60-second interview: The rising tide of regulation

Change – the CISI’s regulatory magazine is ten years old. The regulatory landscape for firms has altered dramatically since the first issue of the publication in June 2005 as explained by its Editor, Christopher Bond, Chartered MCSI, Senior Adviser to the CISI


How does the level of financial regulation compare with ten years ago?
Ten years ago we had the Financial Services Authority (FSA) which had a ‘light touch’ regulatory philosophy – remember how little capital banks needed and how much freedom they had to run their businesses. Today we have two regulators – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority – which regulate many more financial sectors, such as consumer credit and mortgages, judge firms’ business strategies, and have much greater powers to fine and ban firms and individuals.

The fines have become eye watering. Change has reflected and commented upon these trends – the first edition in June 2005, then titled Regulatory Update, was 14 pages long, and the most recent, in May 2015, stretched to 68 pages. The original vision continues of keeping members up to date with recent and future regulatory changes.

What has led to such a dramatic expansion in regulation?
The financial sector came near to disaster during the 2008 global crisis. The understandable reaction of governments worldwide and regulators was to say ‘never again’. That meant a seismic shift in prudential requirements, market transparency, investments settlement and attitudes on banks deemed ‘too big to fail’. Some countries added structural bank reform and consumer protection. This tsunami of regulatory change is likely to reach its considerable peak this year. Evidence of these changes can be seen in the exponential growth of compliance and risk departments.

has evolved continuously in content and form over the last ten years to stay relevant and meet the needs of different financial sectors – the latest being to divide it up between retail/private wealth management, wholesale and capital markets covering sell-side and buy-side, banking and universally applicable articles."This tsunami of regulatory change is likely to reach its considerable peak this year"

To what extent has the focus of regulation shifted from the UK to the EU and US?
A great deal. In 2005, about 90% of the changes were UK regulator generated, and in 2015, this percentage is almost entirely reversed in favour of the EU, US and global regulators. The EU single rulebook and the use of EU regulations which are directly applicable in the UK are both powerful in empowering supranational regulators at the expense of national ones. In the US, the Dodd-Frank legislation and Foreign Account Tax Compliance Act (FATCA) have exported US rules globally. Unfortunately, regulators have interpreted the G20 changes differently, leading to serious compatibility problems, such as in the central clearing of derivatives that are traded globally.

Looking ahead, what are the major challenges faced by both retail and wholesale firms?
The retail sector has always been more regulated to protect consumers. Martin Wheatley, FCA Chief Executive, has a strong agenda to put the consumer at the heart of a firm’s decision-making. He is not alone – as can be seen in the EU’s MiFID II (revised version of the Markets in Financial Instruments Directive) conduct of business changes. Other challenges include how the Retail Distribution Review will change under MiFID, product governance and distribution and understanding behavioural economics, revisiting conflicts of interest, how platforms and their users will be regulated, pensions advice in the new world and costs disclosures.

Wholesale/capital markets was regarded as self-regulating between the sell-side and the buy-side. Nearly everything that happened in the financial crisis – and since – has been in this sector. Unsurprisingly, regulators have decided that the sector cannot be trusted. It is therefore changing practices in many previously unregulated markets, such as forex, under the Fair and Effective Markets Review, has made ‘conduct risk’ – and culture – at all levels of firms a top priority, and is pinning responsibility for breaches on senior managers under the Senior Management Responsibility regime. At an EU level, MiFID II and MAR II will make big changes to how markets operate for both buy-side and sell-side.

And then there are the changes which apply to all types of firms. These cover overseas firms collecting US taxes under FATCA, structural bank reform exported from head offices to their overseas group companies, the cybercrime and data protection policies of firms, tougher anti-money laundering and sanctions rules, new client asset protection requirements and a plethora of new prudential and transaction reporting functions.

All in all, the pendulum tightening global regulation has swung very far and may need to be recalibrated so that financial services can perform its true role of encouraging businesses to expand and creating world growth.

Read the June 2005 edition

Read the May 2015 edition of Change
Published: 12 Jun 2015
  • Change
  • Financial Planning
  • Operations
  • Compliance, Regulation & Risk
  • Wealth Management
  • Capital Markets & Corporate Finance
  • Integrity & Ethics
  • Islamic Finance
  • The Review
  • Regulation
  • tenth anniversary
  • Change

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