Taking a holistic approach to sustainable finance
The fast-moving pace of regulatory change related to climate change and, latterly, wider ESG issues, creates a significant challenge for FS firms operating across multiple borders. For example, jurisdictional differences in taxonomies make group-wide definitions and product-level disclosures problematic. Cross-border firms will also need to comply with different data and reporting requirements and supervisory approaches (for example, stress testing).
It is important that firms understand and take a holistic approach to the totality of the sustainable finance-related regulatory requirements, in particular external disclosures, that apply across their locations.
Strengthening position - technology investment
Technology is transforming FS and the regulatory approach is central to where and how firms develop their strategy. Boards will need to understand where diverging or different standards could cause complications.
Areas under the regulatory spotlight, where we see differences in approach emerging, include, but are not limited to: payments, artificial intelligence (AI), RegTech, crypto assets and the cloud. In particular, we expect regulation to evolve rapidly in relation to AI as the use of big data and algorithms clearly concerns regulators. This means cross-border firms will need to monitor AI requirements in the jurisdictions in which they operate, as well as where their clients impacted by those AI systems are located.
The EU digital strategy is also an ambitious strategy that covers a host of topics including crypto assets, another area where we see regulation developing and maturing fairly rapidly. Despite the benefits of technology, FS firms may face difficult choices ahead when deciding where and when to invest large amounts in technology programmes, and how to “future-proof” their decisions in the light of regulatory uncertainty.
The winning formula
The challenge now for FS firms is to review their overall legal entity structure in the UK, the EU and globally, aligned with an examination of business strategy. This will help develop a clear picture of how to operate profitably with acceptable returns, in the context of substantial regulatory change and divergence. It will not be straightforward and will require serious investment and board time. Without that level of monitoring, major operational and strategic decisions become more about luck than skill.