Views on Regulatory Reform from the Financial Services Industry

Transcription

1 Views on Regulatory Reform from the Financial Services Industry Survey highlights concerns of U.K. and U.S. executives over costs and benefits of regulatory reform initiatives In the third quarter of 2010, Protiviti conducted a survey on regulatory reform and its impact on financial services companies in the United Kingdom and United States. Respondents, who included chief executive officers, chief financial officers, chief operating officers, heads of compliance and other financial industry executives, were asked in a series of questions to assess the effects of regulatory reform initiatives in their home countries and globally, specifically looking at the effectiveness of reforms in preventing another crisis, compliance costs and international coordination. This is the first in a planned series of surveys from Protiviti focusing on financial reform issues. Following is a summary of the results along with additional commentary from Protiviti. Regulatory Reforms Will Not Prevent Future Crises, but May Moderate Some of Their Effects All survey participants were asked which country the United Kingdom or United States has taken more effective measures to address regulatory reform. Interestingly, 42 percent reported that neither has taken effective measures, while only 13 percent said that both countries have. Of note, there appears to be a higher level of reform buy-in in the United Kingdom, as 45 percent of U.K. respondents believe their country has implemented more effective measures. By contrast, just 21 percent of U.S. respondents said regulatory reform measures in the United States are more effective. Overall, however, 97 percent of the respondents were pessimistic about the effectiveness of the measures taken by legislators and regulators in preventing another financial crisis, though nearly half do believe that the new measures will be helpful in moderating the effects of future financial crises.

2 Q. What impact do you believe the measures taken will have in preventing another financial crisis? 3% 50% 47% The new measures will not prevent another financial crisis The new measures will not prevent another financial crisis; however, they will moderate the effects The new measures will play a key role in preventing another financial crisis Regulatory reform is generally backward looking. Legislators and regulators consider the events and circumstances that contributed to a specific financial crisis and seek to effect changes to prevent that crisis from occurring again. While certain aspects of current regulatory reform packages, such as a greater focus on systemic risk, are intended to result in more proactive regulatory regimes, much skepticism remains about the regulators ability to identify and respond in a timely manner to developing crises in the future. Crises in the financial services industry have occurred many times throughout history. As the survey respondents noted, it is unrealistic to assume any reform measures can completely prevent future crises. If, however, other elements of financial reform, whether they include increased capital and liquidity requirements or enhanced risk management practices, serve to moderate the effects of future crises, then regulatory reform may be viewed as effective though at what cost to customers is not yet apparent. Protiviti 2

3 Regulatory Reform Viewed as Detrimental to Recovery from Financial Crisis The results suggest that far more companies believe industry reforms will have a negative rather than positive effect on their efforts to recover from the global financial crisis. Overall, 39 percent of respondents believe regulatory reform will have a negative impact on their organization s recovery from the crisis. The response was even higher among U.S. respondents, with 54 percent reporting a negative impact, compared to 28 percent of U.K. respondents. Just 9 percent of survey participants believe regulatory reform will have a positive impact on recovery efforts. Q. What effect will regulatory reform have on your institution s recovery from the financial crisis? Very positive Somewhat positive 4% 5% Somewhat negative 29% Very negative 10% No effect 52% The survey participants response to this question may be influenced by both the type and size of institution each represents. Generally, we would expect larger banking organizations to be most affected by financial reform, both in terms of potential lost revenue from activities that must be discontinued or restructured to meet new requirements and in terms of costs associated with adopting regulatory changes. There is also the significant concern of uncertainty given the myriad studies and additional details yet to come out of the regulatory reform legislation. Protiviti 3

