Duty Calls – but Is the FCA Listening?
Regulators are always keen to tell us how enthusiastic market participants are about a new piece of regulation or a different approach to industry oversight. So it was no surprise when the UK Financial Conduct Authority stated earlier this month that its Consumer Duty was helping banks deliver better outcomes for their customers.
The CEO of Barclays UK told a recent Treasury Select Committee hearing that thematic reviews were helping the bank improve how it deals with vulnerable customers, while his counterpart at HSBC said it was taking a more forensic approach to complaints.
The FCA has garnered some goodwill from its decision to remove the requirement for firms to have a Consumer Duty board champion, allowing them to determine the most appropriate governance arrangements for their specific circumstances.
Read more: Consumer Duty at One – FCA Pushes Firms for Evidence of Progress
One broker refers to a more data-focused approach from the FCA, which it believes will enable it to better understand the firms it regulates, pre-empt market issues, and react appropriately to developments that could harm clients.
However, many firms feel that the UK has become one of the most challenging brokerage environments in the world and that overall compliance costs have risen. There is no denying that a number of UK-licensed brokers have shifted their focus away from the UK since the introduction of the Consumer Duty in 2023.
There has also been minimal change in the way clients are advised, according to research by Defaqto. The firm’s analysis of the filters advisers use when conducting research for their clients shows that the main priorities remain unchanged and that there has been no notable shift in the relative importance of factors such as online client valuations.
WATCH: Consumer Duty Debate!
Had the pleasure of hosting a roundtable with regulatory experts to discuss consumer duty.
Check out the highlights! 🧵
Consumer duty debate: The ‘outrageously poor’ area missed by FCA pic.twitter.com/0Zclc457gI— Olivia Bybel (@oliviavenetia) February 13, 2024
Cost Warning Over Faster European Settlement
A new report from Firebrand Research suggests that post-T+1 implementation reviews in the US have highlighted some areas in need of more focus, such as FX, fund settlement cycles, and further automation across the post-trade lifecycle.
FX costs have increased for many firms and will likely increase further. As more markets move to T+1, there is an increasing demand for wider discussion about changes to the FX settlement cycle and cut-off times, particularly within CLS.
These costs are one of the greatest concerns around European T+1 for buy-side firms. FX and cash account for 2.7 million of the just over 16 million standing settlement instructions stored by DTCC.
More on the topic: CySEC Informs Firms as EU Commission Targets T+1 Securities Settlement by 2027
The move to T+1 in Europe will require all market participants to be as automated as possible and to accelerate post-trade processing (for example, trade matching, affirmation, settlement, FX) within the same day that trading takes place. This will inevitably require further investment in automation, AI, and machine learning for exception management and predictive error and mismatch forecasting.
One of the promised benefits of accelerated settlement in Europe is that it will release a significant volume of margin due to lower counterparty risks. However, the scale of the margin release is likely to vary widely.
There isn’t much from the 1920s we’d want to go back to (unless you’re into silent films), but a 1-day settlement cycle (T+1) is one of them. Now, if you sell your stock on Monday, you get your cash Tuesday. pic.twitter.com/y8dSJPPzlZ
— SEC Chair Gary Gensler Archive (@GenslerArchive) June 11, 2024
Centrally cleared trades where margins are tied directly to the exposure timeframe may bring some efficiency. But for OTC trades, it may not be as significant as initially expected, and lower counterparty risk due to shorter settlement cycles might not mean lower risk overall, as new types of risks may emerge with the shorter settlement period, such as an increase in settlement failure or prefunding (and therefore underfunding and overfunding) of trades/FX in certain markets.
These new risks may reduce the benefits of accelerated settlement until processes such as FX conversion can be synchronised with the shorter settlement cycle. So, if we want to see more margin being released, an important next step is to review the processing of FX related to cross-border securities trading. Custodians will need to rethink how they can support cross-border counterparties to meet their settlement deadlines.
Messing Around in the Sandbox
Five years after the ECB started talking seriously about the digital euro, noises from Brussels suggest we are on the cusp of real progress and that the eurozone could have a functional central bank digital currency before the end of the decade.
Last month, the ECB unveiled an ‘innovation platform’ through which almost 70 market participants would have the opportunity to play around with a virtual version of the currency and show how it could be used.
The list of digital euro innovation partners (modestly referred to as either pioneers, visionaries, or both) is an eclectic mix of global consulting firms, digital banks, fintechs, and research institutions. The ECB states that the list also includes merchants, although there are certainly no high-profile names among the organisations listed.
These organisations will be encouraged to push the limits of the digital euro for payments and to look at how it could boost financial inclusion.
More on the topic: How the Digital Euro Could Compromise Financial Autonomy
Speaking at a conference just over a week after the innovation platform announcement, ECB Executive Board member, Piero Cipollone, suggested that the necessary legislation could be in place by ‘very early’ next year and that Europeans could be using the digital euro to make payments within a further 2–3 years.
Speculation around why the initiative seems to have suddenly gained momentum has centred on Europe’s desire to reduce its dependency on the US firms that manage most of the world’s payments.
Russia and China have been trying to do this for years with limited success. However, the actions of the US administration since Donald Trump came to power again – specifically his constant criticism of Europe for not pulling its weight in areas such as defence and his desire for a greater chunk of the revenues generated by US-based companies to be booked and taxed at home – have highlighted the potential risks of relying on US-controlled payment infrastructure.
In April, ECB officials suggested that Europe needed to develop a payment system over which it had more control, reducing the use of platforms such as Visa, Mastercard, and PayPal.
