In the light of recent regulatory developments including the Markets in Financial Instruments Directive (MiFID II), the implementation of the International Financial Reporting Standard (IFRS) and the Senior Managers and Certification Regime (SMCR), firms now need to do a lot more to remain compliant. Monique Melis, the global head of regulatory consulting at the compliance consultancy of Duff & Phelps and an eminent ex-regulator herself, asks whether enough is enough.

It is clear that the financial services industry is more complex and more fractured than ever before, but this also raises the question: should policy makers take a step back from time to time and question whether current regulation is still fit for purpose? Or should we even raise the possibility of some sort of deregulation?

In the UK, we live under (and like) a principles-based regime, which has helped us to be more open with regulators, customers and counterparties alike. However, with firms under greater pressure to demonstrate compliance than ever before, does it make sense to have all of this regulation? Or should regulators concentrate on using the tools they already have, rather than superimposing rule upon rule?

Counting the cost of regulation

To continue on the theme above, it is important to remember the huge costs that the industry has to pay in its struggle to report transactions. MiFID I transaction reporting was introduced in November 2007. At the time, this was one of the most complex and costly pieces of regulation ever to be introduced in Europe. It was hard to get right and as a consequence some firms did not implement it properly and misreported data instead. As a result, regulators in Europe were not able to use MiFID I reporting to its full potential and many firms started wondering what those regulators were doing with all that data.

With the introduction of MiFID II, we have seen a repeat of the same problem. According to research from CoreData, which surveyed almost 1,000 UK advisers, 57% found it to be an unnecessary burden, while 56% saw the directive as a waste of time and money.

Because of the difficulties associated with legislation like this, firms have been misreporting since 2007. Although the need for rules and regulations is undeniable, we also need to consider those that are already in play and whether expensive regulatory evolution is worthwhile.

The problem with PRIIPs

Another example is the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation. Despite the industry’s efforts to be transparent, i.e. to send informative data to regulators and customers, some regulation appears badly thought-through and, again, extremely costly.

Generally speaking, openness is a good thing, as argued by Jonathan Ford of the London Financial Times – especially when it comes to preventing fund managers from unfairly charging firms for research, and also making them accountable for their own research spending in line with MiFID II. Despite the the benefits of transparency, however, we have a landscape in which people are calling on the industry to do a lot better in terms of research costs and charges.

These issues are evident in the recent PRIIPs extension, which sparked controversy over predictions of future performance, and raised concerns about the methods that firms were using to estimate transaction costs. Is regulation of this kind simply going to stifle the industry’s performance, rather than allow it to thrive?

Making sure that regulation has the desired effect

Anti-money-laundering (AML) regulation is another shining example of great but costly rule-making, especially as it remains a work in progress, with the Financial Action Task Force currently working on a worldwide set of standards for virtual currencies. To assess its true effectiveness, we should look at its success in terms of combating actual money laundering. We must be careful to avoid making regulation a box-ticking exercise; instead, firms should use the rules to instigate real change for the greater good of the industry.

The documents required by firms as part of the AML process are actually quite easy to falsify, so it may appear that a firm is acting compliantly when in reality no real change is taking place. Efforts have been so heavily focused upon building a regime of collecting data, rather than catching crooks, that it would be useful if we could find a way of measuring this process to see where we can make real improvements and gain greater insight into whether the regulation is having the desired effect.

Let us not forget too that, as an industry, we face the problem of several regulators giving out mixed messages. From global standards to national and European regulation, we have various different regimes to satisfy. How can firms comply in an environment that has so many contradictory rules? We need to make it as easy as possible for firms to remain compliant and it is therefore our duty to make the rules less difficult to interpret and easier to apply.

Remembering the real purpose of regulation

At the moment, every little change to a document costs millions. It is important that we think about who pays for it and where the money goes. We do not want to be overloaded with very costly yet badly conceived regulation. What we need is someone in charge to question and to assess all the various regulations to ensure that they are fit for purpose. Who really does that? Of course the regulator has consultation papers and discussion papers and cost-benefit analyses, but does the industry really believe that the analysis is right? If not, is it too fatigued to fight back?

Despite the fact that 98% of the financial industry genuinely wants to comply, our job is to try and make up for the remaining 2% of the industry who do not wish to play ball. What we have seen so far is that it is all too easy to create red tape, but the important thing is not to create regulation for regulation’s sake.

Regulation must be there to aid the economy, make consumers feel safer and protect the weakest people in the industry. It is the enforcers’ duty to ensure that he is implementing the right kind of rules, taking stock of what is already there and abandoning unnecessary regulation so that firms do not become too heavily burdened, to the detriment of the entire industry.

* Monique Melis can be reached on +44 2070890820 or at Monique.Melis@duffandphelps.com