After two years of the COVID pandemic, we are slowly, but steadily, entering a normalisation phase in which society is learning to live with the virus. With this, the global economy too is getting back on track and economic output is returning to pre-pandemic levels. For all of us, COVID has brought sweeping changes, for example, with home-office working and digitalisation becoming integral parts of business life. At the same time, the pandemic’s aftermath is still of concern to financial markets and the world economy. With problems in international supply chains and a general shortage of employees causing a sharp increase of inflation, central banks around the world have been forced to turn away from their zero-interest rate policy and reduce their massive financial markets operations.
With the effects of the COVID pandemic fading out, a new danger and source of uncertainty for the world economy and financial markets is emerging on the horizon: the Ukraine conflict. Although it is almost impossible to estimate the long-term effects, it is already clear that the commodities and energy sectors are significantly affected, and supply chains as well as trade are severely hit. For the financial sector, sanctions and restrictions on doing business with certain clientele will be an ongoing issue for the months and years ahead.
Nonetheless, the dangers of climate change, as outlined in the recent report by the Intergovernmental Panel on Climate Change (IPCC) issued at the end of February 2022, are increasing and cannot be disregarded. Therefore, the ongoing efforts of political decision-makers and supervisors in the area of sustainable finance can be regarded as positive developments. New sustainability obligations are being published continuously, particularly in the EU but also in Switzerland and globally. With an increasing focus not only on the E (environmental) component but also the S (social) and G (governance) components, companies from all industries are being forced to analyse how they are affected by this sustainability regulatory tsunami. At the same time, other big topics, such as digitalisation, data, transparency, operational resilience, as well as the connection between environmental, social and governance (ESG) and digitalisation, need to be monitored closely.
In these uncertain times, our Strategic Regulatory Foresight Banking Report is aimed at providing a comprehensive overview on the key themes and topics in financial markets regulation in Europe, Switzerland and globally. In this regard, we not only outline ongoing regulatory initiatives but set out regulatory trends and their impact on the financial markets for the upcoming years. The following core issues and topics are presented:
The Basel III framework consists of a collection of standards published by the Bank for International Settlements’ Basel Committee on Banking Supervision (BCBS, hereinafter the “Basel Committee”) in response to the 2007 global financial crisis. Compared with previous versions (Basel I (minimum capital requirements), Basel II (regulatory supervision), Basel II.5 (market risk)), Basel III addresses weaknesses and vulnerabilities in the regulatory framework to improve the global banking system’s resiliency to potential future financial crisis.
Originally, the finalised Basel III reforms were scheduled to enter into force by 2022/ 2023, with a phase-in of the output floor between 2022 and 2027. Due to the global COVID-19 pandemic, the Basel Committee decided to extend the implementation of Basel III by one year, to 2023/ 2024, and the phase-in of output floors to 2023 to 2028. In Switzerland, the plan is for the current capital adequacy ordinance (CAO) to be split into five different ordinances, each covering a specific topic (own funds, leverage ratio & operational risk, credit risk, market risk and disclosure), that will replace the corresponding FINMA circulars. The revised Basel III final regulation will entry into force in Switzerland on 1 July 2024. All key changes introduced with Basel III final can be found in our new Strategic Regulatory Foresight Banking Report.
The Trade and Cooperation Agreement (TCA) establishes a broad relationship between the UK and the EU. The TCA sets out preferential arrangements in most areas. However, it contains scant provisions on the provision of financial services and does not provide a comprehensive agreement for the industry.
Since the UK was unable to negotiate a clear regulatory framework for financial services, the country is now considered to be a ‘‘third country’’ in according with World Trade Organisation (WTO) rules. Financial service providers based in the UK lost their passporting rights and must now apply for equivalence or set up subsidiaries in the EU to provide financial services. Equivalence is usually conditional, limited in time and based on reciprocity. It allows non-EEA firms to provide services in the EEA.
Given the complexity of the UK’s exit from the EU and the significant and long-term impact on the financial services sector, we are supporting you with the efficient implementation of regulatory requirements with our end-to end-services like Regulatory Radar, impact analysis of manufacturers/distributors, detailed legal framework assessment, entity structuring, strategic gap analysis, regulatory transformation, workshop-based approach.
Exposure to climate-related risks is gradually becoming a key factor in risk management. Climate change affects all businesses, but its impact is highly variable and often not yet sufficiently taken into account. Physical risks are the most visible effect of climate change, with extreme weather conditions impacting millions of individuals and value chains worldwide. Transition risks, such as ambitious climate policies, also represent a significant threat if not appropriately addressed. These risks arise especially as carbon-intensive economies move toward a greener future. Climate risks are increasingly recognized as potential systemic risks for the financial sector worldwide.
Due to their nature, the most advanced climate risk management methods include a forward-looking analysis and stress testing. Regulators internationally are exploring climate scenario analysis and respected stress testing methods for testing the resilience of the financial market and individual financial institutions to climate risks.
