Have Your Say in the Life Cycle of Regulatory Change

Lora Bentley

Lora Bentley spoke with Susannah Hammond, regulatory affairs executive at Complinet. Hammond has more than 15 years of wide-ranging domestic and international experience in the financial services industry.


Bentley: What drives regulatory change in the financial services industry?
Hammond: There are three main drivers, if you like. One is the big scandals that arise. To be fair, in the financial services world that tends to be less things like Enron...and more about things like the credit crunch we are going through, an institution failing and customers being at risk of losing their assets, or a particular product that has been deemed to be systemically missold. These are the types of scandals that would drive a big change in the financial services market.


Bentley: And the others?
Hammond: Another driver for change is political. An awful lot of what comes into the UK legislature comes out of the EU (European Union), and the EU right now is politically driving for convergence - to make sure that, basically, if you're sitting in any one of the EU jurisdictions there are no barriers to trading across the internal boundaries. Each jurisdiction should have the same standards, the same approach, the same disclosure requirements.


For example, if you're sitting in France and you wish to buy a mortgage in Spain - in other words, you want to raise your house finance in a different country - you should expect the same information disclosure requirements, the same capacity to switch that mortgage, complain about that mortgage, terminate that mortgage as if you had gone to a French vendor - in France...And if it's politically driven, it's because there's real economic benefit there. There's a beast at the EU level, the European Commission level, called the Financial Services Action Plan, that's been running for probably five years now, that is all about driving regulatory convergence all across Europe. When the EU decides on something, then the UK has to implement it.


The last driver for change is market developments and changes. And this doesn't happen as often as it did, perhaps, in the 1980s and 1990s - but it's where the market itself develops a whole new way of doing something.


Bentley: Can you give an example?
Hammond: Well, good examples are some of the derivatives, like hedge funds. Fifteen years ago, hedge funds didn't exist. But the market has developed hedge funds and venture capitalist funds....All of these things are either new products or new ways of doing things, and that in itself has then driven regulatory change. The regulators are not really quite sure how to handle them, so they have to create new sets of rules to put a framework around them.


Bentley: So once a change is in the works, what does the process look like?
Hammond: What will happen is that regulators will issue - they call it different things in different places - a consultation paper or a discussion document saying, "This is what we want to get to, this is the end result, and this is how we think we're going to get there. Would you please let us know what you think about these proposed rule changes?" And then there's an intricate consultation process that the proposal goes through...At all stages (from the highest level to local jurisdictions), it is absolutely open to influence.


Bentley: Who participates?
Hammond: The people who tend to respond to these inquiries very much in the U.S. and the UK are the firms who are involved. For instance, if you're Goldman Sachs, you would respond to FINRA or the Fed in the States or the Financial Services Authority in the UK and say, "I'm really happy with the first three points, but I hate the fourth one. I don't think that will work at all."


Also the trade bodies in the financial services industry are very influential in terms of shaping regulatory change. And they are rather arbiters. Firms tend to lobby on two fronts. One is to make sure that the regulatory changes are as beneficial as possible to themselves as institutions. Also, [they want to make sure] that the changes are as damaging as possible to their competitors...Hence the trade bodies, because they are apolitical, tend to be a bit of reason in the middle.


Bentley: Does that then make the trade bodies' opinions more influential?
Hammond: Well, it tends to make them, perhaps, the middle ground. It doesn't necessarily make them right or wrong, but they tend not to take either one extreme or another. In terms of lobbying voice, they can be very powerful, but because they are not at the commercial reality sharp end of things, they can't really go to the regulator and say, "This won't work for our customers, and here's an example of why." They are a safe middle ground for regulators to work with.


Bentley: So the lesson for companies in the industry, then, is to be aware of what's happening and be involved in the change process?
Hammond: We're sort of back to making sure that you at least have a say in the control of what the future rule book looks like. That can make a very big difference for you. If, for instance, you are the only one not lobbying, but all of your competitors in the marketplace are aware of that and together move to make the rules as disadvantageous to you as possible, you're going to spend so much, more much money implementing that new law - changing your business plan, readjusting your products, reengineering your products - than those who lobbied successfully. They had a minimum amount of change to go through.


Often when it comes to new law there's unintended consequence, [and if you lobbied] you're able to go back [to regulators] and say, "Actually, this is what happened in practice, and that's not what we meant." You've got a better voice next time there's a change coming around.

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