City firms are facing increased regulatory pressure, according to new research shared exclusively with City A.M., as the UK and EU diverge on financial services rules.
The burden of regulation for financial firms in both the UK and EU has risen to an aggregate score of 7.3 out of 10, up from 7.2 in September, according to KPMG’s latest Financial Services Regulatory Barometer.
The news comes as some firms have hit back against what they argue is over-regulation from financial watchdogs that could hurt profitability and competitiveness.
Financial resilience has overtaken ESG and sustainable finance for the first time to become the barometer’s highest-scoring regulatory theme, coming in 0.1 higher at 8.5.
Banks’ profits are expected to take a hit from the implementation of the UK’s final Basel III rules, due next July. The sector is also facing new proposals to mitigate bank failures in the wake of Silicon Valley Bank’s collapse last year.
Meanwhile, the insurance industry has reportedly warned that new powers handed to regulators as part of the government’s overhaul of the EU’s Solvency II regime could hamper their ability to bolster investment in the economy. Both banks and insurers also face new requirements for solvent exit planning.
Despite falling 0.1 to second place, KPMG said the 8.4 score for ESG and sustainable finance remained “very high”, with a heavy focus on greenwashing, expanding reporting and disclosure requirements and lower tolerance from supervisors.
Philip Deeks, head of KPMG’s Regulatory Insight Centre, said: “Political and regulatory agendas are becoming increasingly intertwined. Some regulators are applying more flexible and proportionate approaches, but as we see in the Barometer, progress takes time. Regulators must strike a balance between reducing the regulatory burden while promoting safety, soundness and consumer protection in an unpredictable world.
“We expect to see further compromise going forward and ultimately a tapering of regulatory pressure. In that sense, there may be something of a pendulum swing – but novel risks mean that regulation will necessarily keep evolving. The difference between good and bad regulation will be whether it achieves the intended outcomes without unnecessary cost, complexity or commercial implications.”
Other areas highlighted by KMPG included the challenges of implementing the Digital Operational Resilience Act by January 2025, and the expansion of regulatory remits and greater supervisory focus on corporate governance.
Concerns around corporate governance clocked the biggest jump, rising to 6.9 from 5.2 since September.
KPMG said the increasing divergence between UK and EU rules in the wake of Brexit remained a “major issue” for British firms doing business in Europe.
Michelle Adcock, director in KPMG’s Regulatory Insight Centre, said: “While the new joint EU-UK Financial Regulatory Forum aims to improve the current situation, many of the decisions on divergence are political rather than regulatory.
“With elections in both the UK and EU this year, the future direction is unclear. In the meantime, the UK has started to look for routes other than equivalence to access other markets – for example, the Mutual Recognition Agreement with Switzerland.”