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Regulation falling short, say financial services leaders

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Senior executives at financial services firms are concerned that regulation in the sector is not promoting stability, according to the 2016 Global Regulatory Outlook published by Duff & Phelps.

A majority of 193 C-Suite and senior level staff polled by the firm believe that regulation is having little or no effect on stability, and potentially making the industry less stable.
 
Asked if regulatory changes in recent years have created adequate safeguards to prevent a future crash, only 6 per cent of respondents felt able to give an unqualified “yes”. Of the remainder, 37 per cent says they had not, with 54 per cent saying that new rules offer only partial protection against another crisis.
 
Asked if regulation had improved investor and consumer confidence in the industry, fewer than a third of respondents – 31 per cent – answered affirmatively. Fifty seven per cent say it has had little or no effect, with a significant minority of 8 per cent believing confidence has been harmed.
 
This is a more negative view than the one reported last year, when 43 per cent of those polled says confidence in the sector had been boosted by regulation.
 
Julian Korek, Global Head of Compliance and Regulatory Consulting at Duff & Phelps, says regulators are likely to be worried by the weight of industry opinion questioning the efficacy of regulation.
 
He adds: “The findings may simply reflect the limitations of what regulation can achieve. There are, after all, few guarantees with financial markets. However, the depth and breadth of regulation continues to expand, with new requirements on firms and new areas brought within regulators’ remits.” 
  
A particular concern was the perceived lack of coordination globally between regulators, with only 16 per cent of respondents agreeing that the industry is effectively getting to a single global set of regulatory standards. A larger proportion, 42 per cent, conceded that this is improving.
 
Monique Melis, Head of Regulatory Consulting at Duff & Phelps, says that global coordination is unlikely to be resolved in the foreseeable future and this will remain a challenge for firms.
 
She says: “Even with transatlantic regulation outlining identical requirements, cultural differences between regulators and their enforcement regimes on each side would challenge any globally standardized approach.”
 
She adds, though, that meaningful harmonisation and improvements in the industry’s standards have been achieved, with regulatory arbitrage decreasing: “Relocations prompted purely by a desire to escape remain rare. You can run but you can’t hide, as the adage has it.”
 
But while regulators’ inconsistency comes under scrutiny by survey respondents, this is not a failing to which financial services firms themselves are immune.
 
Just under half (49 per cent) of respondents says that corporate culture was the most important factor on governance to get right to avoid regulatory issues. When asked what skills they would look to hire into their compliance teams, the majority (38 per cent) says technical knowledge of regulations, followed by 15 per cent who cited leadership and team management skills.
 
Melis says: “If firms are truly to achieve a cultural change, it is hard to see how this can be achieved without such skills, particularly on the leadership front to drive change efforts.”
 
As the corpus of regulation increases, so too will the associated costs, according to the survey’s respondents. 85 per cent expect regulations to increase their costs this year. Looking ahead, 20 per cent expect them to have increased to 10 per cent of revenue in five years’ time, with a further 28 per cent expecting them to rise by between 4 per cent and 10 per cent.
 
Julian Korek at Duff & Phelps says that it is hard to reconcile the industry’s perceived lack of confidence in regulation when the majority of industry respondents expect regulatory compliance costs to increase over the next year. However, compliance spending is justified by the potential consequences and cost of failures, and firms should see it as an opportunity to proactively build a positive case for compliance. The compliance function can move from being seen as a cost centre and “business prevention unit” to a “value generator”.
 
He added, however, that the industry and regulators must ensure that enforcement actions don’t simply become a fact of life, with the costs passed automatically to customers.
 
“If this happens, the entire point of delivering penalties will be lost,” he says

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