In many respects, 2016 looks to be a continuation of forces set in motion during 2015, which means it will be a challenging year. One of the main challenges will be dealing with continued uncertainty – with political change in the U.S. (regardless of who wins the election), geopolitical instability, shifts in the global economy, and a continued focus on revising the rules of the road. Uncertainty is always difficult in and of itself and, unfortunately, this time it looks as if it might lead to more intrusive regulations. With this in mind, we offer eight predictions for 2016.
1. Global financial regulators, concerned that they are becoming less relevant as a result of their own rules, which have focused on pushing financial transactions out of regulated entities and into non-banks, will rethink the rules as they reach for new turf in 2016. Our hope, which is far from certain, is that the public will engage in a meaningful discussion so that the purpose and reach of the regulatory framework will be clarified. Attempting to fully protect all market participants from themselves leads, in our eyes, to a controlled economy that is inconsistent with capitalism and risk-taking.
2. Regulators concerned about their own relevance (see above) will engage in a frenzy of information gathering. Also, as the significance regulators place on reports increases, their efforts to drive timely and accurate reports will grow. 2016 will not be a year to dismiss reporting requirements, which often contain criminal penalties.
3. Regulators will respond to a growing focus on terrorism with an emphasis on areas with which it overlaps, such as cybersecurity, sanctions, and AML concerns. Pending legislation in the U.S. and the E.U. is poised to address cybersecurity concerns. While we await FinCEN’s adoption of new regulations extending AML requirements to asset managers, New York State has expressed concern with the “serious shortcomings” in the existing programs of already regulated financial institutions. Take any new requirements on the AML front very seriously and get ahead of them; this is not an area in which to drag your feet.
4. Should revenues tend to shrink, the search for new taxing sources will continue. Some see investment managers as clearly in the line of fire, with campaign rhetoric likely to be louder in 2016 than in years past. Carried interest will continue to be a lightning rod, followed by “populist support for a financial transaction tax.” Combating offshore tax evasion, The Common Reporting Standard goes live in “early adopter” jurisdictions January 1, 2016; and the U.K. also is adopting tougher sanctions for tax evasion.
5. Regulators and legislators have been busy criminalizing many activities, and this is likely to continue. With zero tolerance for missteps in certain areas (such as spoofing, in which the problematic behavior comes close to approaching normal market activities in the eyes of some), the best protection in such an environment is a good compliance program containing reasonable procedures. Also, senior management should focus more broadly on two areas: ethical behavior and conflicts. As to ethics, the line between normal market practices and illegal obfuscation continues to blur – now is the time to be more attuned to how an action will look in hindsight; conflicts have been a hot topic with the SEC throughout 2015, ending with a $267 million settlement from JP Morgan for a conflicts-related action.
6. Market innovators will continue to reshape the financial landscape. Whether innovations will involve the use of blockchain technology in new and innovative ways (making existing clearing systems irrelevant, for example), the computerization of treasuries trading, the advent of machine learning as a way to trade or monitor email compliance, or something we have not yet heard of, expect the innovations to continue – and expect them to be plagued by friction generated by regulators trying to assess how the new technology impacts their long-standing goals and turf.
7. The U.S.’s increasing income divide is shaping up to be a central issue in the 2016 election. The democratic frontrunners are attuned to public sentiment and they are clamoring to distance themselves from Wall Street. The risk here is that all sorts of firms get lumped under the Wall Street umbrella.
8. 2015’s focus on the ethics of gatekeepers, including outside counsel, will continue into the New Year. The current year ends with a “big bang” on this topic as prosecutors and the SEC demonstrated that they would hold attorneys accountable if advice crosses a line.
This same trend is also apparent for other trusted advisors, such as accountants and audit partners. The challenge in 2016 for all gatekeepers will be to be prudent but not unduly cautious.