Global finance is an ever-changing and complex system. In 2023, five key factors will be influencing the global financial market. By understanding these top 5 factors, you can stay ahead of the curve and make informed decisions about your investments. Let’s explore how each factor plays a role in global finance.
By every standard, 2022 was a challenging year for Europe. Inflation that is out of control, energy security, a war on the continent, and even a corruption scandal in the European Parliament. The political landscape will remain dominated by these issues because they are not going away. A crucial year for the financial services industry and its policymakers will be 2023, though.
2023, which comes before 2024, will be a fascinating year. Despite the fact that it seems clear, a new European Parliament, Commission, and, most likely, UK general elections will all take place in 2024. (Not to mention a Presidential election in the US). The present Commission’s program will be the emphasis in Brussels, and the UK’s current government will be working hard to convince lawmakers that it deserves to have a longer-term in office.
Policymakers will be under increasing pressure to take action, thus this will require constant observation. Whether acting directly or indirectly, businesses should be prepared to influence the process.
Competitiveness
Even if there has been some warming in relations in 2022, the competitiveness of different jurisdictions has emerged as a major problem as the UK and EU continue to live under the shadow of Brexit. The Financial Services and Markets Bill in the UK will give regulators a secondary goal to take into account the competitiveness of the UK. The Edinburgh reforms, a regulatory approach announced by the UK government, are another example. These primarily centre on changing undesirable aspects of the UK system that have been labelled as exploiting Brexit freedoms. Ironically, some of the most visible reforms were implemented in areas unrelated to EU law, such as ringfencing and the senior managers’ regime.
A rule in the EU wants to give the single market “open strategic autonomy.” By reducing reliance on “third nations” like the UK, this ambiguous designation aims to increase the efficiency of the single market and the competitiveness of EU businesses. Tech and data will play a key role in the EU’s regulatory activities in 2023 as it seeks to make real headway on its Capital Markets Union agenda.
Although a regulatory focus on competitiveness may seem appealing, there may be resistance because of the financial crisis, which occurred before competitiveness was a regulatory goal. Additionally, authorities in Europe have a poor track record of fostering innovation and data-driven change, so particular attention will need to be paid to this.
Crypto
The year 2022 has been termed the “crypto winter” because of the sharp drops in the value of cryptocurrencies and numerous well-publicized failures in the space, like FTX and Terra. This has created a conundrum for European policymakers. Because of the emphasis on competition, some individuals wish to embrace this ground-breaking technology, which many people still think has a promising future. However, certain institutions are having trouble sleeping due to the risk to investors, the instability of the economy, and even the capacity to monitor and regulate the money supply.
When it comes to creating regulations, the EU is, as usual, in the lead globally. MICA, its hallmark rule, has been agreed to and is prepared to become law (although it will be some time before it needs to be adhered to). The ECB is now putting up a group on regulation creation, and the EU has progressed its work on digital currencies.
In a similar vein, the UK is getting ready to hold consultations on digital currency and crypto asset legislation. New regulation is not anticipated in 2023, with the exception of new authorities pertaining to financial promotions. But in 2023, the course will be decided.
It will be interesting to watch if the UK and EU take similar tactics. An ecosystem of competition where each jurisdiction tries to lead the way in, say, blockchain adoption or central bank digital money might develop. In a drive to advance, this could result in concerns regarding intended outcomes when regulatory measures are not well considered.
Additionally, there’s a chance that excessive caution will impede the sector’s growth in Europe. It will also be interesting to observe how the UK and EU resolve the conflict between people who want an atmosphere that is focused on technology and regulators who will be extremely concerned about the risks.
Sustainable development and effective finance
Governments have been concentrating on how private sector funding may be used for public policy reasons and how investors can be convinced their money is used for such purposes in an environment where public budgets are under extreme stress. This is most obviously demonstrated in the regulation of climate change, where many businesses doing business in the EU are finding it extremely difficult to comply with the remarkable variety of laws the EU has put in place, including the Taxonomy and disclosure requirements. The UK is following its own agenda, and an ambitious strategy is being devised, where the departure from EU regulations poses its own difficulties.
Additionally, there are plans to look at how regulatory changes may boost sustainable investment and, in the UK, other policy goals including levelling up and fostering innovation. In public debates held last year, the contenders for UK prime minister discussed how Solvency II and other regulatory changes should be utilised to encourage more of this kind of investment in the country.
For the businesses that are affected, changing regulation in the EU and the UK will bring risks, burdens, and possibilities. Although it will probably be challenging to comply with new disclosure standards, altering the investing rules could work in certain organisations’ favours. Businesses should make sure politicians are aware of what is realistic and efficient.
Energy
Given the events of 2022, energy affordability and security are now primary priorities in Europe, and policymakers have moved quickly to help consumers and markets. There are three primary issues with financial services. Can investment levels be raised in order to lessen reliance on fossil fuels in general and Russian gas in particular? Second, have markets served European consumers effectively? Third, as seen in markets like the London Metal Exchange, may the turmoil on the energy market affect the financial markets?
The first of these three worries has made it more urgent to establish a regulatory framework to boost investment in non-fossil fuels (as described above). Regarding the second argument, there has been a growing desire for government direct market intervention, particularly in the EU. For businesses involved in the energy industry, this is extremely unsettling because price controls and financial instruments created by the public sector (such as price benchmarks) have the potential to stifle competition and damage consumer confidence if not calibrated properly. Policymakers will require a lot of support because they lack specialised knowledge.
The third point—that risk is shifting from the energy sector to the financial market—is also going to be difficult, especially for businesses that choose not to operate under the weight of financial regulation. Without adequate calibration, these measures could raise operational expenses on the energy markets and, ironically, result in higher energy prices.
Financial misdeeds
Finally, authorities will concentrate on finding ways to lower financial crime rates and protect investors. The story has included investor losses brought on by the drop of cryptocurrency values, but there have also been a series of misspelling scandals that have humiliated regulators and eroded investor confidence. We may anticipate that the FCA will improve the strategy it is taking to protect consumers in the UK. Regulation that tightens the standards for banks and social media service providers could also assist prevent scams.
A set of anti-money laundering policies are being developed in the EU to provide a more uniform approach across the single market and to establish a new EU-wide regulator to improve supervision. For those included in the scope, this probably means higher compliance and due diligence costs.