Uncertainty and Regulation

One of the biggest factors driving periods of uncertainty and the necessity for managing change in uncertain times is the pace of regulatory reform. Faced with regulatory reshuffle, businesses are up against politicians, negotiating and pushing regulation, and regulators, tasked with enforcing regulation and compliance. One of the emerging trends is the tension driven by divergent interests of regulators and politicians.

  1. Uncertainty and regulation post-2008
  2.  

Historically, the evolution of the banking sector has followed an arc of increasing globalisation and global expansion. In most instances this has taken on the shape of a proliferation of legal entities and what some critics have seen as a loss of control over sprawling entities and an increase in the complexity of these structures. Following the financial crisis of 2008, policy priorities resulting from this analysis pushed for reduction of banking structure complexity as a means of reducing the inherent instability risks of these structures. This really came from a desire to mitigate the risk of failure by enhancing the ability of large bank holding companies to absorb risk and develop mechanisms for resolution. Over the past 2 years, while Brexit talks have been taking place, large bank holding companies have been pursuing risk mitigation strategies to reduce the potential impact of regulatory shake-up in the UK and safeguard their ability to continue to operate seamlessly across European regions post-Brexit.

Since 2008, the pace of regulation has sharply increased – MiFID and EMIR have been at the forefront of the landscape’s dramatic redesign, initiatives driven by regulators which aim to make financial services organizations easier to govern; while other more politically-driven initiatives, such as GDPR, have pushed for better reporting and transparency across sectors. While regulatory mandates of this scale can appear as a compliance burden, they can also be a tool for transformative change.

In the case of Brexit, perhaps the greatest risk is in its implementation – at the heart of which lies the tension between the incentives of regulators and those of politicians. Regulators must take pragmatic approaches – uncertainty in the implementation of regulation is an inherent part of their role. However, politicians present a much less certain picture, with decisions often driven by short-termism, corruption or the timing of electoral cycles. In addition, businesses may face a period of additional rather than reduced regulation – if they are asked to be compliant with divergent UK and EU regulation. For businesses, an important element of preparation for the uncertainty of regulation could be building up awareness of upcoming regulation, or of regulations which may become relevant. Know what regulations impact you and build up a catalogue of the ones you will need to adhere to.

 

  1. Uncertainty and regulation post-Brexit
  2.  

Looking ahead to the longer-term likelihood of settled but continuous regulatory and political uncertainty, companies should look to the overall change to industry structure and regulatory pace of reform. Brexit is already showing signs of rewriting the legacy of the financial crisis – creating its own inheritance in the shape of many newly created entities, replacing post-2008 simplified company structures with more complex systems capable of operating across a new Europe. Another aspect is the long-term outlook for the ‘worst-case scenario’ solutions implemented by businesses in the transition period, and indeed how approaches adopted will differ between regulators and consultants once more. For instance, European governments looking to the scale and influence of their financial sector could opt to request a larger share of people, roles and entities in their countries, rather than accepting officially headquartered banks with no bankers, and split country roles. Solutions implemented in times of increased uncertainty may not always stand the test of time. Ultimately, to safeguard themselves against these risks, businesses need to look to build resilience and accountability internally for process and people. As data often presents the biggest risk, this is likely to be a great area of focus for regulators and therefore for businesses to guarantee.

What can you do to mitigate the impact of uncertainty and change for your organisation?

 

 

  1. Allow more contingency for unknown unknowns – set yourself up for flexibility by putting processes and routines in place, giving you access to up-to-date information about how your organization operates and equipping you to respond quickly to new regulatory demands.
  2. Maximize economies of scale by mapping what aspects of your business could be impacted by local regulation, and which can be easily served by a shared service model without threat of local intervention; and adopt a location strategy that meets this.
  3. Operating costs have become hidden in the centralized models that have grown in the past decade. Make steps to better understand the true cost of serving client segments and products.
  4.  

High degrees of uncertainty aren’t going anywhere, but there are measures you can take to look ahead, plan to your scenarios, build resilience to upcoming shake-up and safeguard yourself against catastrophe. If any of the above sounds applicable to your organisation, and you’d like to find out more, get in touch - we’d love to have a discussion with you about it and see if we can help.