Changing the regulatory burden into a business advantage
Financial services companies that proactively approach the challenges posed by the growing body of regulation for the sector, the top business threat in Ireland and globally according to FS CEOs, and set the correct tone from the top can turn the increased regulatory burden into a competitive advantage writes John McDonnell.
Eight out of ten CEOs globally and in Ireland see over-regulation as the top economic and business threat.

In the wake of the financial crisis the reaction from global, regional and local regulators has resulted in an increased regulatory burden on the financial services industry, including higher capital charges, greater liquidity requirements and increased requests from regulators for information. The increase in costs is substantial but regulation has also increased other risks, including operational and reputational risks for financial institutions.
The purpose of the new requirements, rules and regulations, is to create a safer and more resilient financial system. However, ensuring that the rules are applied effectively, are focused on the risks and are proportional, is key to avoiding the pitfalls of over-regulation. On a European level, the decision by the European Commission to review the wide array of financial regulations is a positive step as over-regulation can reduce efficiency, create unnecessary regulatory burdens and give rise to unintentional consequences.
John McDonnell, regulatory leader (centre), and the PwC Regulatory Team.
John McDonnell, regulatory leader (centre), and the PwC Regulatory Team. (click to enlarge)

From a competitive standpoint, there are two aspects: Firstly, the bigger the organisation, the better generally they can deal with the regulatory demands and, secondly, non regulated entities can have a competitive advantage in certain areas. It is also essential that firms are proactive and take on the new regulatory requirements head-on.

The last six years have been a period of intensive rule making in the EU and regulators, including the Irish Central Bank, have become more proactive with more questions being asked. Consequently, at PwC, we are seeing a much greater demand for regulatory services from the financial sector.

The approach by financial institutions to regulation needs to start at board level. Boards need to have the right risk appetite for the business, understand the level of risk being taken on and the impact of this on its regulatory requirements. This should then cascade down to the different regulatory areas in the business, whether it is prudential, conduct or compliance.

Firms need to ensure that a robust and efficient operational risk and regulatory/compliance framework is in place to deal with day-to-day compliance. Processes to deal with future changes to rules and requirements should also be a central part of financial firms’ strategies.

Requirements for financial services firms are constantly changing and being refined. Dealing with these changes effectively is about leadership and having the right tone from the top. Those who do it better will be better positioned competitively.
John McDonnell is partner and Regulatory Leader at PwC.
This article appeared in the April 2016 edition.