Are banks used as guinea pigs by the regulators?
I have worked on a number of regulatory change projects over the past few years, with different clients and different regulators. In that time, I have experienced two distinct scenarios in the way the banks worked with their regulators, where they were, in my opinion, treated as guinea pigs by their regulators, with requirements and deadlines moving faster than a ferret up a trouser leg. Admittedly, there were many differences in the projects themselves, as well as the outcomes, but it leads me to question,
how should the regulators work to get their regulations right first time?
Based on my experiences, I have a few suggestions on how the regulators could help their industry to cope with new regulations in future.
I have found that regulators are often not close enough to the frontline of the industry they are regulating. As a result, regulators are often playing catch up to understand the latest industry developments, which means that they may not fully appreciate the impact of the regulations they write. Inevitably, there is an initial period where regulators observe the impact of the new regulation on the industry and tweak the rules to manage the implementation implications, and ensure the regulation is achieving its goals. Unfortunately, this practice only serves to create a moving compliance target for the banks to hit.
An EMIR Trade Reporting project I worked on is a good example of this. The rules were issued and a “go live” date was set with the industry, which was upheld by European Law. The rules were supplemented by regulatory and technical standards, and by Q&A documents that were issued following questions raised by industry forums. However, these documents were frequently amended and often contradictory, making an already challenging implementation plan even worse. ESMA recognised the failings of their documentation and issued updated texts in November 2015, endorsed in 2016 – 2 years after the go live date.
The implementation of EMIR reporting has allowed ESMA to gain practical experience and to detect several shortcomings and limitations in the reporting, which have been addressed through the review of these Commission Delegated and Implementing Regulations.
Thankfully, most of the clarifications and changes to the text seek to make life easier for the banks, but the point still stands – how can banks be expected to comply with a regulation that has continued to evolve for 2 years after being finalised?
The other scenario I encountered was where the bank was working with a regulator before a legally binding requirement was put in place. The bank, therefore, could not be penalised for issues in the implementation, which resulted in a much more collaborative working style with the regulator to agree the desired outcomes and align them to priorities for the future.
However, even this approach posed issues for the bank. Without a legally binding requirement it was difficult to secure the internal sponsorship needed to build a strategic infrastructure and without a clear, consistent view of the long term goals of the regulator it was difficult to define what the strategic infrastructure needed to be anyway!
These two, very different, approaches to regulatory implementation have given me pause to think about what the regulators could be doing to help the banks achieve the right outcomes for regulatory implementations.
- Publish a clear view on the long term, strategic objectives and importance of new regulatory requirements. If this is something that will be a cornerstone of how banks should be managed, they should be told!
- Work collaboratively with the banks, not just through the formal consultation processes and industry forums, but through specific working groups, and in the case of supra-national regulators like ESMA, by leveraging relationships with national competent authorities like the FCA to really understand the challenges the banks have, before the rules are written into stone and punishable.
- Consider a period of soft enforcement for new regulations; a period of forgiveness where banks commit to a best efforts level of compliance, and the regulator uses this as a period of learning to evolve the regulation.
With more communication and collaboration between the regulators and their industry participants I believe we could see a much more positive response to new regulation, where banks are given the clarity and support to comply with the spirit of the regulations, and not just the letter.