In this article the general manager at Mitsubishi UFJ Investor Services and Banking (Luxembourg) SA issues a clarion call for greater collaboration between regulators and the financial services industry, making especial reference to the recent experience of Ireland.

The regulation of financial services is becoming ever-more onerous and compliance costs at firms are spiralling upwards. Compliance teams have to shoulder sizable overheads as they manage complex regulatory initiatives. This has become a standard part of firm's internal processes, particularly at firms that have to cope with regulatory differences between countries and regions. Many of the frustrations that people have in the financial services industry are born out of a misinterpretation of the intent of regulatory bodies, the fact that they do not tell firms what they want them to do very clearly and the impression that regulatory bodies often fail to approach policy pragmatically.

It is easy for firms to regard compliance as a burden and to forget the intentions behind regulations. The point of regulation is to protecting members of society, not to punish people and firms in the financial sector. Indeed, if we look at the regulators in Ireland, we can see that one of the five strategic themes they pursue is ‘Strengthening Consumer Protection’. Regulation is good for everyone when executed well and it is important to remember that. Generally speaking, criticism from the industry has to do with the relationship between the industry and regulatory bodies, rather than the regulation itself. The regulated community would welcome regulation with much more approval if a stronger relationship existed between the industry and the regulators. The regulators would also be able to implement their policies more effectively. Many financier believe that the regulators have a greater opportunity than they realise to use representative bodies such as the Irish Association of Investment Managers and the UK's PIMFA to put their messages across constructively before any regulatory changes occur.  

Two recent examples of this are the Irish Central Bank's consultation papers CP95 (entitled Funding the Cost of Financial Regulation) and CP108 (New Methodology to Calculate Funding Levies). Both involved the national industry body (Irish Funds) which was most effective at telling the regulator about practitioners' opinions.

Financial firms do know that it is natural for a healthy tension to exist between regulated institutions and the regulator, but there has to be a balance in the minds of the regulators between the ‘macro’ of intent/policy and the ‘micro’ of supervision. This is not an easy balancing act for the regulators to pull off, but in Ireland since 2008, people have often thought that the pendulum has swung too far towards supervision at the expense of all else. This may only be a perception among financiers, especially those that have exposure to regulators in other global markets, however it is a perception that is carried in the news wires.

As markets and the inherent risks in evolving portfolio strategies become more complex, it is vital for regulatory bodies and participants in the financial services industry to collaborate in concentrating on the pro-cyclical behaviour of the financial system, with the shared objective of financial stability in mind.

The regulators are, of course, taking a tougher approach than ever before in the wake of the Libor and FX market abuse cases (words such as indictments, sanctions and fines are becoming a regular feature in the financial news). Nevertheless, there is evidence that the relationship between market participants and regulatory bodies has improved in the last five years. The regulator now participates regularly at industry events, roadshows, FinTech sandbox events, etc. The CEO and CCO community is slowly accepting the more draconian scrutiny and faster pace of change being demanded by regulators as necessary things that will protect their firms against the 'probability risk' that they must take into account when conducting 'multi-year planning.' If both regulator and regulated can co-ordinate their efforts, I believe that the new regulations can be put into practice in the best possible way and that an enduring accord will underpin their relationship.

In future, the vital things that will make regulation as impactful and well-received as possible are collaboration between the industry and regulators, more representation of market participants in regulatory bodies, and continuous learning from the past. The financial sector is pleased when regulators encourage the setting-up of such bodies as the Consumer Advisory Group, whose job it is to advise the Central Bank about the performance of its functions and the exercise of its powers in relation to consumers of financial services. Such groups give market participants a platform and relay advice to the wider industry and public.

With thoughtful participation from both sides, regulatory effectiveness will continue to improve, thereby benefiting both financial service firms and the people whose jobs it is to put regulatory initiatives in place. This will ultimately society as a whole.

Although many people with an interest in the financial services industry (including the Government) benefit from regulation, it is crucial never to lose sight of the fact that the ultimate beneficiary of regulation should be the underlying consumer. This should remain at the centre of debates on this subject and the dialogue should remain lively and clear.

* Brendan Toolan can be reached on +353 1 634 4271 or at brendan.toolan@lu.tr.mufg.jp