Market abuse, MiFID, collateral, IAS, IFRS, Sarbanes-Oxley; the list goes on. Each new regulation imposes costs on the industry it regulates, and it also opens new business opportunities.
As sellers of financial instruments and investment vehicles market their offerings to customers, so the regulator will follow. Governments are interested in orderly markets, the rule of law and taxpayer protection, and seek to use regulators to oversee markets and ensure that laws are obeyed and consumers protected. That’s what regulation is.
In the UK we have, in the City of London, the most interlinked and central financial centres of them all, and so almost any regulation made anywhere impacts firms that do business in London. London is pre-eminent not merely because of its location on the Greenwich Meridian, but because its regulations are relatively light, there is a good body of contract law and property rights are strongly upheld.
And yet regulation is a fallacy. We imagine cool-headed, competent people, selflessly devoted to the public good, impartially monitoring their market and enforcing the regulations for the good of all. Such people do not exist. Instead we have a system where the industry being regulated works hard to capture the regulator - to make the regulator serve the industry and not the wider public good. When industry achieves this it is called ‘regulatory capture’. Remember that no company likes competition in its own market and so will back anything that can serve to reduce competition - and it’s quite cheap to capture the regulator: a few plum jobs on the boards of large firms when one’s term of office has expired - well, one has school fees and a villa in Majorca to pay for, right?
Regulation is a fallacy for a second reason - any rule book can be gamed. The moment a rule is made concerning one thing - opportunities open up in everything else. There are loopholes to be exploited, exceptions to be sought and special cases to be plead. Often, regulations do no more than codify how firms are expected to comply with existing law, which gives comfort to a firm - it is a reasonable defence to claim that the relevant regulatory principles and guidelines were followed and obeyed.
Regulations add massively to the costs of the industry being regulated. There is a whole industry created to help firms comply with regulations; to understand the rules and their application, to run projects to change systems and procedures, and to monitor and certify compliance.
So, how would I advise a CEO? Create a chart of the regulatory change in the pipeline. Assess, at a high level, the impact on your firms’ operations. Get close to the regulator - offer them staff, facilities, expertise. Find out what the big consultancy firms are doing. Make full use of any comparative advantage your firm may possess.
Regulations are good things for the industry being regulated. Cynical, huh?
