The result of the UK referendum on its EU membership and the outcome of the US Presidential elections of 2016 have laid the ground for 2017 to be a year of transition for both Europe and the United States. As transitions are often associated with uncertainty, this article aims to provide some insight into the legal and regulatory developments expected to take place during the course of 2017.
European Union and United Kingdom
The UK referendum set in motion a number of actions and preparation regarding the exit of the UK from the EU. However, all EU regulations will continue to apply to UK financial institutions until the UK formally leaves the EU at the end of the exit negotiations. This is likely to be at least two years after March 2017, when Article 50 of the Treaty on European Union is expected to be triggered. Meanwhile, the political environment throughout the EU is rather sensitive, with both the French and the German upcoming elections generating further sources of uncertainty and concern. With that in mind, the main EU regulatory areas to be affected during 2017 are outlined below:
- Financial crime: Financial crime is a high priority for both the EU and the UK. EU member states are required to transpose the Fourth Money Laundering Directive into national law by 26 June 2017, while the European Parliament and the Council of the EU are already considering going beyond this with the Fifth Money Laundering Directive
- FinTech: The General Data Protection Regulation ("GDPR") will have a direct effect in all EU member states from 25 March 2018. Financial institutions will consequently need to prepare in the course of 2017. GDPR may have an impact on FinTech, which remains high on the priority list for both the EU and the UK, and may also affect the transfer of data between EU and third countries
- Individual accountability: The UK Senior Managers Regime and the Certification Regime will be extended to all authorised firms, with the FCA consulting on the precise arrangements. "Material risk-takers" will need to be assessed by firms by March 2017, while the scope of application for Conduct Rules will be extended from March 2017
- Investment funds: The EU Parliament and the Council are expected to formally adopt the proposed Regulation on Money Market Funds ("MMF Regulation") in 2017. The MMF Regulation will affect the requirements relating to the liquidity and stability of money market funds
- Payment services: Member states must transpose the Payment Services Directive 2 ("PSD2") into their national laws and regulations by 13 January 2018. PSD2 will have a wider scope of application compared to the initial directive
- Prudential regulation: During 2017, the Parliament and the Council of the EU will continue the amendment process for the Capital Requirements Regulation and the Capital Requirements Directive IV. Basel III measures will be introduced into EU law to improve lending for small and medium-sized enterprises. Meanwhile, the Basel Committee on Banking Supervision also intends to amend the Basel III framework, leading to Basel IV
- Securities markets: Financial institutions affected by MiFID 11 will spend most of 2017 preparing for the implementation of the new regime on 3 January 2018. Financial institutions will also have to deal with EMIR and any related developments to come during this year
- Retail securities markets: The application date of the Regulation on key information documents ("KIDs") for packaged retail and insurance-based investment products ("PRIIPs") has been delayed by a year in order to enable the RTS on KID to be revised by the Commission. Issuers and distributors of PRIIPs will have to be compliant by I January 2018
- Capital markets union: Despite the fact that the UK - one of the strongest advocates in favour of a capital markets union - voted to the leave the EU, it seems that the Commission intends to move forward with that initiative, even without the UK. Key developments will include political agreement on the proposed Securitisation Regulation and on the amendments to the European Venture Capital Funds Regulation, as well as on the European Social Entrepreneurship Funds Regulation
A number of issues are likely to be affected by the imminent inauguration of President-elect Donald Trump on 20 January 2017 and the new administration, as well as Republican majorities in both houses and the changing political atmosphere in the US. The change of leadership is bound to lead to policy changes and a possible reshaping of the regulatory status quo.
It is still too early to have a clear idea regarding the specific intentions of the new President, but based on President-elect Trump's comments while a candidate and those of his transition team, it is likely that the new administration will seek to simplify the rules relating to lending in an effort to move to a more lending-friendly environment.
