The pace of financial regulation has been accelerating since the late 1980s, with the financial crisis ramping up the speed even more. Developments in regulation have not always been straightforward or even logical, but despite their flaws, they have brought security and stability to our operations, customers and the market.
Tighter capital and liquidity requirements
The COVID-19 pandemic has highlighted the importance of the stability of the financial market. Banks have demonstrated their ability to operate during the crisis, in part thanks to the capital and liquidity buffers imposed on them. The economy as a whole has also not suffered as much as feared.
Harmonisation has made banking requirements clearer in general, but accounting for the specificities of the different business models is a difficult task.
Risk management and reporting
Different ways to identify, address and manage risks have evolved substantially over the years, and the importance of risk management is well understood across banking organisations. However, risk management has become such a multi-faceted and complicated process that it can sometimes be challenging to see the wood for the trees.
Reporting to the authorities has become somewhat of an art form, requiring specific reporting skills in addition to financial administration skills. Reporting currently serves the purposes of the authorities and not the businesses themselves, and as a result, the same data is being reported multiple times in an inefficient way. It would be beneficial to eliminate these overlaps and streamline reporting practices, but looking at the current roadmap of regulatory development, this does not seem very likely.
Requirements for investment services
The provision of investment services involves a considerable amount of reporting and information sharing between authorities, customers and other market participants. The rules are made to provide security for everyone in the market, but they also assist the authorities in their supervisory work to promote market stability.
Information overload can make investment services difficult to approach, but it is not the original purpose of regulation. This problem could perhaps be solved with legal design, which means making regulation and the relevant documentation more user-friendly and understandable.
MuniFin provides investment services on a relatively small scale, but the new regulation has nevertheless affected us substantially – perhaps even more than the regulators intended.
Necessity is often a good motivator. The current operating environment could have come about through independent market developments, but at a slower pace and with much more variation between different organisations.
Faster globalisation is challenging traditional operating models
Globalisation is accelerating and posing major challenges for the traditional approach to regulatory work. Very few things concern only individual countries these days. Time will tell whether regulation based on strict geographical boundaries will become downright impossible.
The European Union has partially tackled this issue by creating an European market. But the euro area and the European Union are not the same thing, which already creates many new regulatory nuances. Global phenomena will not stop at some boundaries drawn on a map; a good example of this is climate change and the EU Taxonomy for Sustainable Economic Activities, which seeks to speed up the achievement of climate goals by linking the funding of investments to their environmental impacts.
In the future, regulation will be problematic not only because of climate risks but also because of cyber threats, as a cyberattack can strike anytime from anywhere in the world. Regulation has the potential to make the world a better and safer place, but this requires more global cooperation.
At MuniFin, we closely monitor regulatory developments that are relevant to our own operations and aim to influence potential problem areas. In this constantly changing world, nobody has all the answers, but through open dialogue and cooperation, we can bring about regulation that truly advances society.
Executive Vice President Legal and Communications, Deputy to the CEO, and Member of the Executive Management Team at MuniFin