Sat, Jan 24, 2015

Regulatory change in the year ahead

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If the financial services industry has not grown to love regulation, it is starting to accept it, according to our Global Regulatory Outlook (GRO) 2015. The report includes survey responses collected from nearly 300 financial services professionals from around the world asking about the industry’s expectation of the key regulatory developments impacting business through 2015 and beyond.

Industry reaction to regulation

Following the significant regulatory changes in recent years, 2015 will likely be characterized by how firms address the challenges of newly implemented requirements. The survey findings from GRO 2015 show increasing acceptance of the role of recently introduced regulation. More than one-third (39%) of senior executives (and 38% of non-executives) now say regulation is promoting stability in the financial services world. This figure still represents a minority, but it is up from 30% last year and just 19% two years ago. The proportion of survey participants believing that regulations have little or no impact has shrunk over the same period, from almost two-thirds (63%) to under half – at 48% – today.

This softening in attitudes reflects a number of factors, two of which particularly stand out. First, there has been growing confidence in the industry, despite recent market wobbles. The majority of the big US banks have reported strong third quarter profits (Emily Stephenson and Susan Heavey: “US bank earnings rise to $38.7bn in third quarter 2014 –FDIC,” Reuters). In the UK, despite some struggles, the Office of National Statistics’ (ONS) recent figures show that financial sector profits are back to their pre-crisis peak and, most eye-catchingly, bonuses are at their highest rate since the crisis.

With profits and bonuses strengthening, it is difficult to argue that regulations are undermining the industry to any significant degree. However, 11% of all respondents in the GRO 2015 survey do believe regulations have made the financial services world less stable.

Regulation in reality: from concept to practice

There is a second factor likely to be tempering firms’ concerns: regulators and the industry have moved from debating and drafting legislation to implementing and enforcing it.

Of course, that is not without difficulties for firms. Despite some criticism, the US Securities and Exchange Commission (SEC) shows no appetite to abandon its ‘broken windows’ approach to regulation, cracking down on even minor infringements. Meanwhile, in the UK Bank of England Governor Mark Carney has publicly lamented how executives at large banks largely emerged from the 2008 crisis unscathed without sanctions. The Daily Mail quoted him stating: “Bankers caused the crash and got away with it.”

However, the flipside is that firms are now operating increasingly in a post-implementation environment. The focus has shifted from assessing proposed regulation to planning how to meet requirements currently in place. In short, they have greater certainty. There are a portion of industry professionals who support making executives criminally responsible for the actions of firms. Whilst the majority of survey respondents still believed it would be a bad thing, nearly a quarter (23%) of senior executives (and 33% of others) backed the idea, as opposed to 40%, who say it will have a long-term negative impact.

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