Too Much of a Good Thing?

Read Global Regulatory Outlook 2018 

Regulatory developments in the coming year are unlikely to change many minds. With the start of 2018, we have seen not only the long-anticipated introduction of the Markets in Financial Instruments Directive (MiFID) II but also implementation of the International Financial Reporting Standard (IFRS) 9 amongst other changes the coming months and years are bringing many more.

The complaint about much of the regulation implemented since the financial crisis is not just the costs, but also the efficacy. There is no doubt that huge investments and advancements have been made in both compliance arrangements and regulatory oversight in recent years, but many respondents are yet to see the full impact and return in terms of greater protection for investors and a more stable, secure financial system—at least in comparison to the additional work and costs involved.

It is, however, possible to argue that a key aim of financial regulation in the last decade is in fact slowly being realized: cultural change. Individual accountability is providing real incentives on those held responsible to ensure appropriate behaviors (and competence) across their firms. In particular, the Senior Managers and Certification Regime (SMCR) in the United Kingdom is starting to have a profound impact. It is already driving cultural change in the banking industry to which it applies, with plans in place to extend the regime to insurers in December 2018 and all other Financial Conduct Authority (FCA) regulated firms in 2019. While there is yet to be an SMCR enforcement case, a Freedom of Information Request last year to the FCA made by Allen & Overy showed that a small number of SMCR investigations were open. Given the regulator’s strong focus on individual accountability as a key part of its regulatory framework and to maintaining market integrity, we may see the first case come to light in the near future. When this occurs, the industry will start to build a better understanding of regulatory expectations and how the rules impact senior roles; and crucially, continue the cultural shift as intended.

Nevertheless, for some firms, there is evidence that even where there is a genuine desire to comply, the weight of regulation is proving a practical obstacle to doing so. Compliance and Risk are facing unprecedented challenges to stay on top of changes whilst delivering business as usual activity. We see this most clearly in the cases of retaining talented staff leaving roles after short periods or in some cases, the industry as a whole.

Of course, much of the regulation in recent years has been necessary to address past faults. But in continuing to layer on ever-more requirements to firms, governments and regulators are increasingly in danger of seeming to want to test this approach. In any case, this volume cannot continue indefinitely.

Ultimately, it may impact some jurisdictions’ competitiveness, as well as the intended spirit and outcomes of the regulation’s principals being lost.

With regulators and industry working more closely together and the cultural shift continuing, we may in the future start to see a move away from the continuous implementation of new rules. For example, on making better use of technology to monitor conduct and market behaviour, regulators are using tools currently at their disposals but in more enhanced ways combined with greater regulatory collaboration across borders to streamline regulation, as seen in the airline industry. Innovation and business must still be allowed to flourish; without it, we will all be worse off.