Regulation vs Deregulation in the Financial Services Industry

The global financial crisis of 2008 highlighted the inadequacy of both domestic and cross-border Financial Services legislation. Consumer protection has become a highlighted subject matter over the past decade, giving rise to the issues stemming from the global financial crisis such as the collapse and near collapse of financial power houses like Lehman Brothers and Bear Stearns in the U.S. and Northern Rock in the UK. Notwithstanding, we saw the consolidation of an industry due to mismanagement, poor corporate governance, inadequate risk and control management, along with antiquated capital adequacy provisions to sustain financial markets in the event of a significant financial crisis.

Legislative Provisions: Post Crisis

To mitigate future financial crises from occurring, governments such as the U.S. instituted wide-sweeping regulatory reform with the enactment of regulations such as the Dodd-Frank Consumers Protection Act. While not perfect, Dodd-Frank sought to mitigate the lack of financial control and governance that the Financial Services industry required. This resulted in significant risk, control and governance changes among Financial Services firms which are still being implemented by institutions nine years later. Both domestic and foreign banks are struggling with the implementation of new technology, compliance measures, internal control and risk mitigation to ensure on-going compliance.

Efforts by Financial Institutions: Post Crisis

While we applaud the industry for its significant investment in human and technological capital, there remains significant work to be done. Many institutions still struggle with their implementation of corrective internal controls and risk mitigation implementation, due in part to not having the right subject matter expertise to assist in the implementation and on-going sustainability, over-worked internal practitioners and the acceptance of responsibilities by stakeholders.

Another key hindrance is technology. Many Financial Services institutions grew through acquisitions and today are left with technology platforms that fail to communicate and produce key information such as metrics, KPIs, KRIs, aggregated reporting to support internal and external attestations, and a proper client on-boarding platform, which is key to the genesis of client information management across all business lines. In addition, most of these platforms are dated, cannot be adequately updated and may not be considered for replacement due to prohibitive costs and retraining requirements. Firms struggle with the decision to maintain legacy systems or replace them.

Regulation versus Deregulation

Fast forward to 2017, the new U.S. government administration has just signed an executive order to ease Financial Services regulation to ensure firms can be competitive globally with their product and service offerings. The order’s intent is to further simplify regulations, provide efficiency and to have bespoke regulations versus broad-sweeping legislation that cannot be enforced effectively and will curtail innovation of new products and services and the ability for U.S. banks to be global competitors. We have seen deregulation in the past through the Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLBA), with its intent to deregulate the Financial Services market by repealing the Glass-Steagall Act, a statue which was written and enacted to protect the interest of consumers and businesses post the deficiencies sited after the Great Depression of 1933. Some have argued that the GLBA was a significant contributor to our more recent financial crisis of 2007/8.

Regulation versus deregulation has been debated extensively post-crisis and is still a subject of discussion today, with banking lobbyists seeking deregulation on behalf of Wall Street’s biggest banks. The argument is that increased financial regulation prohibits free enterprise, while another view is taken by pro regulation advocates: strengthen regulatory provisions to mitigate systemic risk, corruption and destabilization of the domestic and international financial markets.

Historical financial events demonstrate to us that we require enhanced and logical financial regulations that can be efficiently supervised internally through on-going compliance, risk and internal controls provisions and externally through applicable regulatory agencies. Systemic risks of unregulated financial markets can be traced back to 1855 as it pertains to the Californian banking system due to over speculation. We have also experienced several financial crises since, such as the 1930 global depression, 1973-1974 UK stock market crash, 1985 US savings and loan crisis, 1987 global stock market crash, 1990 Japanese financial system stock and property market bubbles, 1997 Asian financial crisis, 1998 Brazil and Russian banking system crisis, 2000 global technology bubble, 2001 human and financial impact of September 11, 2002 stock market correction and the 2007/8 global financial crisis.

How do we prepare?

Financial institutions must not become complacent during Financial Services deregulation. Instead, we at TORI Global advise our clients to continue enhanced risk and control measures until new regulations are enacted. Failure to comply will still lead to significant financial and reputational risks. It is important to note that the executive order to repeal Dodd-Frank needs to undertake a review process of 120 days, where an assessment of what should be repealed and replaced will be presented. Furthermore, the proposed deregulated regulations will require approval by various government bodies such as the Senate and Congress.

The key to preparedness is having in place:

  • risk and control practitioners,
  • investments in the right technology,
  • an effective risk and control framework,
  • a legal and compliance framework,
  • well written operating policies and procedures that can be practically applied,
  • efficient management exception reporting,
  • mitigation resolution options to remediate potential non-compliance,
  • training of both senior management and lines of business staff
  • adhering to a culture of regulatory awareness practices.

Above all, partnership with external firms like TORI to assist with expediting implementation of regulatory and technology change management and training. Essentially, simplified and targeted internal controls and risk measures are fundamental to regulatory preparedness.