In the finance world, the prevailing opinion is more regulation = less growth. The dominating sentiment is that complying with regulations is time-consuming, and costly, reduces productivity and innovation, and impedes businesses and therefore the economy. This may be because up to very recently there were no technological solutions that could have aided in managing the workload associated with an ever-growing body of regulations. All compliance work would have been done manually using simple tools like Excel sheets or Word docs with compliance teams struggling to keep up with their tasks.
Interestingly the government has come out recently to argue that regulations create a robust economy and develop growth.
In this article, we will look at why the government believes regulations can increase growth, how firms are going to have to adapt to this ‘new normal’ and how regulatory technology- RegTech might just be the answer to tackling the growing regulatory burden.
How can regulations increase growth:
1. Stability- no more boom and bust
The financial crisis of 2008 revealed what we already knew that a healthy financial sector is a cornerstone of a developed economy and instability in this area has wide-reaching negative consequences for the broader economy; sometimes devastating. The government’s plan to stabilise the economy includes implementing regulations designed for decreasing the risks of further financial crises, and creating a more predictable economy for financial firms to operate in, thereby encouraging investment. The ‘steady as she goes’ nautical-economic mantra for long-term growth.
2. Enhancing competition- playing within the rules of the game
‘Creative destruction’ was a phrase utilized by Joseph Schumpeter, the 20th-century economist to describe the way in which competition creates an ‘out with the old in with the new system’, in which old and inefficient firms are replaced or are forced to adapt in the face of competition. This system is seen as driving innovation and economic growth. Encouraging competition is a highly recognisable aim and a often-used phrase. Less well known is Schumpeter’s, ‘but on the other hand’, in which he describes the pitfalls of excessive competition.
Condensing complicated and highly nuanced academic theory into a short paragraph will inevitably leave much to be desired, please allow us some liberty to give it a go.
In highly competitive environments the emphasis is on short-term gains and the necessity for firms to increase profits and reduce costs, due to immediate competition with other firms. This comes at the expense of research and development which is seen as too risky and too long-term in the face of the dangerous immediate competition, subsequently, reducing innovation and long-term growth.
And so, we arrive at the formerly mentioned point, the government curating regulation for the purpose of stability and long-term economic growth, by encouraging the right amount of competition to boost innovation but preventing excessive competition that results in preoccupation with short term gains at the expense of long-term innovation and growth.
The art of getting it right
The IMF publishes bi-annually the Global Financial Stability Report which usually contains a section on regulation and has concluded, “tighter regulatory structures and supervisory practices are associated with lower systemic risks and better economic outcomes.” Whilst simultaneously stressing that excessive regulation restricts growth and innovation. So, as the long arm of the regulatory authorities wraps its embrace around the financial services industry, in the name of stability and long-term economic growth, the government ought to be very careful as to how tight the embrace should be. The government’s response is that it acknowledges these significant elements and will try to limit the costs and work created through complying, but that ultimately, with their approach, the positives outweigh the negatives.
Despite the governments’ assurances, firms are rightfully concerned about the increasing costs of compliance and its time-consuming nature; however, there is light in the end of the tunnel as it is likely regulations will reach a plateau in the next two years (there is evidence of that in the USA and the UK) and RegTech will carry the torch as it catches up with modern compliance practices and needs.
Following from the above points on how the regulation is the ambassador for growth, it seems inevitable that the body of regulation will keep on growing for the betterment of the whole system; therefore, firms should consider the adoption of regulatory technology allowing for the automation of their compliance processes via one coherent compliance infrastructure. If the competition is to be encouraged to foster innovation, firms need to have enough headspace for such innovative thinking and their compliance departments need to be able to participate in conceptual thinking instead of spending time on mondain tasks. This is where systems like Leo are truly beneficial: Leo frees up capacity by automating repetitive tasks such as employee attestations, data collection, reporting on regular ongoing compliance controls or dealing with private account dealing requests; it streamlines compliance processes and creates redundancy useful in the case of any business continuity need; it centralises all compliance documentation in one place, allows cross sharing with authorised users and third parties; it reduces the possibility of human error and gives users more capacity and therefore time to think and improve compliance and business associated ideas.
You may agree or disagree with the government’s position; nevertheless, the new regulatory environment is here to stay. To borrow a well-used phase, it is now the ‘new normal.’ In the face of increasingly expensive and time-consuming compliance requirements. Using RegTech will also provide a competitive advantage. Some firms may do this in house others prefer third-party solutions.
We certainly think Leo offers more than others …
Curious to find out more? See the links below
FCA- How regulation can prepare the ground for economic growth
IMF Global Financial Stability report- https://www.imf.org/en/Publications/GFSR
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