What is a regulation
Dictionary meaning is – “a rule or directive made and maintained by an authority”. In practical terms, it generally involves passing a law by Government/parliament, followed up by setting up authorities/existing authorities to ensure compliance i.e. oversight over various market participants. These authorities (called regulators) then issue rules, guidelines etc. which should be followed by the impacted public / section of public
Regulation types/requirements
Different regulations have different requirements/scope. However, these can be categorized majorly as (will be discussed in detail in forthcoming articles)-
As per one estimate, cost of compliance is expected to be > 5% of revenue for many financial services firms.
Changing landscape
Crisis has always had a major regulatory response. Great depression of 1930’s led to the creation of Securities and Exchange Commission (SEC) in the US in 1934. Latest, the major regulatory overhaul was done after the global financial crisis (2008) shored up key segments, from over-the-counter derivatives to investment funds and market infrastructure. Many new regulations were given birth, and majority were rehauled. But now, even after historic enhancements in recent years, countries still need to keep pushing to lower risks and strengthen the tools to manage future crises, and ultimately to reduce fluctuations tied to economic cycles.
Advances in technology, ever increasing complexities of the businesses, progressive topics and the need for standardized approach are shaping the regulatory responses. In addition, data control, transparency and quality have become increasingly important to regulators, more so in a post-pandemic world.
Data standards, automation and collaboration are also in the spotlight as both capital markets participants and, to an extent, regulators seek to ease the complexity and burden of regulatory reporting.
Key themes
- Technology advancement – Innovation in technology offers opportunities for firms to improve data sourcing, manage cost, become more efficient and controls oriented. Technologies like AI, ML are expected to provide breakthrough. Concept of “Reg Tech” has already taken off. Working with RegTech vendors with API capabilities, for example, allows firms to traverse decision trees, interpret data and improve decision making.
- Emerging issues/topics – There is no dearth of emerging issues when it comes to regulations. Managing these has been a challenge and a priority for all regulators and participants. While cyber-security has been a long standing, buzzword now a days are Crypto and climate related
- Control framework – Having adequate data control frameworks has always been a key priority. Outsourcing regulatory reporting to other firms involves controls related concerns. Do they need to second source data to ensure the data they report is correct? For many, RegTech providers have answered the questions and helped them tighten up control and accuracy
- Data quality – Data quality has been an elusive element of reporting for many firms over many years, despite its importance to risk analysis and accurate reporting. These problems are now being addressed by regulators putting their own houses in order in terms of data quality
Regulators are becoming more and more active. US SEC has been a leader in this space, and has approved more than 30 proposals recently to amend existing or create new regulations. Brexit has yet to make a big impact on regulatory reporting. ESG, as mentioned, will also dominate this space. So, definitely more to come.
Capital markets regulators have intensified their enforcement efforts. When paired with the onslaught of new rulemaking activity (mentioned above), firms’ compliance functions have not been under comparable regulatory pressure for years.
Opportunities
Overall, capital markets regulations are stronger and countries have made significant progress towards addressing financial stability risks identified during the financial crisis, but more remains to be done.
- Cross-jurisdiction regulatory collaboration – Ever increasing cross border operations demand that there be a central regulatory authority, which can work through cross-border issues and provide effective regulation, and help avoid redundancy. Even the re-alignment of and having better dialogue between different divisions of one regulator would be helpful
- Efficiency & cost savings – There is no doubt that regulations are critical, and changing landscape must be evaluated for new regulations. Efficiency, redundancy and cost effect of this must also be factored in. Regulators should do a better job in terms of assessment of the “burden” estimate they have vis a vis actual increase in cost
- Responsive regulation – There have been cases of regulations implemented late or been withdrawn or merged. Also, there is a need for better dialogue between different regulators e.g. single collection window
- Regulation as an enabler – How can regulators and regulations respond and facilitate capital markets’ continued innovation and growth
Thanks for reading! In the forthcoming publications, we will review these regulations in detail, geography by geography.
