Global Round Table: Regulation hots up 

Giles Williams: We’re going to talk in a moment or two about the KPMG ‘Regulatory Heat Map’ which captures the current impacts of regulation. But first I thought it would be helpful if we put it into a broader context. During the global financial crisis, complete catastrophe was averted partly by luck and partly by concerted action by governments and regulators. The G20 rapidly moved to the forefront of action to restore stability and began the process of building a more resilient global financial services structure. Markets and economies began to recover. However, I think all of us would agree that the global recovery has weakened in recent months and new trends are emerging. The regulatory debate is broad; with the systematic risk arguments, the role of capital and need for liquidity. This is in the context of the wider political dimension focusing on the role of financial services in the rest of the economy, the protection of consumers and the contentious issue of executive pay.

Jim Low: Right, and this is being felt, to a greater or lesser extent, across all advanced countries. The specter of ‘double dip’ recessions is looming closer. In the USA, the economy remains weak, and consumer confidence continues to be weighed down by a moribund housing market. In Europe, as you know well, sovereign debt concerns are spreading, and the risk of default by one or more members is calling the structure of the eurozone into doubt. Across the globe, excessive debt – and concomitant deleveraging – are dragging down economic performance already hit by increased commodity prices.

And this is the key background to the G20’s commitment, in November 2011, to work towards a more stable and resilient international monetary system and to improve systemic stability in the global economy.

GW: So turning to the ‘heat map’, the G20 regulatory agenda is intended to:

• create a new framework for banks, OTC derivatives, compensation practices and credit rating agencies;
• address the too big to fail issue; ‘fill in the gaps’ in regulation and supervision of the financial sector;
• tackle tax havens and non-cooperative jurisdictions.

The ‘heat map’ locates the principal regulatory initiatives currently being implemented on a grid relating five key themes – financial stability, conduct, market infrastructure, tax and finance and governance – to the three primary industry segments of investment management, banking and insurance. The color key reflects the main geographic regional impacts.

Simon Topping: What really comes across to me from our analysis is that we’ve seen a significant change in the regulatory landscape over recent months. One of the most obvious points to note is that the three industry segments look really quite similar. There are some differences of emphasis, for sure; but it is now clear that the impact of new regulation will be widespread and comparatively intolerant of special interests. In early 2011 it was still possible to argue that hedge funds should be spared the most draconian new requirements because they played no role in creating the crisis; or that insurers operate a fundamentally more stable business model and require different treatment. Now, however, there is little distinction; this is a real change.

JL: I think that’s exactly right. The political agenda has ensured that the financial services sector as a whole is going to share the pain. But what we have now is a remarkably complex and ambitious agenda.

GW: The G20 would no doubt argue that it is deliberately comprehensive and consistent. I have a quote from the final declaration from the Cannes Summit in November 2011, where they emphasized:

“We are determined to fulfill the commitment we made in Washington in November 2008 to ensure that all financial markets, products and participants are regulated or subject to oversight as appropriate to their circumstances in an internationally consistent and non-discriminatory way.”

ST: Well yes, but a more pragmatic assessment also raises a number of areas of concern notably:

• the scale and cost of the additional regulatory burden, all of which will be borne, in the end, by financial services companies and their customers
• the scope for inefficiency, duplication, inconsistency and contradiction
• the opportunities for regulatory arbitrage
• the damage to global GDP which may follow the imposition of a more costly, less profitable, less responsive financial services sector.

JL: Our three Regulatory Centers of Excellence are uniquely placed to compare and contrast the impact in different geographic regions. Where are the agendas most strongly correlated across the three regions? Clearly, the most obvious area is where firms are truly global in the first place: regulation has to impose a consistent global framework. But there is a deeper area where the end-game itself implies convergence. For example, the pressure for structural reform in the banking sector may be stronger and more explicit in the UK and elsewhere in the EU. But the consequences will inevitably be felt here in the US, and in Asia, and will drive change towards comparable ultimate goals.

ST: Indeed. For instance, recovery and resolution planning is now a significant regulatory agenda item in Australia, impacting on companies which remained untouched by the crisis. So to a significant extent a common agenda is emerging, and common themes are extending across all geographical regions. But although the G20 emphasizes the international and global nature of the framework it believes is necessary, there are differences in emphasis, and the balance between the five themes is different.

GW: Some of the marked contrasts can be seen in the conduct agenda. This is not an especially significant imperative in Asia. It is of some relevance in the USA, but there it remains heavily colored by a strong caveat emptor principle: the customer needs to recognize and assume an appropriate degree of risk, and so the emphasis is on supporting information provision and understanding. In Europe, however, it is a key theme of the regulatory agenda: the cultural and policy mind-set is that the consumer needs protection, and cannot – or should not – be exposed to excessive risk.

ST: Nevertheless, despite such differences, I think we are seeing a kind of creeping convergence in individual regional agendas. Issues of governance run across all three regions, although the strength of implementation necessarily varies, from very prescriptive in the EU to – as yet – more consensual in the Far East. There is convergence too in the way the objective of strengthening financial stability is being extended into insurance through Solvency II; and in the way that protection against systemic impacts is leading to resolution and recovery planning for insurance companies.

JL: So a key question is how far, and in which directions, will these regional agendas influence each other in future. How far will the US begin to reflect European concerns? Will the US agenda be increasingly reflected in Europe?

GW: Yes, and one of the largest areas of uncertainty, and one which interests me in particular, is the extent to which the balance will change in future between returns to shareholders, customers, executives and employees. There are constant, and understandable, pressures from politicians and the public they represent to impose more drastic and punitive changes. So far, the limited evidence seems to show that policymakers and regulators are acting in a responsible and thoughtful manner, seeking to be proportionate and achieve the broad objectives of restoring stability and increasing resilience without unduly damaging competitiveness or economic value.

ST: Nevertheless, financial services will cost more, and deliver lower returns, to the extent that greater regulation imposes higher costs and lower profitability. The main problem arising from this is there is little evidence as yet that consumers accept the implications for the costs and benefits they receive. This is going to make the challenge for CEOs all the greater. But there are clearly some key questions they need to be asking themselves.

Article author