Regulatory Horizons

Welcome to the latest edition of KPMG Regulatory Horizons.

The challenging economic environment is having a significant impact on financial services firms. ESMA's Trends, Risks & Vulnerabilities report highlighted that the war in Ukraine and increased inflation have profoundly altered the risk in EU financial markets with recovery faltering, volatility increasing and market corrections growing more likely. Concerns of a hybrid geopolitical conflict and a resurge of cyber security issues causes digital risk to be high in EIOPA Risk Dashboard, with macro and market risks also high. However, so far, the EBA's Risk Dashboard shows that capital ratios remain broadly stable while liquidity ratios have only declined slightly.

Against this backdrop, regulatory change is still being planned and delivered, with priorities for the next year becoming clearer. In this quarter's issue, we consider what this may mean for firms.

The European Commission has adopted its Work Programme for 2023, focusing on the delivery of six headline ambitions, of which the European Green Deal and a Europe fit for the digital age will likely have the greatest impact on the financial sector.

The European Supervisory Authorities (ESAs) have also issued their workplans for 2023 and announced or reconfirmed their strategic focus for the medium term. The plans echo the Commission's, with common themes including ESG and delivering the sustainable finance agenda, consumer protection and supporting developments in innovation and digital finance.

All the ESAs will take on oversight roles as a result of the implementation of the EU Digital Operational Resilience Act (DORA). Our article on Managing Critical Third Parties (CTPs) reviews the requirements under DORA and new legislation being introduced in the UK. 

ESMA will also have to oversee the implementation of the distributed ledger technology (DLT) pilot regime, which it has now dubbed DTLR. We look at the structure of other innovation sandboxes around the world and the challenges arising so far from the use of DLT in finance.

Other EU regulations are under review. We consider the impact of the reviews of the Benchmark Regulation on access to third-country benchmarks in the EU.  

Finalisation of proposed amendments to the Capital Requirements Regulation (CRR3), which will implement the remaining Basel reforms in the EU, may still be some months away, but there is much that banks can be doing to prepare. The first article in our “Moving the Dial” series looks at the increasing complexity of capital requirements. 

Regulators around Europe are creating new fund vehicles to offer greater flexibility to fund management companies and investors, and to bolster private investment in illiquid assets. Our article updates on developments regarding the UK Long-Term Asset Fund and European Long-Term Investment Fund regimes, and also considers the growing trend of including crypto-assets in fund portfolios.

Finally, we showcase our new KPMG Regulatory Barometer which aims to help firms identify the key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change. The first edition is available here and we welcome your feedback.