Financial Services end of year review—a look forward to 2016

Our panel of experts considers what lies ahead for financial services lawyers in 2016.

The experts

Chris Finney, partner, Cooley

Caroline Bystrom, professional support lawyer, Taylor Wessing

Chris Ratcliffe, associate, Taylor Wessing

David Troman, head of financial services, PA Consulting Group

A view from the market

What are your predictions for 2016?

David Troman: Rising customer expectations and the emergence of new competitors. While ignoring innovation may get incumbent companies through the next few years, it is not a sustainable business strategy for the longer term. The FinTechs are disrupting traditional approaches in areas such as payments and peer-to-peer lending. The competition is only set to increase as the majority of European FinTech investment comes to London.

Digital will be key to success. Although larger and established banks are using digital technologies to expand their delivery options, they are invariably still burdened by decades-old IT systems. They will need to overcome this in 2016 as FinTechs and challenger banks not only avoid these legacy problems, but often have digital at the core of their business models. This will increasingly give them a competitive advantage and will be a key issue for the industry in 2016.

Utilities are the next step in simplification. In search of efficiencies, financial institutions will have to do what other industries already do and develop utilities that can serve multiple institutions rather than each of them providing every service. Insourcing is also an option, where there is no competitor advantage.

Attracting talent will be a key challenge in 2016 as financial institutions face being side-lined for the tech industry. Financial institutions used to be able to pick the cream of the graduate crop. With the explosion of the tech industry, this is no longer the case. The industry needs to work out how it will attract—and retain—the top talent and compete with the likes of Google, Facebook or even unknown but exciting start-ups.

Legal developments and practical impact

How is 2016 shaping up in terms of important cases and legislative developments?

Chris Finney: There are a few things that are still perhaps a few years away, but which people will be starting to prepare for and look at in more detail.

The Second Payment Services Directive and the Insurance Distribution Directive. Neither of these new regimes is complete, but I think in 2016 the relevant industries will start to think about the impact the rules will have on them, before beginning to prepare for compliance.

The Fourth Anti-Money Laundering Directive 2015/849/EC—recently, there has been some suggestion that the European Council will be calling on the European Commission to accelerate its work on money laundering and terrorist financing after the Paris attacks, with a particular focus on virtual currencies. I’m not sure whether there is some suggestion that virtual currencies were used to fund the Paris terrorists, or if Europe’s thinking is that if it makes it harder to move money, it will hamper the ability of terrorists to carry out more attacks. Either way, I’m expecting more developments there too.

Solvency II will be bedding in. People may think they have understood it, but when they have worked with it on a practical level, they may start to question if they have understood it correctly, or if their current ways of complying with it are actually sufficient. It’s really a shift to business-as-usual working—it might mean a change in work, but no change to the rules.

We have already had conversations about the risks involved in a UK exit from Europe with our clients, but I expect these kind of conversations will really come to the fore next year. The impact on the financial services industry if the UK left the EU would be huge, and there will be a lot of contingency planning to do to prepare for such an eventuality.

How will these developments affect your cases and working life?

Chris Finney: I think my workload next year will be reasonably equally split between Solvency II business-as-usual-type activity, and fund manager work as more third-country fund managers come back to Europe. The Brexit threat will loom large though. When we know the date of the actual vote, as we get closer to it, and if opinion polls suggest it’s tight, it could overtake everything else.

What would you like to see in 2016?

Chris Finney: It would be great if the UK regulators walk the walk on virtual, digital and crypto-currencies and start to bring forward some regulatory proposals. The UK has a great tech and FinTech industry—there are lots of people with great ideas, people who want to invest and innovate, and we have a government that is very keen to be a world leader in this area, but our regulatory framework is lagging behind. I would like to see some sensible and proportionate enabling legislation or rules made so people can make the UK what the government says it wants the UK to be.

Chris Ratcliffe and Caroline Bystrom: Technology will continue to be instrumental. An area of interest is robo-advisers. As millennials have come of age in a digital environment, they are looking instinctively for digital and mobile solutions and the next new thing. They apply this quest to financial services as well. Combined with the Financial Conduct Authority’s (FCA) Retail Distribution Review, which has caused a bit of a gap in the market and the new pensions freedoms, a lot of people need financial advice, but face the question of affordability. This combination of inclination and need, together with improving technology will help firms properly explore providing effective and palatably priced services to this sector—the automated nature of the robo-advisor model allows smaller investment sums to be dealt with in a cost-efficient way. We hope the FCA continues to work on facilitating this trend.

Current governance and control requirements in the financial services sector do not appear to lend themselves to some other trends, such as crowdsourcing and other forms of modern working practices. As such, methodologies are prone to emerge rapidly, perhaps even chaotically, with room for high-profile information security issues and concerns about probity and oversight. We hope the UK’s regulators provide guidance to firms on this, similar to the finalised guidance we expect in early 2016 on use of the cloud (see GC15/6). Small print in legislation such as MiFID II (Directive 2014/65/EU) needs to be factored in—will the firm be able to meet their record keeping, monitoring and recording obligations with an agile workforce? FinTech firms are likely to be more permissive to new ideas and are possibly at most risk of any side effects.

2016 can be the year of proportionate regulation! Regulation should be flexible and versatile with a strong practical bent. 2016 presents the chance for regulators to demonstrate their intelligence and talent for solving the conundrum of the complexity of the steady flow of regulation we are seeing. Properly differentiating the compliance burden for smaller firms would very much help the drive for innovation. The RegTech call for input is useful, and we would like the FCA to indicate where firms should focus their drive for innovation in RegTech. We hope the FCA will help firms in some traditional ways too—giving more upfront guidance in the Handbook (eg updating and enhancing the Perimeter Guidance Manual). Nothing should be ruled out.

Clients and business development

How might the expected developments in 2016 affect your business and clients?

Chris Finney: The continuing Brexit risk will be one of the biggest concerns for our clients. Because so much financial services law originates from or is integrated with European law, they may even be considering leaving Europe. If the UK left the EU, business could be lost or groups restructured. There would also be risks to existing contracts, and day-to-day business that is already in hand would be thrown into disarray. It will be an enormous job to work out from business to business what the impact of Brexit would be, how businesses can plan for it, and how they can survive and thrive in a new world—and all this when we have possibly two more years of uncertainty, if nothing else.

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.