4 Regulators Will Shape Industry More Than New Laws A strong majority of respondents 84 percent noted that actions of the regulators will be more important than changes in laws in determining how financial services companies operate. The responses generally were comparable among survey participants from the United States and United Kingdom, with 90 percent of the former and 80 percent of the latter expressing this view. Q. Which will be more important in determining how financial services companies will operate in the future? Actions of the regulators (Overall) 84% Changes in laws (Overall) 16% Actions of the regulators (U.K.) 80% Changes in laws (U.K.) 20% Actions of the regulators (U.S.) 90% Changes in laws (U.S.) 10% Before any legislators adopted regulatory reforms, we saw regulators in the United Kingdom and United States taking actions intended to shore up the financial services industry. Regulators in both jurisdictions have considerable latitude in the ways in which they interpret and enforce regulatory requirements. As such, executives surveyed recognize that over the long term, the attitude and actions of the regulators will have far greater impact than the specific laws or regulations themselves. Protiviti 4

5 Expect Compliance Costs to Rise Nearly all survey respondents 95 percent believe their organization s compliance costs will increase as a result of regulatory reform. All U.S. respondents say these costs will rise, and 91 percent of U.K. respondents share this view. There was less agreement among survey participants, however, with regard to how much of an increase there will be. Just over half believe costs will rise by less than 5 percent (these results were comparable among U.K. and U.S. respondents). Yet one in five said that costs will rise by more than 25 percent, and the response was even higher among U.S. financial services professionals, with 31 percent predicting such an increase compared to 13 percent of U.K. respondents. Q. How much do you think the cost of regulatory reform will increase in the financial services company you represent? Increase by more than 25% 21% Increase by 10 25% 3% Increase by 5 10% 19% Increase by less than 5% 52% No meaningful increase anticipated 5% If the cost of compliance rises, it is not unreasonable to think that the cost of financial industry services will also go up and/or that certain customers of financial services companies will find that services are no longer available to them. This often is the consequence of regulatory reform, yet it is an issue that often receives little attention during legislative debates. Protiviti 5

6 Executives See Much Room for Improvement in International Coordination of Regulatory Reform Respondents were asked to rate the level of international coordination on regulatory reform. Though a majority of respondents rated this as fair, one in three believe it is poor. Just 11 percent of all respondents (18 percent in the United States, 6 percent in the United Kingdom) rated coordination as good, and only 1 percent described it as excellent. When debating and crafting regulatory reform, notwithstanding the rhetoric that international cooperation and coordination are critical to ensuring effective reform, most jurisdictions understandably appeared to focus on solving the problems within their own borders. This means, however, that there are disparities, such as differences in compensation standards and in permissible activities, that will need to be addressed to prevent continued regulatory arbitrage and to reconcile and rationalize supervisory approaches for multinational financial institutions. Other findings of note: Effect on company culture There is a stronger belief among U.K. respondents than U.S. respondents that regulatory reform will lead to cultural changes in their organizations. Among U.K. survey participants, 45 percent said that such reform would result in cultural change to a moderate extent, compared to 23 percent of their U.S. counterparts. However, 21 percent of U.S. participants said regulatory reform would, to a great extent, lead to cultural change in their institutions, versus just 7 percent of U.K. respondents. Most and least impacted organizations Both U.K. and U.S. survey participants agree that banks are more impacted by regulatory reform than any other segment of the financial services industry. Two out of three respondents cited banks; no other type of institution received more than 15 percent of the response. Results regarding the least-impacted segment of the industry were more mixed, though there is general agreement that insurance companies will feel the effects less than any other industry segment. No shifting of business operations Despite some concerns expressed around costs and impact, relatively few organizations foresee shifting business operations to other countries as a result of regulatory reform measures. Interestingly, however, we note that in recent weeks the media has reported stories about U.K.-based financial institutions concerns that European compensation standards and a new bank levy are making it difficult for them to compete with financial institutions from other regions. Protiviti 6

