With new regulations going into effect this year, regulatory change is second only to market volatility as an executive issue for financial services firms, according to “The Regulatory Pressure Cooker: Assessing Regulatory Stress In The Financial Services Sector,” from Sungard, the financial services software and services provider. Further, senior execs now are concerned regulatory change is distracting attention from core business activities and could hinder companies’ growth.
Regulatory changes also are causing the financial services industry to rethink their approach to compliance and restructure their organizations, Sungard said, and many said they are not ready for the changes taking effect this year. Sungard said almost half described themselves as “highly stressed” by the pressure of regulatory change, and despite ongoing efforts, readiness levels remain low. Half said they are “highly ready” for the changes they must confront in 2014 and 2015, Sungard said. Companies plan to continue investing in technology, people and processes to cope with regulatory change, and half said dealing with regulatory change has impacted shareholder returns and the ability to invest for the future.
“The definition of what regulators are becoming concerned about is broadening to include areas such as operational risk, adding extra strain to the financial services industry,” said Jeffrey Wallis, managing partner and president of SunGard Consulting Services. “Our survey demonstrates that executives at the highest levels are struggling to marry ensuring regulatory readiness with maintaining a focus on day-to-day operations. In our work with firms on regulatory compliance, we see the most success when a business takes a combined approach to the twin challenges of growth and compliance.”
Five current international reforms include:
- Global Systemically Important Insurers. The Financial Stability Board has listed nine insurers as being of global systemic importance, though it has yet to finalize details of how this will affect regulation of them, Sungard said.
- Dodd-Frank Act. The United States’ response to the financial crisis was signed into law in 2010 and affects all financial services firms doing business in that country. Legal challenges to aspects of the reforms continue to this day, Sungard said.
- Basel II. Global reform of bank capital and supervision rules; implemented in 2006, just before the financial crisis, the accord was updated four times between 2007 and 2009, Sungard said.
- Foreign Account Tax Compliance Act (FATCA). A U.S. tax law that requires foreign institutions to report details of U.S. citizens’ assets to the Internal Revenue Service, no matter where they are held, Sungard said.
- Alternative Investment Fund Managers Directive. The European Union’s revised rulebook for hedge funds and private equity funds operating in the EU, Sungard said.
“Regulatory reform is putting the financial services industry under intense pressure, and the situation will not change in the near future,” said Sang Lee, managing partner, Aite Group. “This pressure is being felt all the way up to the C-suite and the board. Regulatory uncertainty has forced some companies to put off key investments in new industries and geographies at a time when they are increasing their investment in compliance across departments. Regulations may be putting a strain on the industry, but we are starting to see some companies use them as an opportunity to reorganize themselves along more efficient lines. These businesses will be the future leaders in the industry.”
In addition, there are more regulatory changes on the way:
- Basel III. Global reforms of bank capital and liquidity rules; the details still to be confirmed, but the changes are due for implementation in 2019, Sungard said.
- Markets in Financial Instruments Directive (MiFID) II. EU reforms that will affect anyone dealing in or processing financial instruments across Europe; the details still to be confirmed, but the changes are due for implementation in 2015, Sungard said.
- Solvency II Directive. EU reforms intended to harmonize insurance regulation; the details still to be confirmed, but the changes are due for implementation in 2016, Sungard said.
- G20 Financial Transactions Tax. Efforts to introduce a “Tobin Tax” across the EU continue despite opposition in many parts of the world; the details and timetable unknown, Sungard said.
- Global derivatives regulation. Watchdogs around the world are negotiating over how to police the $700 trillion over-the-counter derivatives market; the details and timetable unknown, Sungard said.
The survey was commissioned by SunGard and conducted by Longitude Research in late 2013. Participants included 400 international senior financial services executives; 30 percent are in the insurance industry and 25 percent are in North America.
