migrates the European regulatory landscape from a principles-based philosophy toward a more US-style rules-based regulatory regime. It also extends the MiFID framework across asset classes and into markets in which central bid/offer markets and pre and post-trade transparency have never existed. This is expected to have a tremendous impact on how OTC markets operate. The possible extension of MiFID’s transparency requirements to non-equity markets is one of many areas the European Commission is expected to investigate, in line with the European Central Bank’s efforts with the code of conduct for clearing and settlement.
Conclusion
Alium has a growing number of interim managers deployed on regulatory programmes in a variety of financial institutions, and demand shows little sign of abating. There is much pressure on firms to keep ahead of implementation deadlines, so interims experienced in this area should make their skills and knowledge known to our Financial Services Sector practice.
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