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How the New Regulatory Environment Will Impact Financial Business Models

Balazs Fejes

EVP, Banking and Financial Services
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  • Financial Services

January 2018 is a big month for change within the finance industry. For the past few years, firms have been preparing for several major European regulations to come into effect. These regulations cover a wide spectrum of practices in the industry – like accounting, retail banking and trading – and predominantly act as protective measures for financial consumers.

After the financial crisis, regulators aimed toward “enhancing financial stability and managing systemic risk, rebuilding financial institutions and making the financial sector work for the benefit of financial users and society as a whole.”1 Now that the time for day-one compliance has come, financial firms must brace for impact on their existing business models.

Though firms will certainly face challenges in adapting to the new regulatory environment, the changes could easily be viewed as an opportunity to address technology solutions that are key to executing effective strategies.

Take IFRS 9, for example. This regulation outlines accounting rules for financial instruments in three main areas: classification and measurement, the impairment of financial assets credit risk and hedge accounting. While firms have tackled technical requirements, they must still develop proactive strategies that align with the new regulation. More specifically, firms will need to figure out how to address major impacts on reporting, data quality and completeness, information systems and processes, communication and economic models.2

Keeping in mind that these regulations largely protect financial consumers, it seems apt to focus on improving interactions between firms and consumers. Delivering a human-centric experience begins by implementing effective service design, which will help firms understand how each moving part contributes the customer’s end-to-end journey.

Another regulation, PSD2, will fundamentally influence retail banking practices related to payments security and overall consumer protection.3 With PSD2 introducing Account Information Service Providers and Payment Initiation Service Providers, banks soon must deal with added layers of competition and ensure that they not only implement an appropriate business model, but also meet consumer expectations.

With fintech companies pervading the marketplace, traditional banks must act fast with upgrading their business models. One option worth considering involves building applications around banking institutions and utilizing APIs to simplify the programming process, otherwise known as Open Banking. In such a competitive and highly regulated industry, why not simplify wherever possible?

Changes to the trading lifecycle brought on by the MiFID II regulation will require a much deeper level of engagement between financial advisers and banks, as well as market participants. Complying with these strict rules, which were designed to organize processes, and the resulting changes to market structure will inevitably lead to the emergence of new business models. Overall, these adjustments should affect a firm’s conduct and culture.4

For example, how individual orders are processed in a post-MiFID II world will significantly increase the amount of stored reference data and, of course, must support easily accessible best execution evidence. Big data and cloud-based services offer the flexibility and scalability necessary for such a feat.

Moving forward, it’s important for firms to understand the landscape and consider specifically how these regulations will affect current and future business models. If firms fail to take the necessary steps in proactively approaching the new regulatory environment, they risk losing some of the business value they could have gained by responding to the mandate for compliance with business model innovation.


[1] https://www.oecd.org/finance/Banking_in_a_challenging_environment.pdf

[2] https://www.sab2i.com/blog/en/ifrs-9-a-new-regulatory-change-in-2018-are-you-ready/

[3] https://www.evry.com/en/news/articles/psd2-the-directive-that-will-change-banking-as-we-know-it/

[4] https://www.financierworldwide.com/the-impact-and-far-reaching-consequences-of-mifid-ii/#.WcvcQMiGPIU

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