A wave of financial regulation following the meltdown of 2008-09 is sharpening the focus of European financial companies on their relations with regulators and on their overall approach to regulation itself. Many financial services companies see the wave of new rules as an opportunity to overhaul their approach to regulation and to make it more proactive, according to a new survey conducted by the Economist Intelligence Unit (EIU) and sponsored by Sybase.
The study, titled ‘Compliance and Competitiveness’, is based on a survey of 160 western European financial services firms, including companies in investment management; investment banking; commercial, corporate and retail banking; wholesale capital markets operations; and hedge funds. More than half (51%) of the companies surveyed have global assets of US$75bn or more. Nearly half (48%) of respondents are C-level executives or board members.
The research produced the following key findings:
- Effective regulatory compliance benefits businesses across a wide range of performance metrics. Among respondents 69% say that proactive compliance can be a source of competitive advantage. Survey respondents who consider their institutions to be effective at using compliance as a source of competitive advantage derive a broad range of benefits from this more proactive approach. They have more effective risk management, better business controls, and also enjoy an enhanced reputation with customers, investors and rating agencies. They are also much less likely to suffer a negative impact on their revenue and profitability from forthcoming regulation.
- Financial institutions that undertake only the minimum compliance measures will be at a disadvantage relative to those that take a more proactive approach. Adopting a ‘bare bones’ approach to compliance is a false economy. The survey shows that, while it may save money in the short term, it stores up problems for later. Respondents who do only the minimum to achieve compliance spend more time and resources on regulatory activities than those who take a more proactive approach. They are also less effective at understanding the impact of regulation on their business, find it harder to deal with compliance breaches and are less able to use compliance as a source of competitive advantage.
- The increased costs of compliance will require financial institutions to look carefully at how they structure and implement compliance activities. Dealing with the high costs associated with regulation will encourage companies to think differently about how they co-ordinate and manage their compliance activities. Currently, this is an area of weakness for many institutions. Fewer than half of respondents say that they are effective at co-ordinating individual compliance projects, and fewer than 40% say they are effective at maximising the efficiency of the compliance process. Forward-looking institutions are addressing these issues by improving co-ordination between disparate projects and using technology to streamline and facilitate the process. They are also exploring the integration of regulatory risk management into broader enterprise risk-management strategies.
- A more efficient approach to compliance minimises regulatory risks. Respondents who run an efficient compliance process are much less likely to suffer a negative impact from gaps or failures in regulatory risk management than those that are less efficient. They are less likely to have encountered increased regulatory scrutiny from authorities, and much less likely to suffer reputation damage due to compliance issues.