Duty Calls – but Is the FCA Listening?
Regulators are always keen to tell us how enthusiastic market participants are about a new piece of regulation or a different approach to industry oversight. So it was no surprise when the UK Financial Conduct Authority stated earlier this month that its Consumer Duty was helping banks deliver better outcomes for their customers.
The CEO of Barclays UK told a recent Treasury Select Committee hearing that thematic reviews were helping the bank improve how it deals with vulnerable customers, while his counterpart at HSBC said it was taking a more forensic approach to complaints.
The FCA has garnered some goodwill from its decision to remove the requirement for firms to have a Consumer Duty board champion, allowing them to determine the most appropriate governance arrangements for their specific circumstances.
Read more: Consumer Duty at One – FCA Pushes Firms for Evidence of Progress
One broker refers to a more data-focused approach from the FCA, which it believes will enable it to better understand the firms it regulates, pre-empt market issues, and react appropriately to developments that could harm clients.
However, many firms feel that the UK has become one of the most challenging brokerage environments in the world and that overall compliance costs have risen. There is no denying that a number of UK-licensed brokers have shifted their focus away from the UK since the introduction of the Consumer Duty in 2023.
There has also been minimal change in the way clients are advised, according to research by Defaqto. The firm’s analysis of the filters advisers use when conducting research for their clients shows that the main priorities remain unchanged and that there has been no notable shift in the relative importance of factors such as online client valuations.
WATCH: Consumer Duty Debate!
Had the pleasure of hosting a roundtable with regulatory experts to discuss consumer duty.
Check out the highlights! 🧵
Consumer duty debate: The ‘outrageously poor’ area missed by FCA pic.twitter.com/0Zclc457gI— Olivia Bybel (@oliviavenetia) February 13, 2024
Cost Warning Over Faster European Settlement
A new report from Firebrand Research suggests that post-T+1 implementation reviews in the US have highlighted some areas in need of more focus, such as FX, fund settlement cycles, and further automation across the post-trade lifecycle.
FX costs have increased for many firms and will likely increase further. As more markets move to T+1, there is an increasing demand for wider discussion about changes to the FX settlement cycle and cut-off times, particularly within CLS.
These costs are one of the greatest concerns around European T+1 for buy-side firms. FX and cash account for 2.7 million of the just over 16 million standing settlement instructions stored by DTCC.
More on the topic: CySEC Informs Firms as EU Commission Targets T+1 Securities Settlement by 2027
The move to T+1 in Europe will require all market participants to be as automated as possible and to accelerate post-trade processing (for example, trade matching, affirmation, settlement, FX) within the same day that trading takes place. This will inevitably require further investment in automation, AI, and machine learning for exception management and predictive error and mismatch forecasting.
One of the promised benefits of accelerated settlement in Europe is that it will release a significant volume of margin due to lower counterparty risks. However, the scale of the margin release is likely to vary widely.
There isn’t much from the 1920s we’d want to go back to (unless you’re into silent films), but a 1-day settlement cycle (T+1) is one of them. Now, if you sell your stock on Monday, you get your cash Tuesday. pic.twitter.com/y8dSJPPzlZ
— SEC Chair Gary Gensler Archive (@GenslerArchive) June 11, 2024
Centrally cleared trades where margins are tied directly to the exposure timeframe may bring some efficiency. But for OTC trades, it may not be as significant as initially expected, and lower counterparty risk due to shorter settlement cycles might not mean lower risk overall, as new types of risks may emerge with the shorter settlement period, such as an increase in settlement failure or prefunding (and therefore underfunding and overfunding) of trades/FX in certain markets.
These new risks may reduce the benefits of accelerated settlement until processes such as FX conversion can be synchronised with the shorter settlement cycle. So, if we want to see more margin being released, an important next step is to review the processing of FX related to cross-border securities trading. Custodians will need to rethink how they can support cross-border counterparties to meet their settlement deadlines.
Messing Around in the Sandbox
Five years after the ECB started talking seriously about the digital euro, noises from Brussels suggest we are on the cusp of real progress and that the eurozone could have a functional central bank digital currency before the end of the decade.
Last month, the ECB unveiled an ‘innovation platform’ through which almost 70 market participants would have the opportunity to play around with a virtual version of the currency and show how it could be used.
The list of digital euro innovation partners (modestly referred to as either pioneers, visionaries, or both) is an eclectic mix of global consulting firms, digital banks, fintechs, and research institutions. The ECB states that the list also includes merchants, although there are certainly no high-profile names among the organisations listed.
These organisations will be encouraged to push the limits of the digital euro for payments and to look at how it could boost financial inclusion.
More on the topic: How the Digital Euro Could Compromise Financial Autonomy
Speaking at a conference just over a week after the innovation platform announcement, ECB Executive Board member, Piero Cipollone, suggested that the necessary legislation could be in place by ‘very early’ next year and that Europeans could be using the digital euro to make payments within a further 2–3 years.
Speculation around why the initiative seems to have suddenly gained momentum has centred on Europe’s desire to reduce its dependency on the US firms that manage most of the world’s payments.
Russia and China have been trying to do this for years with limited success. However, the actions of the US administration since Donald Trump came to power again – specifically his constant criticism of Europe for not pulling its weight in areas such as defence and his desire for a greater chunk of the revenues generated by US-based companies to be booked and taxed at home – have highlighted the potential risks of relying on US-controlled payment infrastructure.
In April, ECB officials suggested that Europe needed to develop a payment system over which it had more control, reducing the use of platforms such as Visa, Mastercard, and PayPal.
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