Compliance considerations in 2021

From a global viewpoint, recent regulatory changes have provided a statement of intent and set the agenda of priorities for 2021. These include a focus on stimulating investment and access to capital while navigating the ongoing uncertainty and repercussions of Covid-19. Included in this, is integrating ESG & Sustainability across different jurisdictions and timelines to direct capital flows into sustainable projects, which will require amendment to internal systems and controls of financial market participants and financial advisers, and examination of related transition risks associated with a shift in investor appetite.

Covid-19

Covid-19 has dramatically changed the manner in which businesses and individuals function and has created a period where flexibility and adaptability in business have been critical to navigate the continuous uncertainty of the pandemic. The pandemic risk to both financial and human resources has led to a substantial increase in outsourcing of compliance functions, often delivering cost savings as well as providing access to wider resources and operating infrastructure, which businesses may not have had the capacity to build or maintain during Covid-19. We expect compliance outsourcing by Financial Institutions to continue in 2021, driven by the need for additional assurance over the internal compliance process and the ongoing lack of in-house compliance resources, access to global opportunities, as well as access to technological support, further acting as the impetus for outsourcing. The use and reliance on technology, particularly in a WFH environment, is accelerating the focus on disruptive technology both across the industry and within regulatory agencies themselves and further developments in technology are anticipated in 2021.

Brexit

In the UK & Europe, the primary regulatory focus will be on the implications of Brexit and consideration of the proposed changes through the Financial Services Bill. These include whether the proposed Overseas Funds Regime (OFR) will mitigate the loss of the EU passporting regime and opens up the question of whether the EU will reciprocate the proposed OFR. As the Financial Services Bill passes through parliament, the FCA is consulting and preparing the industry for what can only be anticipated to be a period of uncertainty for the financial services industry. This will last until there is clarity in terms of whether there will be any increased cost, in terms of regulation or capital, of doing business with the UK.

ESG

Climate change risk mitigation remains a priority. To achieve global targets set out by the Paris Agreement, a concerted global effort is required, drawing on legal and regulatory measures. ESG is no longer a ‘nice to have’, but has become part of the mainstream for businesses.

Financial services institutions in Europe will be prioritising ESG in 2021 as they prepare for the regulatory changes that have been set forth in a number of EU regulations, some of which are anticipated to take effect in March 2021.

While the initial implementation across the EU begins in 2021- globally, any exposure to the EU markets for investment activities, portfolio management, distribution and ‘manufacturers’ of financial products across the EU will be impacted by the EU Disclosure and Taxonomy regulations. The disclosure requirements seek to enable informed decision making by investors across the EU, but such investors’ investment appetite is unlikely to be confined to the EU, therefore we also expect change globally.

This blog post, contributed by Hari Bhambra, Global Head of Compliance Solutions, was originally published by Modern Law.