International law firm Eversheds LLP recently gathered together senior City executives and canvassed their views concerning the City’s regulatory framework. The results clearly demonstrate that, while the City is broadly in favour of compulsory regulation, the generally held view was that the current uncertain regulatory landscape – particularly around international regulation – is creating a problematic working environment for the City. In some cases, this is even leading to organisations delaying business activity. As well as unearthing the detail of this in-depth research study, this article also unveils a ‘Regulation in the City’ charter – a wish list that summarises how City professionals would like to be regulated.
The Eversheds ‘Regulation in the City Report’ engaged with almost 200 senior-level decision makers currently working in the London’s financial services sector to gauge opinion on regulation impacting on the City. They were asked for their thoughts on the status of current regulation, regulatory reforms, and how they would like to be regulated to ensure the City of London remains competitive on the global financial stage.
The legislative burden
The financial services sector around the globe is facing a changing regulatory landscape, with the consequences of proposed UK, EU or US reforms currently on the minds of many City businesses that operate across borders. From the results of the Regulation in the City report, it can be clearly seen that the City has concerns in a number of areas, including the role of international regulatory control.
The main concern expressed by many is the perceived lack of joined-up thinking between UK, EU and US regulatory regimes, particularly at a time when a raft of regulatory changes are being considered and implemented across markets. This, according to the research, is placing increasing pressures and costs on businesses as companies try to satisfy the demands of three regulatory authorities, each with separate remits.
Though the City generally acknowledges the requirement for tight control, with 80% in favour of a compulsory rules-based system, the research pointed to a significant degree of frustration about the UK regulatory regime. With a feeling that some areas of regulation are onerous and purposeless, 34% believe that a lack of collaborative thinking means that complying with one piece of legislation can often mean contravening another. Worryingly, nearly two-thirds (61%) stated that the uncertainty around legislation had led to their organisation delaying business activity.
For many in the City, the belief that the recent regulatory changes are merely a reaction to the current financial difficulties holds sway. The research highlights the practical impact of continual tweaks to regulation and the difficulties in managing such a situation. Indeed, some indicated that highly experienced professionals are being forced out of the sector as a result of changes, with the FSA Retail Distribution Review cited as a prime reason for this occurring.
To get a detailed insight into the regulatory framework affecting the City, views were canvassed concerning specific pieces of legislation. It is clear that the growing number of separate pieces of legislation offers a challenge to the UK financial services industry, presenting an uncertain and problematic regulatory landscape.
The research asked for views on the Bribery Act, the Remuneration Code, the Financial Services Authority Retail Distribution Review and the Vickers Report. Many felt the Bribery Act was too complex, lacked transparency and a clear definition. Tellingly, only 7% thought it will be effective in reducing systemic risk in the UK financial services industry.
The Remuneration Code was generally welcomed, with 48% of the City thinking the legislation does not require change and more than a quarter (26%) believing it would be an effective policy going forward.
However, the FSA Retail Distribution Review raised a number of concerns. More than half of those questioned (51%) believe the review will place unnecessary administrative burdens on the sector, with concerns around potential qualification confusion and the broad brush nature of the regulation itself clearly expressed by the City.
Finally, the highly publicised Vickers Report does not appear to have whole-hearted support from the City. The majority (59%) believe it has not struck the right balance between managing risk and the need to grow the economy. A lack of guidance concerning detail and implementation was also highlighted by the City professionals that Eversheds engaged with.
The research touched upon a number of key pieces of EU legislation affecting the UK financial services sector, including Solvency II, the Alternative Investment Fund Managers Directive, the EU Savings Directive and Basel III.
The majority of City businesses think Solvency II requires simplification, which is in contrast to the smaller number (27%) who stated that in their opinion it does not require any further changes.
The Alternative Investment Fund Managers Directive received broad support and 17% of those questioned said that they believed it will be effective in helping to reduce systemic risk in the UK financial services sector. However, a fifth (21%) are calling for simplification of the EU Savings Directive, believing it places increased administrative burdens on UK businesses. Finally, Basel III split opinion, with a quarter (23%) thinking it did not require any further changes – but with an additional 15% calling for simplification.
