2018 – May You Live in Interesting Times

Next year will be a momentous one for the European banking and insurance industries as legislators have a field day in launching new regulation. Spurred on by “well meaning” politicians with a natural desire to protect the consumer from the ravages of another banking crisis, the EU rule books governing the financial services will be turned upside down in 2018.

Biggies will see the arrival of the Markets in Financial Instruments Directive-II (MiFID-II) and Payments Services Directive (PSD2) in January, the Insurance Distribution Directive (IDD) in February and the General Data Protection Regulation (GDPR) in May.

PSD2 is being seen as a charter for the fintechs promising open banking with full access to all payment information if with prior customer agreement. The main high street banks could see their account information constantly raided by mobile payment operators and the traditional banker-customer relationship could all but disappear. Is MiFID-II a power grab by regulators to ensure that every FSI firm and financial market is supervised and run to a strict set of rules? For the UK, it will provide a Retail Distribution Review (RDR)+ package for retail investment advice in an attempt to ensure optimal consumer protection.

For an insurance sector still recoiling from Solvency-2, the IDD is far broader in scope than its predecessor (Insurance Mediation Directive). It is being called the ‘MiFID of insurance’ and sets rules on product manufacturing and seeks to create a level playing field for distributors. Whilst the IDD replicates many existing UK domestic regulations it will necessitate widespread changes in the FCA handbooks. Of course, all is being introduced under the new Senior Managers and Certification regime ensuring that if anything goes wrong an individual within the organisation will be held responsible. Careers are at stake!

So what does all this mean?

The insurance sector is being brought to heel (for sins it has not committed) and to many a banking revolution is on the cards with the fintechs and new challenger banks to the fore, boosted by PSD2. A revolution? I wouldn’t bet my last £5 on it. Bank bashing is a vote winner but dabbling in an individual’s banking arrangements is a different matter. PSD2 may be demanding open banking but it appears public opinion in general is not thrilled by the prospect of freedom of access even if prior permission is required. Recent Cyber breaches won’t help consumer confidence.

The new GDPR will be welcomed as it is all about restricting access and limiting information in direct contrast to PSD2. The existing Data Protection Act has been around in the UK since 1998. It has served us well but there will now be sweeping changes. The GDPR requires businesses to protect the personal data and privacy of EU citizens for transactions that occur in any of the EU member states. Non-compliance could cost companies dearly with fines of up to €20 million or 4% of annual turnover. We should also not forget the fears generated by cybercrime. It is a major barrier to the expansion of online business and the proliferation of mobile payments.

Regulation has a cost and ultimately it is the consumer that pays. Despite the best of intentions, we should remember that these new EU directives are based on compromise, designed in a silo and now always delivered to an impossible timetable. Brexit will also add another layer of unwelcomed complexity. Simple, proportionate and cost-effective regulation for the financial services is not on the cards. For the consumer, 2018 may well be the year of the white elephant.

Jon Murphy is Managing Director at Limehouse Consulting.

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