Over the last six months, I’ve read countless editorial and columnist pieces about how financial regulation (commonly truncated to finreg) is the nemesis of industry innovation. Finreg is on a “perilous path” say some, regulators are damaging the economy, say others. Can I remind everyone again why finreg exists? It isn’t about destroying market sectors; it’s about protecting those markets and investors from harm.
Many of these recent hyperbolic think pieces have been in reference to the Securities and Exchange Commission’s (SEC’s) focus on cryptoassets or trading activities that have previously flown under the finreg radar, but they reflect a recurring refrain from certain corners of the industry over the last couple of decades. However, the message that finreg is bad for market growth and innovation, and only a light touch will result in prosperity is complete and utter nonsense.
I’ll take this time to refer you all over to the example of Lehman or the global financial crisis of 2008 to highlight why finreg is necessary. Unfettered “innovation”, as it is now being called, can result in poorly designed and risk managed offerings on the market. As more and more firms pile into a market with the fear of missing out on revenues at the forefront of their agendas, things get missed. Things like asking whether the product is a good fit for your clientele’s risk profile, or whether there are underlying risks to your own business or the industry at large that you might not have noticed at the outset.
Regulators are there to mitigate this risk, especially at the systemic level, which is often missed by firms that are rightly concerned with their own businesses. Finreg needs to be carefully crafted to reflect the particularities of the markets and that takes cooperation from the industry rather than belligerence. After all, fighting the introduction of regulation takes much more effort than ensuring the regulation is fit for purpose.
As the industry seemingly becomes much more polarised (which is likely a reflection of society as a whole at the moment), there’s been a definite increase in anti-regulatory sentiment. Hiring ex-regulators to act as lobbyists also seems to have become the industry norm in key jurisdictions. If you have the experience of a regulator to hand, a much better use of their time would be reviewing how to improve your compliance processes rather than paying them to act as mouthpieces for your particular cause by lobbying on Capitol Hill (or in Paris and Brussels).
Don’t get me wrong, there are procedural changes that are required to make better finreg, such as longer comment periods in general and regulatory understanding that if you issue numerous regulatory proposals at once, firms need even more time to digest those proposals and to feedback to consultations. Sensible regulation comes from a partnership between the industry and the regulators, and I’m afraid that in many instances, that is lacking at the moment.
Regulators are often seen as the enemy. Lurking behind sandboxes to catch the industry out. But we should always remember that they are there to serve a function and that function isn’t to destroy financial markets. If we instead think of regulation as a jumping off point for innovation, a safety net to ensure that mistakes aren’t being made, how much more could be achieved?
Remember, finreg isn’t out to get you. Unless you happen to be engaging in illegal market practices such as insider trading, that is.