Since the first recorded financial ban in 1601, global financial regulators and supervisors have introduced stricter rules and regulations for the various financial activities years after years. The 2008 global financial crisis served as a powerful reminder to regulators that inadequate financial regulation and supervision within countries will lead to global repercussions, and there is an urgent need to strengthen international regulatory cooperation.
Currently, the coronavirus pandemic has put the financial system to its biggest test since 2008. The vulnerability of both the financial scene and the global political environment, together with the rise of FinTech, has led both regulators and financial experts to recognise the imperative need for a strict reform in the global financial regulatory systems.
Also, considering countries’ current priorities in focusing on individual financial and societal problems, whether is it 1% or 100 %, improvement with a new development direction away from the framework set after the 2008 global financial crisis is inevitable and essential for the advancement of the financial industry. As a result of this shift, each country will have to cope with the stress of balancing between individual priorities and international economic cooperation.
Recognising this result, the question that needs answering now is how worthwhile is it to have regulations that are stricter than the last.
The De-globalisation Trend
As de-globalisation in the financial activity is on the rise within the super powers, there has been a significant shift in the regulatory framework away from global cooperation as regulators focus more on national interests than global collaboration.
While country leaders are still seemingly entertaining the idea of having a standard, cooperative and interactive economy system, the actual negotiation and communication between countries are fraying, with a reduced effort and a less ambitious plan to introduce regulatory reforms. One prominent example would be the lack of efforts to introduce new standards than in previous years by the global standard-setting bodies, such as the Basel Committee on Banking Supervision and the Financial Stability Board.
Additionally, as each country prioritises its own needs ahead of international cooperation, the divergence of regulatory requirements between the different regions and cities will continue to increase. With the continuation of national and protectionist practices by countries leader, focusing on their own financial stability and the impact on their taxpayers, the end result is likely that regulatory reforms remain at the national level, instead of the international level.
The Disparity in Business Opportunities
Though it is not realistic for the world to reverse the post-financial crisis regulatory reform implemented since 2008, regulators across the globe are expected to continue to set new high expectations to maintain a healthy and resilient financial sector, especially after the 2020 financial crisis where major technology players are on the rise.
This war of financial regulatory reform, especially with less attention paid to the cross border, cross-sector policies and more towards national financial cooperation, will unmistakably result in a mismatch between countries as well as companies, where businesses in lower regulatory countries will face more difficulties in carrying out financial activities in countries with a stricter regulatory framework.
Undoubtedly, the reforms will have little effects on the big players within the industry. Even if the changes towards the newly improved regulatory framework is drastic, established financial institutions can still easily catch up and comply with these rules with a little adjustment in their operating models, legal entity and governance structures.
With that being said, stricter regulatory reforms will be beneficial to differentiate the great from the good amongst the established institution. The good will just make sure that they fill up the blanks drafted by the regulators, while the great will turn the situation into their favour, making sure that the business benefits from the new regulations and elevats the standard of the financial industry.
However, the same cannot be said about smaller firms. Having a smaller pool of capital and lesser professional connections, these companies are bound to suffer from the increased scrutiny of the new regulations. This will in turn limit their investment opportunities and business growth due to the high entry barrier. As a result of a lack of new competition within the industry, the growth of the financial industry may become stagnant.
A Sliver Lining
Yet, the financial environment is not as harsh as it seems. It is believed that the regulatory reforms, similar to those after the 2008 global financial crisis, will continue to turn the heat up on the larger players in the fields while allowing the smaller and agile corporation to gain traction in the industry especially over the past decade, where several “regulatory adjustment periods” has allowed smaller companies to catch up with the norms. During these buffering period, companies will not only get the chance to reorganise their operating structure to be in line with new regulations, but investors will also get to search for loopholes and create new disruption in the financial industry.
Just as the FinTech industry was introduced to the financial world in the post-2008 financial crisis as a result of stricter regulations introduced, the constant changes in regulations will stimulate the creativity of investors, propelling them to explore ways to emerge ahead of the system, fulling up the gaps left behind by new regulations with an innovative and forward-looking industry.
As such, a reduced appetite for the cross-border financial regulatory framework is not a total loss as though tight regulation will result in a disparity in business opportunities, it may also be a game-changing moment for the financial industry with new and creative solutions to overcome current problems within the industry.
Is it worthwhile to be so strict?
As the saying goes, “In every adversity, there is an opportunity for the better”. Rather than viewing the regulation as being strict and rigid, we must recognise the reason to reform global financial regulatory framework and embrace the challenge that comes with it.
While it is true that the war of regulation and supervision will be at the expense of the companies’ business growth and the economic growth of each country, the financial regulatory framework will have to keep up with the changing times to accommodate and provide a holistic and inclusive economic environment where the interest of all its stakeholders are being taken care of.
As such, instead of taking the regulatory reforms negatively, we should focus on the positive prospect of these changes, where long term solutions, be it digitalised or not, will be expected to emerge, creating a more robust financial scene. Yet, we must also prepare ourselves to brace for the impact of the reforms and navigate through this harsh environment with short and medium-term solutions of coordinating and collaborating across different businesses and corporations and in the words of Henry Ford, “Coming together is a beginning, working together is success”.
Asia-Pacific financial services regulatory outlook 2019, Deloitte.com
2020 Asia Pacific Financial Services Regulatory Outlook, Deloitte.com
G20 GDP Growth – First quarter of 2020, OECD, Statista.com
Globalisation and financial regulation: challenges and trends, Cliffordchance.com