Climate scenario analyses can help businesses to better prepare for climate-related risks. Climate scenario analyses are projections that allow businesses to map and quantify risks based on different hypothetical situations. These scenarios are not meant to be precise predictions of the future but rather to help gain an understanding of the environment in which businesses will find themselves if certain conditions are met.
Alongside other measures, the Markets in Financial Instruments Regulation (MiFID II) has been amended as part of the EU Action Plan on Financing Sustainable Growth. Notably, the MiFID II regime now explicitly includes sustainability factors, risks and preferences, thereby extending the existing concepts and processes. This was achieved through delegated acts published by the Commission on 2 August 2021, amending the:
The Delegated Regulation mandates consideration and integration of sustainability factors, risks and preferences into the sales process, potential conflicts of interest and risks. It will be applicable from 2 August 2022. In turn, the Delegated Directive, applicable from 20 November 2022, covers the integration of sustainability factors into investment firms’ product governance.
The SFDR and EU Taxonomy are the key pillars of the package of measures implementing the EU Action Plan on Sustainable Finance and the EU Green Deal.
By introducing sustainability-related disclosure obligations, the aim of SFDR is to provide greater transparency, prevent greenwashing and ensure comparability in the European financial markets. While the first requirements were already introduced from 10 March 2021, further technical standards relating to presentation, the content and the methodologies of the SFDR framework principles will be applicable as from the beginning of 2023.
The SFDR is highly interconnected with the EU Taxonomy, the latter introducing additional Taxonomy-related transparency obligations for SFDR products. The EU Taxonomy is a European uniform classification system for sustainable activities established with the aim of defining what can be considered environmentally sustainable and under which circumstances.
Find out more in the report what environmentally sustainable economic activities need to be or do.
Artificial Intelligence (AI) has become a key enabler for business growth across industries, and there is an increasing trend towards the use of AI among organisations in different areas of activity, including in the finance industry (the Know your customer (KYC) processes, credit checks, human resources, big data, machine learning tools, boots, security, etc.). PwC research estimates that AI could contribute USD 15.7 trillion to the global economy by 2030 as a result of productivity gains and increased consumer demand driven by AI-enhanced products and services.
At the same time, it is commonly acknowledged that the specific characteristics of certain AI systems may raise some concerns, especially with regard to safety, security and fundamental rights protection. In the light of this, on 21 April 2021 the EC published a proposal for a new Artificial Intelligence Act (the “AI Act”). More recently, on 20 April 2022, the European Parliament’s Draft Report for the AI Act has been published.
Stakeholders who wish to use publicly available information are faced with fragmented, low quality and scarce data. This is explained by the lack of an integrated Europe-wide data platform. On 25 November 2021, the EC proposed the establishment of a ESAP to counteract this. The proposed package includes a:
While the first introduces the establishment of ESAP, the proposed amending Regulation and amending Directive incorporate the ESAP requirements into relevant EU legislation.
The goal behind the proposals is to centralise and improve public access to entities’ financial and sustainability-related information through a data platform, in line with the EU’s digital finance strategy.
On 21 April 2015, a coalition of Swiss civil society organisations launched the Responsible Business Imitative (RBI), aimed at introducing a binding legal framework to hold multinational companies (MNCs) in Switzerland to account for human rights and environmental abuses committed abroad.
On 29 November 2020, the RBI was rejected at the ballot box due to the “cantonal majority”, despite an absolute majority of 50.7%. As a consequence, the indirect counterproposal of the Federal Council took effect, entering into force on 1 January 2022. It will first apply from financial year 2023, with reporting taking place in 2024. It imposes:
With the introduction of the Swiss Financial Institutions Act (FinIA) and Financial Services Act (FinSA) on 1 January 2020, the regulatory framework of the Swiss financial industry has substantially changed. In particular, the FinIA introduced an obligation for portfolio managers and trustees to become licensed with FINMA and subsequently prudentially supervised.
More than 2 years after entry into force of the aforementioned acts, it appears that only a minority of portfolio asset managers (hereinafter, portfolio managers) and trustees have filed applications with the FINMA, and even fewer have obtained authorisation. The majority of portfolio managers are currently awaiting the outcome of the authorisation process, while some actors are still considering the options of restructuring their business or retiring by restructuring their company or selling their clients. The whole industry needs, however, to FINMA’s meet two important deadlines: the legal deadline of 31.12.2022 for portfolio managers to submit an application to FINMA, but also deadline of 30.06.2022 recommended by FINMA for submitting an application to their chosen supervisory organisation (hereinafter, the SO).
How can PwC supports portfolio managers and trustees? The answer can be found in our new Strategic Regulatory Foresight Report.
In September 2020, the Swiss Parliament adopted the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (the DLT Act); this has led to amendment of various federal laws, such as the Swiss Code of Obligations (SCO), the Federal Act on Intermediated Securities (FISA) and the Federal Act on Private International Law (PILA). These amendments entered in force as of 1 February 2021. On 1 August 2021, the remaining provisions of the DLT Act led to amendments to the FinSA, the National Bank Act (NBA), the Banking Act (BA), the FinIA, the Anti-Money Laundering Act (AMLA), the Financial Market Infrastructure Act (FMIA) as well as the Debt Enforcement and Bankruptcy Act (DEBA).
