Strategy & regulation

Regulation is ubiquitous. Deal with it. 

But how?

 
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Forthcoming publication

 

Invited to speak at a Bloomberg event on risk and regulation in London in May 2017, one of our managing partners summarised the problems facing financial sector firms in dealing with the deluge of regulations emanating from regulators in the US and Europe, among others. Capturing these important and challenging ideas, we will shortly be publishing a discussion paper titled:

Dealing with the deluge of financial regulation

And subtitled: Taking a holistic view of the current state of financial services regulation and the direction of regulatory travel

We ask the questions: How can firms respond meaningfully to the current deluge of regulatory initiatives from multiple regulators? Are they reducing risk? Should they?

 

 
“Governance, risk and compliance costs account for 15% to 20% of the “run the bank” cost at most large banks and 40% of the costs of innovation projects at banks.”
— Bain & Company, 2016
 
 
 

The perverse effects of regulation

In many – perhaps, most – financial institutions, compliance rules. Compliance with new and forthcoming regulation, mostly of EU origin but, increasingly, internationally comparable, dominates the development agenda of most financial institutions. This is both unhinged and, worse, now at a level that is contributory to rather than deleterious to systemic risk. The unintended consequence of the flood of regulation in the wake of the financial crisis is to increase systemic risk!

The money that is spent of fixing old systems crowds out expenditures on new systems that would reduce error, trading, processing and clearance failures and, therefore, risk – including risk to end-customers. More importantly, satisfying regulatory is not a strategy; and the level of invasiveness of financial regulation now is such that it often drives and even replaces both strategy and tactical organisational decision-making.

However, the most important effect of the regulatory deluge is more pernicious: it reduces risk-taking by financial institutions; it is specifically designed to do so. However, risk-taking and innovation by the financial services sector are at the heart of the productive use of capital in an economy. The over-reaction and mis-reaction to the global financial crisis has been to clamp down on risk-taking rather than to force financial institutions to consider which risks are beneficial and within their competencies and the efficacy of their management control systems and which are not. In short, the regulatory response has been excessive and undiscerning. This is principally because it has been based on mistaken behavioural assumptions about what financial institutions are and how they operate.

But it doesn't have to be like this. Firms can grasp the nettle for themselves and take a more strategic approach to regulation and compliance that supports strategy. Because we understand that the direction of regulatory travel is predictable, we assist financial institutions to get in front of regulatory developments and to reclaim the ground of strategy and tactical decision-making. This involves taking a fundamental approach to business strategy, regulatory reform, systems architecture, workflow and management control. Contact us to find out more . . .