On that basis, the operation and organisational structure of the Consumer Financial Protection Bureau, echoing a stricter approach regarding regulation, may be affected. Other key aspects of Dodd-Frank which industry has disfavoured have the potential to be challenged or revised, including:
- The Volcker Rule's prohibition on proprietary trading and covered fund activities by banking entities
- Composition and role of the Financial Stability Oversight Council and one of its primary missions of designating systemically important financial institutions for enhanced capital and scrutiny requirements
- Thresholds for Dodd-Frank's resolution planning requirements
There is also attention on the impact of the Community Reinvestment Act and whether its mandate for credit to lowand moderate-income borrowers and communities had an unintended consequence of weakening banking institutions during the crisis. During President-elect Trump's term, the following vacancies will result from term expirations:
- March 2017 - Thomas Curry, Comptroller of the Currency and FDIC Board Member
- November 2017 - Martin Gruenberg, FDIC Chairman
- February 2018 - Janet Yellen, Federal Reserve Chair
- July 2018 — Richard Cordray, CFPB Director
And still other resignations are often associated with changes in administration.
Moreover, the upcoming departure of Chair Mary Jo White from the Securities and Exchange Commission ("SEC") is likely to have some effect on the Commission's overall direction. Initially, only two Commissioners of opposite parties will remain to deal with the immediate post-election period. Consequently, there may be a pause in new initiatives as well as some uncertainty regarding the SEC's approach to pending investigations, particularly those where the SEC's enforcement staff is seeking to expand existing legal theories of liability.
The appointment of Jay Clayton, a well-regarded M&A and capital markets lawyer, as the new SEC Chair may bring some changes on the enforcement side, but the enforcement approach to mainstream insider trading, fraud and bribery cases is unlikely to be affected. Regardless of who sits in the Oval Office or who chairs the SEC, the fundamental goal of preserving the integrity of US capital markets will likely remain unchanged and the SEC will likely continue to pursue fraudulent activity. As a result the SEC Enforcement Division's focus on potentially culpable individuals will continue and corporations will still be held responsible for violations although proposed penalty amounts may receive more scrutiny as the make-up of the SEC changes with the new administration. In addition, a newly constituted Commission may shift enforcement resources away from "broken windows" technical violations.
On the regulatory side, given his background, the new Chair (assuming he is confirmed by the Senate) of the Commission could lead the Commission to focus on streamlining regulation and easing the process of raising capital. If this is the case, market participants should expect a newly constituted Commission to look for ways to cut "red tape" regulations that make it harder to raise capital while not adding to the accuracy of financial statements. Another possibility is that the new Commission may also look to expand capital raising options and ease perceived unnecessary regulatory burdens on the financial services industry.
There is also speculation that Congress may decide to revisit the size and breadth of powers of the SEC itself, but nothing is certain. Implementation of the Department of Labor Fiduciary Rule, however, maybe delayed, if not repealed, considering that Republicans now control both Houses of Congress.
The CFTC gained significant powers as a result of the passage of Dodd-Frank. While Republican representatives have stated that they intend to scale back that legislation, there is no clear indication that they will target the agency.
Despite the potential mid or long-term change of strategy, the day-to-day regulation and operation of the regulatory bodies is likely to remain largely untouched by the change of leadership, at least in the near future. Moreover, many financial regulations are written and enforced by non-governmental self-regulatory entities such as the Financial Industry Regulatory Authority ("FINRA") and the National Futures Association, which are much less likely to be directly impacted by a change in administration. According to FINRA's examination priorities for 2017, there is no indication that any major regulatory changes are expected. FINRA's priorities for 2017 include protection of senior investors, suitability of products, credit risk, trading patterns, electronic communications and money laundering.
Support for the FinTech sector is likely to remain unaffected, considering that its growth potential is undisputed by both Democrats and Republicans. The focus on cyber risk, data, quality, analytics and reporting, as well as the focus on prudential standards, risk modelling and management are also likely to remain.