7 Methodology and Demographics Protiviti conducted its Financial Services Regulatory Reform study in September Financial services industry executives and management-level professionals from the United Kingdom and United States were invited to complete an online questionnaire designed to assess the effects and long-term impact of regulatory reform initiatives in their home countries and globally. This is the first in a series of surveys Protiviti plans to conduct on various financial reform issues. Since completion of the survey was voluntary, there is some potential for bias if those choosing to respond have significantly different views on matters covered by the survey from those who did not respond. Therefore, our study s results may be limited to the extent that such a possibility exists. In addition, some respondents answered certain questions while not answering others. Despite these limitations, we believe the results herein provide valuable insights regarding the financial services industry s current thinking on regulatory reform. More than 100 individuals participated in the study 54 from the United Kingdom and 61 from the United States. Following are details regarding the respondents and the size of companies represented in the study. 1 Respondents (Title/Role) Title Percentage Chief Compliance Officer/Head of Risk 12% Senior Vice President/Vice President/Managing Director 12% Chief Financial Officer 8% Director 8% Chief Audit Executive/Head of Audit 7% Compliance Officer 6% ERM/Risk 6% Chairman/Chief Executive Officer 4% Chief Operating Officer 4% Manager 4% Chief Risk Officer/Head of Operational Risk 3% Finance 3% Regulatory Advisor 3% Actuary 2% Assistant Vice President 2% Head of Client Services 2% Internal Audit 2% Legal 2% Other 10% Total 100% Size of Financial Institution Revenue United Kingdom ( ) United States ($) Less than 100 million 15% 10% 100 million million 12% 10% 500 million million 6% 8% 1 billion billion 40% 39% 20 billion and above 27% 33% Total 100% 100% 1 All demographic information was provided voluntarily by respondents. Percentages in the tables correspond to those providing this information rather than the total sample of respondents. Protiviti 7

8 About Protiviti Protiviti ( is a global business consulting and internal audit firm composed of experts specializing in risk, advisory and transaction services. We help solve problems in finance and transactions, operations, technology, litigation, governance, risk, and compliance. Our highly trained, results-oriented professionals provide a unique perspective on a wide range of critical business issues for clients in the Americas, Asia-Pacific, Europe and the Middle East. Protiviti has more than 60 locations worldwide and is a wholly owned subsidiary of Robert Half International Inc. (NYSE symbol: RHI). Founded in 1948, Robert Half International is a member of the S&P 500 index. How Protiviti Is Partnering With Companies on Regulatory Reform In the early stages of regulatory reform, we are encouraging companies to consider how regulatory changes are likely to affect their business and to respond proactively to changes that seem inevitable. In these uncertain times, organizations with strong risk management and an enterprisewide view of compliance will have an advantage because they will be better able to adapt to and manage changing regulations, causing less disruption to their business operations. To that end, Protiviti has launched the Financial Regulatory Reform Task Force. This group, composed of global experts including Robert McTeer, former president of the Federal Reserve Bank of Dallas, can deliver cross-industry, cross-disciplinary insight for those organizations that must comply with new regulations in the financial services industry. Coordinated by the firm s global financial services industry and risk management and compliance leaders, Protiviti s Financial Regulatory Reform Task Force works with clients on key components of the reforms, including compliance with consumer protection laws, additional oversight by the Financial Stability Oversight Council and the Federal Reserve, new supervision for thrifts, restrictions imposed by the Volcker Rule, and restrictions on derivatives and swaps activities. Our risk and compliance professionals have worked with financial services clients around the world. We can help you evaluate and improve your existing risk management efforts. Our professionals create regulatory compliance solutions that align with your business strategy and risk profile. Our multidisciplinary team can ensure your technology infrastructure is supporting your objectives. We also can implement software and controls to improve performance and efficiency. In addition, we have communications professionals who can help you make the cultural changes necessary for effective risk management and compliance. For additional information, please contact: Carol Beaumier Managing Director carol.beaumier@protiviti.com Andrew Clinton Managing Director andrew.clinton@protiviti.co.uk Cory Gunderson Managing Director cory.gunderson@protiviti.com 2010 Protiviti Inc. An Equal Opportunity Employer. Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.