Thursday, April 12, 2018

IFAC finds that regulatory fragmentation costs financial institutions $780B annually

By John Filar Atwood

Inconsistent regulation among different jurisdictions around the world is costing financial institutions an estimated $780 billion each year, according to a report prepared by the International Federation of Accountants (IFAC) and Business at the OECD (BIAC). Based on their findings, the two organizations called on regulators to make international harmonization a policy-making priority.

The report, which was built on a survey of 250 experts at global financial institutions, suggests that regulatory divergence costs financial institutions on average 5-10 percent of their annual revenue turnover. Dealing with an inconsistent regulation consumes management time and capital that could be better spent on identifying emerging risks in the financial system, the report states. More than half of the respondents said resources have been directed away from risk management due to the costs associated with diverging regulation.

Costs. In the survey, 75 percent of respondents said that costs incurred as a result of regulatory divergence were material to their overall performance. The costs include increased head count to manage local, international, and cross-jurisdictional regulatory issues and hiring external consultants to help deal with the problem.

Companies also incurred training costs for staff to deal with regulation and legislative activity across different regions. System costs, including needing to implement multiple systems specifically designed to address regulatory divergence, were reported by most respondents, as was the expense of restructuring the compliance department to better adjust to divergent regulations.

The report states that the costs arising from regulatory divergence are more material to smaller institutions. Twenty-one percent of respondents with a market capitalization under $10 million said the costs of regulatory divergence were material to their performance, compared to 14 percent of institutions valued at $1 billion or more.

Divergence in competition law was most often cited by respondents as a cause of material costs. Market regulation and financial reporting/auditing also were tagged as material by more than half of the survey respondents.

Nearly three-quarters of institutions in the study reported increased costs from divergent regulations over the past five years. Most respondents attributed the increase to regulations introduced in response to the 2008 financial crisis. Two-thirds of respondents expect costs to rise over the next five years, with Brexit and protectionist politics being the likely drivers.

Among the study’s findings are that regulatory divergence represents a barrier to most financial institutions’ international growth. In addition, half of respondents said that they had fewer resources to invest in innovation, lending activities, corporate social responsibility, product development, and brand development.

Specific inconsistencies. Some of the specific issues that respondents cited within the area of regulatory divergence include duplicative reporting requirements and sometimes contradictory interpretations associated with monitoring and enforcement of regulations. The study also cites divergence in the detail of regulatory definitions, adoption of international reforms at different speeds in different countries, and an overall lack of clarity in rules and regulations.

Solutions. In the survey, IFAC and BIAC asked participants to suggest ways to address regulatory divergence. The recommendations include enhanced international regulatory cooperation in the way regulations are interpreted, monitored, and enforced.

Respondents also suggested an overall increase in the alignment of rules, with a greater adherence to global standards. Improved alignment in regulatory definitions also was recommended as was better communication and awareness among regulatory agencies internationally to avoid duplicating reporting requirements and processes.

Finally, respondents called for greater transparency by international organizations in developing new rules and regulations, and greater overall clarity in rules and regulations.