Since 2008, creating more regulation has been our solution to addressing the structural and institutional weaknesses exposed by the financial crisis and the following fraud and market abuse scandals. But market sentiment towards regulation remains hostile, the public doesn’t see it as effective and politicians seem weary of the process. According to participants in our latest Banking Banana Skins survey, regulation remains the biggest threat to banks, ahead of the economy, devaluation of the Euro, geopolitical tensions or threats to cyber security, each which are each very serious concerns. Respondents cited political interference and the backlash against financial institutions as the second largest threat, with one respondent feeling there is a “gotcha attitude” against banks.
Compare this sentiment to that in our 2005 Banking Banana Skins survey. Back then participants also believed that the greatest risk to the financial industry was “too much regulation”. They felt “regulatory overkill” was endangering the health of banks. One senior banker went as far as claiming regulation was “out of control”. If only we had known what was coming!
It’s clear that the yardstick of what is considered “too much” regulation has entirely shifted in the last decade. While preparing for Basel II might have been a big challenge in 2005, it pales in comparison to the reforms financial institutions are dealing with in 2015. Last year firms and regulators struggled to meet implementation deadlines, a tendency that could continue over the next several years. In December we saw further evidence that the focus on implementing very detailed technical regulation will continue for the next several years. In December, ESMA published a walloping 2,100 page consultation on MiFID II, the EBA published a couple of consultations on the Mortgage Credit Directive and EIOPA released 16 consultations on various standards and guidelines for Solvency II. We’ll continue to see this trend across 2015 – the EC and the ESAs intend to progress work more than 350 RTS and ITS year.
But globally, the economic growth agenda is likely to get more attention in 2015, with new regulation becoming a means to an end rather than being the primary focus. In its November 2014 Communique, the G20 used the word “growth” 32 times (compared to 12 times in 2011) e, but did not mention “regulation” at all (2011: five times). The Turkish G20 Presidency mantra of “inclusiveness, implementation, and investment for growth” will prioritise the financial system’s role in stimulating growth in the real economy.
EU Commissioner Hill believes that “right now, there is something else that threatens financial stability…a lack of growth”. This sentiment is supported by his boss EC President, Jean-Claude Juncker, who has put jobs and growth at the top of his priorities for next five years. Juncker has said he will be looking at everything “through the prism of jobs and growth” and sees a “successful, competitive financial services sector” as essential. Juncker wants financial services to be seen as part of the economic mainstream, not cut off from society at large, with a particular focus on funding the EU’s maligned SME market. This agenda is likely present a number of opportunities for the financial industry as it continues to recover, as the regulators seek to open up new channels for financial activity.
Our first feature this month focuses on climate change, which is moving up regulators’ agendas. In our second feature, we provide an update on where we are on the long haul towards MiFID II implementation in early 2017.
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