Five years after the crisis started, real change is finally in store. Who is on the naughty and nice lists?
In 2012, the industry saw a flurry of financial sector reforms. With over 140,000 pages of regulation produced over the past twenty four months, an ambitious but often discordant global regulatory framework has developed, leaving ops and tech departments in a constant state of insecurity and confusion.
New elections in some of the world’s major economies have not impacted rulebooks as some had imagined (and hoped), with political mandates remaining strong to keep regulation high on the agenda. This year we will have said goodbye to a number of titans of regulation and even toppled a bank chief or two. However, even as the ‘old guard’ hands off to newly empowered regulatory bodies, the true effects of these reforms on the economy are beginning to be felt. Put another way, five years on from the start of the crisis the rubber is actually beginning to hit the road even though the drivers have changed.
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- 140,000 pages of regulation will beget many unintended consequences
- Which regulations will need to return to political drawing boards?
- Will 2013 be the year standards move from talk to action?
What does this mean for 2013? Can the industry expect another 70,000 pages as a new year’s gift? The answer is most certainly, yes. As much as we would all like to come back from a long winter’s nap and find the problems of implementation gone, some wishes just won’t come true.
Whatever your new resolution is, one 2013 reality is certain: constant regulatory change for the industry is here to stay and the ability to manage this change in this volatile environment will be indispensable. The reality of rulemaking for the foreseeable future is that many objectives will be in play at once. Politicians just don’t want to change the way trading is done, they also want to upgrade the way financial crime is policed AND the way firms evaluate risk – of course all while protecting the consumer.
Some unappreciated regulatory gifts will have to go back to the store. If the political return policy holds true, we might see some rules returning to the drawing board, even as other new rules are produced. Regulators might even have many gifts they are forced to exchange. 2012 has been a year of shifting and completely missed deadlines, with Solvency II, FATCA, Basel III, RRPs for banks, MiFID II/MiFIR, AMLD, the Data Protection Regulations, COREP, the Volcker Rule all facing their own setbacks. As JWG research showed, the industry has suffered tens of billions due to this drift.
Despite these missed targets, it’s not all coal in the stockings as some major regulations have stayed on schedule, such as key post-trade reforms (Dodd-Frank, EMIR), the AIFMD, PRIPS, Shadow banking and US recovery plans. Perhaps most importantly, the paradigm of global coordination is looking more firmly established than ever before. Even an LEI of some description is moving towards the statute books.
More than ever, the regulatory landscape is fraught with no single view of ‘what good looks like’ resulting in higher cost products with decreasing returns. Today’s large infrastructures were not designed to cope with the both increasing volumes AND complex change requirements. In 2013, front, middle and back offices will be wrestling with the regulatory deltas at paragraph level across customer segments, product types and geographies.
If we had one wish for all our jolly industry fellows, it would be that new year cheer this month would kick off a collaborative sprit across the industry. Gone would be the days when regulators locked themselves up without the industry and a shared view of the problem became the norm. Banned would be the executive committee level conversations that exclude the operations and technology engineers. Never more would the key suppliers be left out on the doorstep while 500 projects sped ahead without them understanding the fuller picture. And, perhaps most importantly, Virginia, we would all believe that standards exist.
Will we get our wish? Probably not. But it could happen if only because of the severe fines now on offer for those that are on the naughty list. In 2012 we woke up to the fact that regulators now have much bigger and more varied sticks. Increased capital/ liquidity buffers, forced absences from the market and, of course, jail time have shown we are now living in a different reality.
What’s more, the ways in which firms are being observed have changed. Gone are the days when a ‘pressed and laminated’ report could suffice. New, invasive approaches based on communication protocols like XBRL and FPL now allow regulators to get their hands on a firms’ data directly. They can use this to run their own stress tests and challenge the way that assets were valued. Furthermore, G-SIB risk reports will provide regulators an ability to compare banks’ activities across the globe in seconds.
As the new year dawns, the senior management running the world’s top firms will have to take a hard look at the hundreds of technologies deployed on thousands of applications with tens of millions of lines of code. The cost of running it is massive. But the cost of changing it is higher – and you run the risk that if you change it too much or too quickly, it will break the bank. So should you tell the boss the 2013 resolution is? Well, as with most things banking, the answer is in large part relative: your target should depend on what others do and get fined for. If, for example, you have a relatively weak KYC capability, reliant on scores of disconnected databases – it might be time to start upgrading the target operating model.
Can regulations tell you what that model should be? No. However, they can provide useful guidance on what you should – and perhaps more importantly, should not – be able to do. Of course, this will suffice for now but it won’t last long. A few more thousand pages of text in 2013 will mean your KYC operating model will need to adapt quickly. One priority is, therefore clear – you need to be speaking to your peers at other firms to work out what good looks like to them – and what good looks like for the industry.
At the end of the day, developing the capability to manage change in a volatile world will differentiate your cost/income and PE ratios. It is therefore critical to get in front of the changes in the 70,000 pages that matter, define the ‘so what’ and decide what this means to you. Merry Christmas and happy holidays from all of us on the RegTech team.
- The market is desperately trying to sort out if or how new rules apply
- Practical ‘so whats’ matter more than ever
- 2013 is a pivotal year where political, supervisory and intra-firm priorities are set.
[pane title=”Top Alerts”]
- HMRC consults on 2013 UK implementation of FATCA: 24 questions on reporting, transitions, aggregation due 23/11
- UBS Puerto Rico settles with SEC for cool $26m for misleading investors, hiding liquidity crisis; SEC says expect more
- Entrenching Euroscepticism: UK foreign secretary calls for audit of impact of EU law on UK‘s position in single market