On 25 September 2020, the Swiss Parliament adopted the revised Swiss Federal Act on Data Protection (“FADP”), which will replace the current Data Protection Act of 1992.
In early March 2022, the Federal Office of Justice (“FOJ”) announced that the expected date of entry into force of the revised FADP and its implementing ordinance should be September 2023 (the Federal Council will ultimately decide on the effective date). According to the FOJ, the finalised implementing ordinance is likely be published a year earlier, i.e. September 2022 (the consultation period for the preliminary draft of the implementing ordinance ended in mid-October 2021).
The revised FADP aims to harmonise and align Swiss data protection with the EU General Data Protection Regulation (GDPR). However, it retains its own basic concept and deviates from the GDPR in various aspects.
The terms metaverse and Non-Fungible Tokens (NFTs) are buzzing around, from mainstream businesses to the high-end business meetings of economic giants. While many people do not really know what to think about or what to do with the metaverse, NFTs are already understood by many to be more than just artwork and collectables. With the current surge in information and knowledge about the metaverse, NFTs are the keys to the metaverse and, with that, are opening the way for an undoubtedly promising future for this technology.
The potential provided by the metaverse is endless: it makes it possible to establish the presence of brands in the virtual world; develop portfolios of products around these brands, thereby providing a broad range of engaging experiences making it possible to develop, broaden and strengthen communities, fans and consumers of these brands.
NFTs are a key component of this broad ecosystem. They enable ownership of land and real estate in the metaverse, the purchase of clothing and items for your avatar/online persona, the participation in events and communities, and ever more opportunities and initiatives for being part of the future digital world.
Money laundering legislation in Switzerland, which has been a member of the Financial Action Task Force on Money Laundering (FATF) since 1990, was last reviewed in 2016. In its report, the FATF found that Switzerland’s money laundering policy was partially compliant with just nine of the 40 FATF recommendations, and that its implementation was, therefore, not adequate overall. Since then, Switzerland has been undergoing the “enhanced follow-up” process, meaning that it must regularly inform the FATF about the progress made with remedying the shortcomings of its anti-money laundering system.
The first such follow-up report was issued on 13 February 2020 and confirmed that Switzerland was working on improving the framework. Three of the initial nine “partially compliant” elements were therefore upgraded to “compliant”. Six “partially compliant” elements remain unchanged (recommendations 8, 10, 22, 23, 35 and 40). These will be addressed in the new AMLA.
Compliance functions are under pressure to do more work and provide greater assurance with fewer and fewer resources. The answer is to make your investment in compliance go further by managing the right blend of people, technology and processes. This is especially important during COVID-19, with compliance risks increasing due to employees working from home, reduced staffing capacity, limited system availability and other factors.
As with so many challenges in today's digital business environment, the future of compliance is to achieve the right operating model to get the most out of your people and the available technology. It is important to take all three factors into account.
You need to embrace digital change, adopting new technologies that will enable you to organise and understand your data and squeeze real value out of it. But, at the same time, you cannot afford to lose sight of cybersecurity, privacy, data ownership and integrity.
But at PwC, we have been thinking hard about how these pressures are affecting compliance functions in particular, and we have come up with very specific approaches to help them respond.
In the context of ever-increasing regulatory complexities, it is essential to maintain an overview of legal updates in order to remain compliant. Because of the fast-changing regulatory landscape, there is an inherent risk for the banking, insurance as well as asset and wealth management industry of missing out on critical topics or of taking the action required too late. To ensure that laws, guidelines, standards, and voluntary standards are systematically observed, a company must also have a clear overview of the changes that are planned or already approved. Therefore, now, more than ever, effective legal horizon scanning is needed.
In addition to the constantly changing updates, a financial market participant must also ask itself to what extent regulatory monitoring can be implemented efficiently and across departments throughout the company. How can regulatory monitoring work for the entire company, particularly where different locations, time zones, and technical platforms are involved?
The financial services sector is facing increasing worldwide regulatory pressure. With society’s understanding that banks, insurers, private equity, impact investors, pension funds, family offices and other market participants are the key drivers in financing and implementing the transformation to a sustainable economy, sustainable finance is gaining traction. Therefore, comprehensive sustainable-finance strategies and legislation must be integrated into already established processes, internal structures and product innovation. Becoming an organisation that is fully equipped to identify and make sustainable investments is demanding. We can help you navigate the complexities of mapping the opportunities and risks presented by sustainability.
Partner, Sustainability & Strategic Regulatory, PwC Switzerland
Tel: +41 58 792 45 23
Moritz Obst
Strategic Regulatory & Sustainability Services, Legal, PwC Switzerland
Tel: +41 58 792 47 19
