by DLA Piper and BDO
A new research report entitled ‘The new twin peaks model: A report on the financial services industry’s views on upcoming regulatory issues’ by DLA Piper and BDO has raised concerns about the impact of the new twin peaks structure, with the creation of the two new bodies – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) widely expected to place a considerable additional cost burden on companies in the sector.
Increased focus on culture represents the biggest challenge to investment and fund firms
Increased focus on culture represents the biggest challenge to investment and fund firms. Out of the firms regulated by the FCA, 91% rank a focus on culture as a high or medium concern. Early publication of enforcement actions was also viewed as a major worry, especially across smaller firms. Both trends consistently appear in this survey across the different sectors. Investment and fund firms also registered the highest level of concern amongst any sector over increased disclosure powers. In addition, investment and fund firms predict that the RDR and the Alternative Investment Fund Managers Directive will have a major impact on their workload in the short term.
Of least concern are powers applicable to the UK Listing Authority and Recognised Investment Exchanges. The shift to judgement-based regulation is also not seen as a significant worry. Compared with firms in other sectors of the market, investment and fund firms strongly expect planned changes to the regulatory system will improve the effectiveness of the regulator, with 88% believing improvements will occur. Unlike other sectors of the market, a large proportion (48%) of investment and fund firms feel that changes will also lead to better risk management.
A major conclusion of the report is that the financial services industry is underestimating the costs associated with increased headcount, which could result in the creation of a “hiring bubble” over the next two years. Of respondents, two thirds (63%) expect a significant increase in financial cost from the regulatory change and 68% expect a significant increase in time spent communicating the benefits and changes to clients. There is also apprehension that the PRA and FCA will not adopt a consistent approach to regulation and that such a disjointed system will further compound the burden of cost for firms.
Furthermore, the proposed creation of the Single Supervisory Mechanism, which will bring all Eurozone banks under the supervision of the European Central Bank, raises the possibility of more maximum harmonisation of EU rules in the future and more detailed reporting and requirements. This calls into question the extent to which the PRA can follow its planned judgement-based approach in prudential supervision.
Despite these concerns, the majority of respondents (79%) think the twin peaks regulatory system will result in improved efficiencies and ultimately directly benefit clients (58%). That consumers are expected to ultimately benefit from regulatory reform is due in part to the cultural shift it will promote within the financial services industry. A shift in the management of regulatory compliance is expected to play a central part in the firm of the future, moving from a box-ticking approach to a more integrated, business-led risk management role. The industry will, therefore, be judged not only on its response to current regulatory pronouncements, but also on how it is perceived to have addressed the concerns of society as a whole.
Evidence suggests that financial services companies underestimate the financial ramifications of the new regulatory regime. Whilst respondents acknowledge that the cost burden of regulation will increase, these costs do not appear to take into account changes to headcount; 59% say there will be no change to headcount in the next 12 months and 20% say no change in headcount in the next 2 years, with 53% expecting only a 1-10% increase in the headcount of the compliance/risk function over the next two years. However, increases of 40% – 50% seem much more realistic given the already high levels of compliance demanded by the current catalogue of regulatory developments.
Michelle Carroll, Partner at BDO, commented that “this reticence towards boosting relevant teams in the near term appears to be rooted in the fact that major regulatory developments such as Solvency II and Basel III have been delayed on a number of occasions. We therefore envisage a “hiring bubble” developing over the next two years as key regulatory deadlines become imminent, potentially creating a “sellers market” for key skills in which the cost per individual is increased.”
Michael McKee, Head of Financial Services Regulation at DLA Piper, gave some clear advice on how to respond to this hiring bubble: “It is clear that Financial Services companies should consider adequately resourcing risk and compliance functions ahead of a potential market squeeze, regardless of the current uncertainty over components of the regulations’ implementation. The rule that failing to prepare, is preparing to fail, may never have been as apposite, as the industry faces the largest changes to its regulatory environment for decades.”
The full report can be downloaded from: http://information.dla.com/