Even as Brexit negotiations progress and SEC priorities in the Trump era take shape, much uncertainty remains regarding global financial services regulations, according to Duff & Phelps’s Global Regulatory Outlook 2018 survey.
With murkiness surrounding the Markets in Financial Instruments Directive (MiFID) II, the General Data Protection Regulation (GDPR), Senior Managers and Certification Regime (SM&CR) in the United Kingdom and Dodd-Frank in the U.S., few survey respondents expect the overall regulatory burden to ease. Fully 95 percent say regulations will increase costs, and almost a quarter (24 percent) said they will spend more than 5 percent of their annual revenue on compliance by 2023. In fact, 11 percent say they will spend more than 10 percent on compliance by that year.
Cybersecurity remains the top regulatory growth area, with nearly 30 percent of respondents saying it will be regulators’ primary focus in 2018. More than half (54 percent) think it will be among the top three priorities, and it’s now ahead of anti-money laundering and” Know Your Customer” regulations among regulatory concerns. The cybersecurity focus will likely only intensify as regulatory expectations in this area are still shaping up and with the continuing prevalence of cybersecurity breaches. Nearly 80 percent of respondents expect to spend more resources and time on cybersecurity in 2018.
Meanwhile, respondents are more confident in regulation’s effectiveness. Just over half said they expect financial services regulation to increase market stability—up from 42 percent in 2017. Still, 29 percent say that regulation has no effect on stability, and 10 percent say it makes it worse. Moreover, the proportion saying financial services regulation is likely to enhance investor confidence is down to 35 percent, with 56 percent saying it has little impact and 5 percent saying it damages it.
Additionally, few respondents believe regulatory changes adequately safeguard against a future crash. Most (57 percent) say the key issues have only been partly addressed, while 28 percent said they haven’t been addressed at all.
“The reason cyber risks are such a key regulatory focus is because of the increasing power and pervasiveness of technology in financial services.”
About 20 percent say greater regulatory harmonization is the most important factor in maintaining an effective regulatory system. More than half (52 percent) agree that regulators are improving their ability to coordinate across borders, but few (29 percent) think they have been effective in establishing consistent global regulatory standards.
Of course, it’s understood that regulation can have some positive impacts: A third of respondents said it “expands market reach” and nearly three-fourths concede regulations encourage improvements in internal systems and control.
Brexit continues to weigh on respondents’ minds. About 20 percent of respondents said Brexit had an immediate impact on their compliance programs, with changes already being made or planned for the next six months; 26 percent are expecting changes within 18 months. As to the scope of those changes, much will depend on the final agreement.
In light of Brexit, 53 percent of respondents say London is the pre-eminent global financial center, but only 29 percent expect it to be in five years. Brexit also presents opportunities—and many firms are considering options to continue marketing in the EU, such as using management companies and revising their operating models.
Brexit is not the only opportunity for firms in the regulatory space. The reason cyber risks are such a key regulatory focus is because of the increasing power and pervasiveness of technology in financial services. Just as firms embrace this in their businesses, so too are regulators in their work in detecting and preventing market misconduct.
As regulators’ sophistication grows, their expectation of firms’ own capabilities to automate compliance and market monitoring does, too. On one hand, that’s a significant threat for firms that fail to take up the challenge. But it offers the promise of more orderly markets (which should be good for the industry and prevents the unscrupulous and unfair gaining of advantage), as well as the potential for solutions that, through automation, ease the regulatory burden and perhaps halt the rise in compliance costs.