The risk of waiting to implement Regulatory Compliance in the financial services industry (Part II)
For some reason, many companies’ in general but financial services in particular sit on their hands, acting as if it is business as usual, nothing has changed and does not wish to lead the game of implementing new regulatory compliance mandates. What are the risks businesses are taking with their relaxed approach to these known impending regulatory changes? What are some of the reasons why implementation is complacent?
Future regulations must be subjected to a litmus test. Today there are too many optional and subjective demands from the oversight authorities that are incomprehensible for the layman. If a compliance system of command (oversight) and control (financial institutions) with the proper segregation of duties and responsibilities is established a majority of the current regulatory compliance can be replaced by market discipline.
Undermine compliance in the economic system
Now more than 5 years after the financial crisis, it seems that the dust has settled down, and customers are broadly satisfied with their banking relationships. However within the financial industry the structure and organization is marked by the compliance implementation requirements. The unstructured and unintegrated compliance backlog is often so massive, that the regulatory process continues to be reactive instead of reaching a proactive position. Nobody can reap the benefits of added compliance.
The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010. More than three years later, regulators have only finalized approximately. half of the 398 rules called for. This slow process also resulted in the oversight missing more than half of the 279 rule-making deadlines that were outlined.
If you think compliance is expensive, try non-compliance
The US oversight and administration still believe that GRC compliance reforms are still a top priority, and the administration and authorities consciously reiterate that the core elements of Dodd-Frank must be "significantly in place" within the next X number of months. Other officials also apply pressure to achieve the outstanding guidance and remaining measures.
On the other hand, financial institutions and banks would evaluate and assess the system requirements to be up to date and prepared for the impending regulatory reporting changes. This is often not the case, as the reality is that the yet-to-unimplemented portions of Dodd-Frank or other EU Banking Union impending regulatory reporting changes are deemed to be expensive and cumbersome for banks.
Wishful thinking
Financial institutions have so much compliance backlog and will continue to do so that the many reforms that have been implemented are done in such a manner that they, unfortunately, do not have a strong track record for compliance implementation efficiency. Some organizations and banks are for some reason also hoping that the remaining reforms may take a long time to endorse and therefore may eventually be dropped entirely.
Financial institutions and Banks are taking unnecessary risks by betting on the oversight and regulators' ability to implement reforms and monitor compliance in a timely manner. Bank and other financial CEO’s also show that they have a stubborn mentality to fight regulation.
Copenhagen Compliance suggestion
The consistent changes more regular demands from the oversight authorities, combined with the increased capital requirements will require the two parties to cooperate. This is a prerequisite if the potential future risks for drowning the economy can be avoided.
The mediator could allow banks to prepare a compliance implementation plan for each of the increased regulation. The C-level financial officers could then cooperate to ensure complete follow-through by the regulators and embed the regulatory controls in the processes and transactions to add value and avoid duplication.
The result would be that the global financial directives are not political shouting points. There will be a mutual limited softening on timelines while the oversight authorities are aware of the plan when they monitor it.
Command and Control
Future regulations must be subjected to a litmus test. Today there are too many optional and subjective demands from the oversight authorities that are incomprehensible for the layman. If a compliance system of command (oversight) and control (financial institutions) with the proper segregation of duties and responsibilities is established a majority of the current regulatory compliance can be replaced by market discipline.
With such a simple platform, each regulatory intervention will receive the right attention when it is conceived. Global investors must be ensured of a safer and more transparent capital markets to make informed investment decisions. They know that there is a transparent and accountable plan for the reform execution will continue strengthens the investors' confidence in regulatory compliance.
Additional sources: The Economist, FT, GARP, Risk Magazine
