An ambitious agenda for capital markets regulation has been saved
An ambitious agenda for capital markets regulation
Exploring the impact on seven organizational areas
The heavy volume of regulatory changes in the financial services industry increasingly requires organizations to expend extensive resources to interpret new regulations and implement a sustainable compliance operation. In this research paper, we explore how active investment management and capital markets regulation is impacting firms and what they can expect going forward.
Why is change a challenge?
The numerous new and proposed regulatory changes in the financial services industry place a tremendous burden on organizations to manage the heavy volume of change and require them to seek new technology solutions, controls, reporting, and staffing necessary to comply with deadlines. The competitive job market, high turnover, and untrained or undertrained resources compound these challenges for many.
What does the regulatory agenda look like?
Among US financial regulators, the Securities and Exchange Commission (Commission) is pursuing a volume of change to investment management and capital markets regulation unseen in the past decade. The Commission is redefining market structure, materiality, and the very universe of entities that it regulates. At the same time, companies subject to financial regulations are facing tremendous challenges, including talent issues, inflation, and a slowing economy. Some of the most significant and costly proposals are expected to be released in the coming months, including substantial changes to the equity and debt market structure.
The seven affected organizational areas
While individual impacts might vary slightly from organization to organization, in aggregate it is evident that the numerous new regulations being imposed on the industry have significant effects at all levels of the organization.
- The board and corporate governance
The greater and more complex the regulatory changes are, the more involved the board must be, which can detract from the board’s primary responsibilities.
- Finance and regulatory reporting
The increased volume and breadth of new reporting requirements could jeopardize the integrity of an organization’s financial statements and disclosures.
The unprecedented regulatory changes create a variety of new risks, such as compliance, operational, financial, reputational, and competitive risks. Because major regulations are frequently amended, these risks can be present far beyond a new regulation’s effective dates.
Implementing the spectrum of regulatory change being pursued today will require firms to design, build, implement, and maintain new systems and processes; they may need to stand up new teams or draw resources from other functions to navigate the complex regulatory environment.
Technology teams often shoulder much of the compliance burden. But when the volume of regulatory change is as intense as it is presently, these teams can become bottlenecks.
In recent years, many firms have created regulatory change functions that are mission-critical in the current environment. However, high volumes of regulatory activity inundate these teams with information and new mandates, creating significant challenges.
By subjecting firms’ activities to a new set of prohibitions and mandates, and by opening new avenues for regulatory and private legal action against firms, new regulations impose significant burdens on legal departments.
These evolving regulations create disproportionately large burdens on small- and medium-size firms, as they are required to meet the same standards as their larger peers but often with fewer financial and talent resources. Well-capitalized and well-resourced firms can absorb the additional fixed costs imposed by regulations more easily than lesser-capitalized firms, or firms with thinner margins, which places those firms at a competitive disadvantage.
Regulatory agencies are likely to achieve better outcomes by proceeding in a more methodical and streamlined manner. This would require regulators to prioritize among the many outstanding proposals and advance to the final rule stage only those that address a clear market failure. Finalizing only the strongest and most urgently needed regulations or using a phased approach may potentially help ensure that firms are able to implement the required changes successfully.
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