Digital resilience key on regulatory agenda in 2021

By Tony Zhang|15 December 2020
Digital resilience

Digital resilience will be firmly on the regulatory agenda for 2021 along with a focus on post-pandemic recovery, according to a new report.

According to the new report FSR Outlook 2021 from Herbert Smith Freehills global financial services regulatory (FSR) team, there will be an increased focus on digital operational resilience from regulators in response to the pandemic, as well as a heightened emphasis on how financial systems can best help support the global economic recovery.

Drawing on its global expertise from across its network, the firm examined some of the most pressing areas of focus for the financial services industry in 2021.

“It looks set to be another interesting and challenging 12 months for firms and individuals in the financial services sector,” Herbert Smith Freehills global head of FSR Jenny Stainsby said.

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“As we all know, 2020 has been dominated by COVID-19, political uncertainty, and the preparations for Brexit – which will likely cast a long shadow over 2021. Our Global Outlook for 2021 draws together the collective thinking of our leading global financial services regulatory practice on themes that we see as at the top of the global regulatory agenda in the next 12 months. 

“Alongside the never ending stream of regulatory change, at international and national levels, the risk of enforcement comes from many directions in a world where regulators themselves remain under the spotlight.”

The study found that firms may be concerned that with operational resilience they are facing yet another large-scale implementation programme. However, at both the conceptual and the practical level, it is more “evolutionary than revolutionary.”

As a result, companies will need to join the dots across a range of existing risk management and governance requirements, including cyber security, data management, business continuity, outsourcing and culture. 

“Operational resilience should not be the kind of policy juggernaut which flattens the business. Rather, firms should be encouraged to view operational resilience concepts as enhancements to day-to-day business management which contributes to long term sustainability,” the report analysed. 

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“The elevation of ‘operational resilience’ to the top of the regulatory agenda represents the next phase in the evolution of financial services regulatory policy.

“Post-crisis regulatory reforms such as resolution frameworks and recalibrated prudential requirements have driven efforts to improve clarity around bank structures. 

“This in turn facilitates better governance and risk management oversight – disciplines which themselves have been reformed in some jurisdictions via the introduction of individual accountability regimes.”

The report revealed that regulators are testing firms and issuers’ market abuse risk management systems, including whether they are able effectively to monitor employees working from home to prevent and detect market abuse. As regulatory forbearance wanes, the report analyses that supervisory and enforcement action is likely to follow. 

The publication also discusses heightened focus on the environmental, social and governance (ESG) framework. To date, much of the focus has been on the disclosure and reporting of ESG performance, but policymakers have started to map out a more ambitious regime with wider-ranging consequences for firms.

“There will continue to be changes to the regulation of the payments market and the very infrastructure on which payments are made,” the report found.

“Individual accountability will remain a priority for regulators globally and investigations involving individuals are set to continue to increase in number.

“As legislators and regulators wrestle with solutions for tough legacy, firms will face regulatory scrutiny of their preparations for the demise of LIBOR benchmarks.”

Digital resilience key on regulatory agenda in 2021
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