Looking Back, Moving Forward: Compliance & Regulation


By Justin Keay

Regulation tends to be reactionary: Regulators get in on the game after events have already happened. The jury is still out on the effectiveness of a lot of the regulation introduced in the wake of the 2008 financial crisis, but one proposed solution involves regulating the regulators.

In the vastly complex, politically contentious world of financial regulation there are two certainties. First, that regulators and politicians will attempt to ready for the next financial crisis by regulating as if for the last. Second, that banks and other financial intermediaries will do their utmost to water down any proposals affecting their business until the proposals are toothless.

In the US, amid calls for the reintroduction of the Glass-Steagall Act, introduced after the crash of 1929 to separate commercial and investment banking but repealed in 1999, The Dodd-Frank Wall Street Reform and Consumer Protection Act was introduced last year. The legislation puts restrictions on risky bank activities (the so-called Volcker rule), establishes a new consumer protection agency and increases regulation of derivatives.

In the UK—the pre-crash home of “light-touch regulation” presided over by a virtually inactive Financial Services Authority—a much tougher structure is to be introduced, with the Bank of England at its apex. The government also seems poised to introduce many of the suggestions of the Independent Commission on Banking (the Vickers commission), which will include a requirement to ring-fence banks retail activities from their riskier activities.

The effectiveness of these reforms remains to be seen. Part of the problem, according to Barbara Ridpath, head of the International Centre for Financial Regulation in London, is that compared with the crises of 1929 (US market crash) the 1970s (energy) and 1980s (Latin American debt), this was the first truly cross-border crisis.

There is also the nagging sense that even if the new regulations had been in place ahead of 2007–2008, it wouldn’t have made much difference. In the US, most of the crisis-afflicted banks were investment rather than commercial banks, and no one has yet come up with a reasonable riposte to the Too Big to Fail conundrum. Gerry Caprio, a regulatory specialist who used to work at the US Fed, says the big lesson is that regulators didn’t use the powers they already had. He points to Anglo Irish Bank, whose loan book grew at 40% a year for 10 years in the run-up to its collapse when few banks survive 15%-to-20%-a-year loan growth for more than five years. Caprio’s solution: Regulate the regulators by having a body of professionals oversee them and ensure rules are applied. “Rather than think about new regulations for the future, we need to think about how to get regulators to act.”