A holistic approach to regulatory watch
A recent Deloitte survey revealed that most financial institutions have now realized the importance of the regulatory watch function for remaining ahead of regulatory challenges. With a holistic approach that combines regulatory watch, compliance, legal, and business functions, it does not have to be more complicated than it already is.
Why do we focus now on regulatory watch? Following the global financial crisis that started to emerge in 2007, the political, regulatory, and supervisory responses have had major implications for the financial services industry.
- Regulatory landscape
The unprecedented regulatory weight has forced financial institutions to develop and broaden the full range of skills and tools necessary to address technical matters and to keep up with an evermore complex regulatory landscape.
- Costs of regulatory transgressions
Penalties for non-compliance have reached unprecedented levels. According to the Financial Times, Wall Street banks and their foreign counterparts have paid out US$100 billion in U.S. legal settlements since the financial turmoil. If one believes that regulatory compliance has become too expensive, non-compliance would certainly be far more costly. While some institutions—usually smaller institutions with limited resources—have been tempted to adopt a risk-based approach toward regulatory compliance, this is nowadays a very risky decision.
- Tighter scrutiny from supervisory bodies
Supervisory authorities have not only become increasingly demanding in terms of reporting and liquidity and capital requirements, but they also pay more attention to the strategies and business models chosen by their supervised entities. Board members and senior management are also being increasingly held accountable for the consequences of their decisions or lack of action. Financial institutions that are most likely to thrive in this environment will be those that understand what an adequate or sustainable strategy and business model look like from a supervisory perspective. To satisfy the increasingly demanding supervisors, they would also need to have the vision to extract the maximum possible benefits from the investments they make.
- Multiple sources of regulatory information
The demand for greater scrutiny has been accompanied by an emergence of new supervisory entities (e.g., the new European Supervisory Authorities) as well as an increase in staff members. With each supervisory entity publishing its own publications (e.g., guidelines and consultation papers), financial institutions have become overwhelmed with regulatory updates. In addition, law firms, consulting firms, global custodians, and industry associations also publish newsletters and alerts.
- Generic vs. specific information
Despite the high volume of publications available, the majority tend to contain rather generic information that is not specific to organizations. The challenge for financial institutions consists in figuring out which publications are really important and which will enable them to anticipate the specific business impacts.
Performance magazine issue 18, September 2015
Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.