‘Regulatory pressure’ has been the byline of financial services life in recent years, serving as context to any client presentation or business case, colouring executive briefings and being more omnipresent than the weather. Yet, it was a comfortable pressure, as it turns out. But hindsight is 20-20.
For a time after the crisis, regulators were indeed mounting the pressure to do more of what was already meant to be happening, but better. “More” and “better” felt like a big ask at the time, but behind closed doors I suspect a lot of the citizenry of key FS players would happily go back to those days. Because “more” and “better” have now acquired a new friend, and this friend is “different”.
New regulations are coming down the pipe thick and fast, and with increasing sweep and complexity. Project teams are being put together across the relevant departments in business and compliance on a regulation-by-regulation basis. Project deliverables are worked out backwards from the timeline imposed by each regulation, in line with the starting point imposed by the existing technology and business practices of each bank. Conferences are organised, white papers are published, steering committees and MIS packs are planned. Things are busy. People are swamped. Deadlines are missed. Fines beckon.
The complexity of complying with each new regulation is staggering. Surely the regulator can see that? Yes. Yes, they can. They can also see that banks are stubbornly and determinedly doing it wrong, because let’s face it there’s an elephant in the regulatory room, a that elephant is called “different”.
Consistent vision of the future
MiFiDII has become an industry in itself. PSD2 comes with its own library. Basel III has sustained entire departments across the industry. And so on. But across all regulatory movement, from CASS to Solvency II, from IDD to Basel III and of course MiFID II and PSD2, the detail is rich and complex but the intent simple and stark. Each regulation is part of a whole, pursuing the same set of goals, driving towards the same, consistent vision of the future:
- Prudential regulation makes over-leveraging, co-mingling of assets and balance sheet acrobatics a thing of the past. Wild flights of imagination and abstract mathematics masquerading as risk-hedged investment or insurance strategies are no longer part of the way we do business.
- Successive pieces of regulation have specifically shifted the focus away from putting the regulated entity at the centre of the landscape towards putting the individual being served at the centre of their thinking. Consequently, regulation protecting the interests of individuals has changed in tone and focus: services and fee structures have to be simplified, obfuscation is no longer an option. Access becomes a priority and choice uppermost; real choice, expressed in simple, accessible language with simplified fee structures and legal guarantees for a competitive landscape of multiple providers with unfettered entry.
- Finally, the era of data protection through black boxes and heavy vault doors is over. Data protection is now married to transparency, openness and visibility; secured but uncompromising in the demands for disclosure, not just to the regulator but to the user and the user’s chosen partners.
Things are different
The three themes are simplifying exceptionally convoluted pieces of legislation, but home in on the key themes that demonstrate that the regulatory landscape has changed forever. It has done so with an incredible degree of internal consistency and purpose, and what seems like an avalanche of different things is actually an extremely detailed but equally constant refrain: things are different.
What we know as the capital markets emerged over time: slowly at times, rapidly at times, yet always in line with market needs and technological possibility. Enterprising capitalists leveraged the best tools to hand to deliver solutions to increasingly complex commercial needs, eventually giving rise to secondary markets of extraordinary and magnificent complexity.
The regulator emerged as a result of this activity and the challenges it faced (and caused) at times, to regulate what was being done. A tautology? Perhaps. But therein lies the “difference” because now the regulator looks forward to what’s possible in technological terms – not just what’s currently being done – and what’s required to fulfil original market needs in a fair, equitable and meaningful way. The distance from “keeping an eye on things” to “believing in better” is one small step for mankind, one big leap for the bank that needs to radically revisit the way it does business (and, ultimately, the way it makes money). All the while fulfilling a consistent purpose.
So there you have it. Complying with the regulation is hard because you’re doing it wrong, trying desperately to cling on to the processes of an analogue world – the ways of old, the profit structures of old, the business sense of old. Complying with the letter of the law while seeking to betray its spirit may be unconsciously done, but it’s exhausting. And it’s thankless. This is not a rebellion you can wait out, because this time the banner of change is flown high by your law makers and law enforcers. Those little rascals.
Main image: jorgen mcleman, Shutterstock.com