Toronto Skyline at dusk, Ontario, Canada

The Canadian financial sector is facing a great deal of uncertainty in terms of the global regulatory outlook, suggests a new report from Deloitte LLP.

According to Innovation in risk management: Canadian regulatory outlook for financial institutions in 2018, the uncertainty stems from the global impact of Brexit, how markets will be reshaped by regulatory reform (such as Europe’s MiFID II regime) and expected turnover atop many of the world’s leading regulatory bodies.

“This will put a premium on firms maintaining strategic flexibility, while at the same time adopting new technologies to react to the threat from ‘challengers’, improve their customer service and outcomes, better manage their risks, and help control costs,” the report says.

Although global economic growth appears solid, there are underlying risks, the report says, including the threat of price bubbles in a variety of assets and markets.

“Supervisors across the globe are very alert to the financial stability risks posed by the political and economic climate, and we expect them to focus on the ability of financial institutions in all sectors to deal with the downside risks of an abrupt shift in market sentiment and any increase in asset price volatility, irrespective of the trigger,” the report says.

In terms of regulatory policy, the report says Deloitte doesn’t expect to see a major rollback of post-crisis reforms. Yet, there are a number of “significant unanswered questions” in terms of bank capital requirements.

Ultimately, “financial services firms need to be prepared to deal with the challenges of diverging regulatory frameworks. At a minimum they will need globally coordinated approaches to understand overlaps, incompatibilities, and potential synergies,” the report says.

Additionally, Deloitte expects regulators to increasingly push financial firms to show that they are dealing with risks that may emerge due to trends such as “technological innovation, aging populations, and climate change…”

The report points out that by the end of 2018, there will be turnover at some of the world’s most important regulatory bodies. For instance, Mark Carney’s term as chair of the Financial Stability Board (FSB) expires at the end of the year. Deloitte also expects the head of the Basel Committee to step down in “the near future,” the report says and there will also be changes atop numerous national and regional regulators.

“On balance we think these new leaders will emphasize practical supervisory initiatives over (new) rule-making, as well as the need for firms to demonstrate that they are financially and operationally resilient to a range of threats, both old and new,” the report says.

“New leaders will be keen to consolidate the outcomes and achievements of the prudential policy agenda that has dominated the last 10 years and focus their tenures on continuing structural challenges as well as emerging risks and issues.”