Read Valuation Insights, Second Quarter 2018
The more things change, the more they stay the same. With Brexit and Trump dominating global headlines last year, much of the resulting uncertainty persists in our Global Regulatory Outlook 2018 survey.
Both developments have yet to play out. On Brexit, negotiations continue with financial services regulation and access remaining among the many sticking points. In the U.S., we are beginning to get a sense of the priorities of new SEC Chairman Jay Clayton but it remains early days.
It is clear, though, that there will be little relief for financial services firms. In the EU, firms began the year with implementation of MiFID II and imminently face introduction of GDPR in May (where almost half in our survey are not confident they are on track to comply). Struggles with the Senior Managers and Certification Regime (SM&CR) in the UK also continue. In the U.S., meanwhile, it is fair to say that, whatever else, the campaign pledges of the Trump administration to dismantle Dodd Frank remain mostly unfulfilled.
At any rate, few expect the regulatory burden and impact to ease: 95% say regulations will increase their costs this year, with almost a quarter (24%) in our survey expecting they would be spending more than 5% of their annual revenue on compliance by 2023. In fact, a tenth (11%) felt they would spend more than 10% on it by that year.
Cyber certainty
As last year, the big regulatory growth area remains cybersecurity – only more so. About three in ten (29%) say this will be regulators’ primary focus in 2018, and more than half (54%) think it will be a top three priority – leaving aside the 22% naming GDPR.
That now puts cybersecurity ahead of even anti money laundering (AML) and Know Your Customer (KYC) regulations as a perceived regulatory concern. The focus on cybersecurity is only likely to intensify, too; as we note frequently in the report, regulatory expectations in this area are still becoming clear.
It’s not just regulatory pressure, of course. The spate of cybersecurity breaches over the last year has also contributed to firm’s determination to address the issue. For both these reasons, 78% of respondents expect to spend more resources and time on it in 2018.
The key question is whether that spending, and the regulation prompting it, will prove effective.
Be careful what you wish for
Whatever they expect its impact to be, what firms say they want from regulation is greater harmonization. Almost one in five (19%) say it’s the single most important factor in maintaining an effective regulatory system (second only to principles-based regulation).
Most agree (52%) that regulators are improving their ability to coordinate across borders; but few think they have been effective in establishing consistent global regulatory standards (29%). This is largely the same as in previous years of the Global Regulatory Outlook survey. A more interesting issue, perhaps, is whether firms are right to yearn for those consistent standards.
Of course, it’s recognized that regulation can have some positive impacts: A third say it “expands market reach” and almost three quarters (73%) concede regulations encourage improvements in internal systems and control.
Regulatory harmonization might alleviate some of the burden and complication of complying with different standards across jurisdictions. Given the tendency when it comes to regulatory alignment to level up to the highest standards in operation, and to harmonize without necessarily removing duplication, it’s unclear whether greater consistency across jurisdictions would reduce, or add to, the cost of compliance.
A Brexit bonus?
That’s particularly pertinent when it comes to Brexit.
About one in five (21%) in our survey said Brexit had had an immediate impact on their compliance programs with changes already being made or planned for the next six months. Another quarter (26%) expect changes within 18 months.
As to how big those changes will be, much will depend on the final agreement reached, but UK Prime Minister Theresa May has recently ruled out passporting for financial services after the UK leaves the EU. This, she said, was “intrinsic to the single market of which we would no longer be a member”.
The impact of Brexit remains to be seen. Yes, it is a risk – and not one that many of our survey respondents feel terribly confident about; while 53% currently say London is the current pre-eminent global financial center, only 29% expect it to be so in five years’ time.
Visit www.duffandphelps.com/global-regulatory-outlook-2018 to read the full report.
