Regulation in review: part 2

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Regulation in review: part 2Following on from David Shinkins' review of the swathe of new regulatory developments that are affecting banks and FinTech companies, Sat Khuntia, Head of Transactional FX for Corporate Banking at Barclays, looks at the extension of new key regulations and what they mean for business.

The following review will seek to provide further insights into these new regulations and their business implications, spanning money laundering, investor protection, and capital and liquidity management:

• Revised Wire Transfer Regulations (WTR2)

• Regulation on Packaged Retail and Insurance-BasedInvestment Products (PRIIPs)

• The second Markets in Financial InstrumentsDirective (MiFID II).

Revised Wire Transfer Regulations (WTR2)

WTR2 took effect in the EU on 26 June 2017, alongside the fourth Anti Money Laundering Directive. The regulations upgrade earlier regulations that were enacted to counter money laundering and terrorist financing. They aim to make payments traceable by requiring payment service providers to supply information about individuals making electronic payments. The revised regulations have a broader scope than their predecessors, covering transfers of funds via card payments and e-money payments below €1,000, both of which were outside the scope of the previous regulations.

Implications for corporates: These regulations will not have direct implications to Corporate clients as the ask is on the Payment Service Providers to include the required information of the Payer and Payee. This obligation on PSP’s may result in a need to update information stored about the Corporate and / or the information that is asked for when processing a payment to specific countries

on a case by case basis. However, the regulations have prompted a review of how we support complex Treasury models. Specifically, the payment processing of Shared Service Centre, Payment Factory and In-House Bank models are considered more closely. Those Corporates that operate such models may be consulted over time as a result of this review.

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Regulation on Packaged Retail and Insurance- Based Investment Products (PRIIPs)

Although PRIIPs are investment products that are typically offered to retail investors, the available information on them has tended to be overly complex. The regulation on PRIIPs, effective from 1 January 2018, aims to help retail investors better understand and compare the key features, risks, rewards and costs of different PRIIPs. It does this by ensuring that they can access a clear, concise key information document (KID), supplied by the institution that produces the investment product, before any transaction is executed.

The PRIIPs regulation builds on the undertakings for the Collective Investment of Transferable Securities (UCITS) regulatory framework to enhance investor protection for products across asset management, banking and insurance. Under the regulation, a retail investor who can demonstrate a loss as a result of relying on a KID may be able to claim damages from the institution that produced the investment product. Where a KID is found to be misleading, inaccurate or inconsistent, the institution responsible could incur fines of up to €5 million or 3% of its total annual turnover.

Implications for corporates:

As well as providing clients with essential information such as a product description, costs, potential risks and performance of the product, the standardised nature of the document is designed to make it easier for clients to compare similar products, and in scope products offered by other providers, thereby promoting transparency and ultimately investor protection.

Second Markets in Financial Instruments Directive (MiFID II)

MiFID II has been effective since 3 January 2018. It replaces the first directive (MiFID I), which came into force in 2007, with the aim of removing barriers to cross-border financial services within Europe, harmonising the financial markets and protecting investors. MiFID II is intended to further boost transparency and investor protection while enhancing controls to prevent market abuse and addressing previously unregulated areas. It focuses on the trading venues on which financial instruments are traded, while its accompanying regulation, MiFIR, regulates the operation of those venues.

While MiFID I was predominantly aimed at the equities market, MiFID II is much broader in scope and covers almost all financial instruments, except for FX spot transactions. MiFID II also extends many of the requirements previously associated with equities under MiFID – such as pre and post-trade transparency – to non-equity instruments. Furthermore, it requires investment firms to deliver a higher standard of best execution and to abide by new product governance rules and transaction reporting obligations.

Implications for corporates: MiFID II directly affects investment firms, trading venues and other trading venues. Most non-financial corporates will be unaffected by the regulation, with the exception of companies that trade commodity derivatives, emissions allowances and related derivatives. These companies will fall within the scope of MiFID II unless they can secure an exemption on the basis that dealing in commodity derivatives is ancillary to the main business of the group.

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Other regulatory developments

Banks are also being affected by a number of other regulatory developments in the UK:

• The Senior Managers’ Regime – this regime, which came into effect in March 2016, increases the personal accountability of people working in the financial services industry

• Ring-fencing – from 1 January 2019, banks must legally separate their retail banking businesses from their investment banking businesses

• CASS 7 client money rules – these rules, enforced by the Financial Conduct Authority, apply to banks and financial institutions that hold money on behalf of their clients. From 22 January 2018, banks have been able to place client money in unbreakable deposits with terms of between 31 and 95 days.

Summary

Recent regulatory changes have impacted banks in several important ways. To comply with them, banks have had to overhaul their processes and make significant investments in people and technology. They have embarked on new partnerships with FinTech start-ups and payment services providers, reviewed their business models, and changed the way that they think about capital and liquidity. They have also committed to large-scale cultural change within their organisations, with the aim of creating accountable, responsible cultures that are geared towards data protection, innovation and meeting customer needs.

If you want to find out more about how regulatory developments are affecting banks, and the implications of those developments for corporates, speak to your Barclays Relationship Director.

About the author

Sat Khuntia is currently a Director of Corporate Banking FX in London. He has worked extensively with corporate treasuries across industry sectors in the UK, Europe and other international markets.

In his current role, he leads a global team which consults with corporate treasuries to help them effectively manage their cross-currency flows and optimise the FX risks involved.

He has an MBA from London Business School and Mechanical Engineer from NIT, India.

Sat Khuntia Head of Transactional FX Sales

Barclayscorporate.com

Every attempt has been made to ensure that the information provided is accurate. However, neither Barclays Bank PLC (“Barclays”) nor any of its employees makes any representation or warranty (express or implied) in relation to the accuracy, reliability or completeness of any information or assumptions on which this document may be based and cannot be held responsible for any errors. No liability is accepted by Barclays (or any of its affiliates) for any loss (whether direct or indirect) arising from the use of the information provided.

Barclays Bank PLC is registered in England (Company No. 1026167) with its registered office at 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority (Financial Services Register No. 122702) and the Prudential Regulation Authority. Barclays is a trading name and trade mark of Barclays PLC and its subsidiaries.

Item Ref: BM403695. July 2018.

Read our Regulation in review: part 1 article.