Nearly two thirds of businesses (63%) also feel that UK interpretation of EU law is more concerned with legal certainty than with upholding the original spirit of the law.
Across the Atlantic, a number of pieces of regulation impacting on the UK are under scrutiny, so as part of the study businesses were asked for their feelings about the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Foreign Accounts Tax Compliance Act (FATCA) and the Foreign Corrupt Practices Act.
Many UK firms have no idea how the Dodd-Frank Wall Street Reform will impact on the UK until matters are simplified. But, there are also fears it will be far reaching and may make elements of business impossible going forward.
FATCA was felt by many to be intrusive, heavy handed and difficult to implement, and while 47% believe it does not require any changes, many also said that it did not work well in its current format.
Finally, the Foreign Corrupt Practices Act is considered by the City to be very similar to the UK’s Bribery Act in that it is not difficult to implement, but is open to interpretation. Just 35% believe it will be effective in helping to reduce risk, but again, one in five (21%) think it will place unnecessary administrative burdens on the UK.
The future of international regulation
With many City-based UK financial businesses working across borders, the challenges of adhering to the various UK, EU and US regulatory controls either currently in place, under review or actively being changed is clearly at the forefront of their minds.
With confusion leading to delays in activity, it is imperative that clarity around the future international regulatory landscape is established speedily and that the views of the City are taken into account when decisions that could affect the success of the UK financial services sector are being made. The research demonstrates that the City is not afraid of regulatory control, but wants any new structure to ensure that the City of London remains competitive on a global stage. Tellingly, the belief held by 50% of key decision-makers in the City, that they think businesses will move to other financial centres such as Hong Kong and New York in an attempt to avoid regulatory pressure, underlines the importance of getting the legislation right for everyone.
The City has its say
Finally, from the wide-ranging research it has been possible to elicit broad consensus on how the changing landscape of regulation should take shape; in effect how the City would like to regulated.
With less than 1% of businesses believing that the current system of regulation works well and that no changes are needed, what does the City want instead? Their views fall into six main categories and provide the basis for the ‘Regulation in the City’ charter.
The Regulation in the City charter sets out the following key points:
- The City is in favour of regulation. City of London executives are not set against red tape, as 80% of respondents feel that regulation of the City should be both compulsory and a clear rules-based system. However, only a small minority of City professionals believe that the regulator should be able to intervene from a very early stage if it believes that a regulated company is not complying with legislation. Indeed, the majority feel the regulator is too focused on micro issues at the expense of what could generally be considered to be more important macro matters.
- Increased guidance from the regulator. UK businesses as represented by City executives want the regulator to help them comply with regulation and provide more specialist guidance to assist them to more fully understand how to act in accordance with financial regulations.
- Regulatory environment should reflect the City’s structure. The City is calling for the regulator to be constructed of bodies and divisions that more fully understand each sector of what is a highly complex industry and to then regulate each sector accordingly. The regulator should also seek to increasingly employ staff that have worked in the industry and have a better and more experienced understanding of its intricate workings.
- Establish a two-tier regulator. Over half of those working in the City (53%) believe the UK should have a two-tier regulatory framework – one aimed at retail investors/consumers; the other for the institutional market place.
- Regulate for the future, not the past. The general view is that the current regulatory reforms focus too much on fixing past problems rather than legislating for the present day and the future needs of the City.
- Embrace EU legislation with a lighter touch. Nearly two thirds of businesses feel that UK interpretation of EU law is more concerned with legal certainty than with upholding the original spirit of the law.
During the past year the topic of regulation impacting on the financial services industry has caused much discussion in the City. Reforms to industry regulation have caused many to say that legislative overkill is due to a lack of imagination from the regulator, rather than lack of choice. In particular, businesses are keen to see the future course of banking regulation resolved as soon as possible so that banks can get back to business, with a clear view of the ground rules under which they will have to operate.