If anyone within the wealth management business was in any doubt about the regulatory tsunami stemming from the market turmoil, new research from JWG, a think tank, reveals eye-popping data to confirm the scale of what is happening.

If anyone within the wealth management business was in any doubt about the regulatory tsunami stemming from the market turmoil, new research from JWG, a think tank, reveals eye-popping data to confirm the scale of what is happening.

To date, the regulatory process in the world's major economies has produced more than 90,000 pages of consultation and other papers. The reading pile tops 8,900 pages in more than 50 documents in July alone, said JWG in a new report based on comments from 44 financial institutions.

So it is not surprising that even the most conscientious bankers are struggling to keep up. Additionally, the regulatory onslaught is making markets in regions such as Europe more, not less, fractured along national lines. This goes against the European Union’s supposed goal of creating a genuine single market for financial services, pushing back some real achievements in this regard. And even more concerning, the regulatory burden may prove so costly and time-consuming to implement that users of financial services may not see real benefits.

By raising the barriers to entry into the business, and hiking compliance costs, the regulatory process could reduce, rather than improve, consumer choice, even though that is not what regulators say they intend. And as this publication has noted in the past, regulations on issues such as tax compliance are curbing, or even reversing, the trend towards globalisation and free movement of people. (To view examples of such articles, click here, and here).

Here is an example of what JWG has found:

“Current standards do not allow for a single method to meet the new customer identity management requirements.  As a result, regulators are not easily able to analyse the information they need from the financial institutions.  In June, JWG carried out a data quality exercise with ten of its members revealing that, out of 60 legal entities, only two names and addresses could be matched in their entirety.”

JWG also said that its research revealed a lack of a common approach by regulators to set down requirements in issues covering traders, machines, algorithms, desks and retail customers. 

Regulatory flood  

There has been a heavy amount of rule-making to absorb. In recent weeks, US legislators have passed sweeping reforms of financial services, designed – so lawmakers hope – to prevent a repeat of the credit crunch with measures designed to reduce risky bank trading, tighten oversight of financial services, and move away from the need for taxpayer bailouts of banks. But other countries may take a slightly different approach to things such as banks’ ability to operate their own proprietary trading systems. (Cynics may of course argue that none of this legislative hyperactivity will do much good unless countries such as the US give up their addiction to central bank cheap money).

In the UK, the regulatory authorities are imposing tighter rules on financial advisors through the Retail Distribution Review; in Switzerland, the regulators have imposed new capital requirements and rules on leverage. And in the European Union, policymakers are pushing for new laws on hedge funds and other alternative investment vehicles.

JWG has, not surprisingly, found that financial professionals are struggling to keep abreast of all this activity: 41 per cent of JWG survey participants who are responsible for data not having heard of the requirement for what is known as a Single Customer View (SCV) - the profile that firms can or should have about an individual so that they can serve customers effectively and quickly.

The think tank itemises some of the problems that sheer regulatory overload could generate:

-- Customer protections implied by the new regulations will not materialise;

-- P/E ratios of financial institutions will be affected as they struggle to articulate how their business models have been reformed;

-- Fiduciary responsibilities to customers will be undermined;

-- Systemic risk controls demanded by politicians will be ineffective;

-- Protection of personal information will be at risk in the rush to gather information.

“Trust in financial services is being reinstated by restructuring everything from customer protections to how risks are mitigated and markets and financial institutions are structured.  Whilst the data exists to comply with the new regulations, it is not possible to transform it into the required information without rules that define how it should be translated and linked,” said PJ Di Giammarino, chief executive of JWG.

“The reality is that each of the 93 points on the G20’s reform plan has been pursued independently and, without a central body to coordinate what is essentially the lifeblood of the industry, the data about the customers and counterparties is going to be useless in the central decision making process," he said.

JWG also warns that regulators in each state could arrive at an uncoordinated approach to implement structural reform and economies will be hurt by higher banking fees and ill-informed monetary policy.

And that is the ultimate problem. There is, for sure, a need for smarter regulation and some laxity in the system needs to go. It is also clear that when markets are well governed and practices such as insider dealing are stamped out, that this fosters greater trust in markets, and makes it easier for companies to raise money for new investment at a lower cost than otherwise, benefiting everyone in the end. But as I have already argued, there is a real danger that legislators have been acting in haste, leaving a painful legacy for the rest of us. And there is more legislation on the way.