From crisis to confidence, evolving regulatory landscapes
Effective, consistent, and fair regulation levels the playing field, instills business confidence and promotes growth and innovation—key underpinnings of a thriving market-based economy. But excessive complexity and fragmentation in the regulatory environment hampers economic progress and obscures the warning signs along the road to the next financial crises. Given vastly increased international and domestic regulation in recent years, now is the time to ask: have we got it right?
Hong Kong serves as a global hub for multinational commerce, supported by a strong and respected accounting profession. Precisely because of its experience as a beacon to international business, Hong Kong’s leaders understand the cross-border impact of inconsistent or onerous regulation implemented in faraway countries: scaled-back strategy and reduced investment.
Typically a financial crisis spawns new waves of regulation. The failures of the financial system in Asia in 1997, and globally in 2008, revealed the need for regulatory reform. Excessive borrowing, imprudent lending and the ‘financial engineering’ of high-risk investment products led to the collapse of blue-chip banks, sclerosis in the financial system and a protracted recession in many countries.
We are still living with the hangover from the global financial crisis. Quite rightly, regulators, politicians and citizens are keen to do their utmost to help prevent another calamity.
However, now that the immediate crisis has passed, it is important to reflect on whether today’s global regulatory ecology is functioning as intended. Is the regulation that was meant to prevent further economic harm working perfectly, or is growing complexity getting in the way of a clear view into today’s emerging risks? Are regulations appropriately harmonized across borders, or are fragmentation and divergence intensifying? What can we learn? What can we improve?
While recent reforms might make sense on their own, their total impact–including measures undertaken domestically without international mandate–could be counterproductive for specific markets and sectors and for overall global growth.
The costs of compliance
We recently surveyed more than 313 accounting, finance and business professionals from around the world. A resounding 83% believed the effects of regulation have become more or much more significant during the past five years and this trend is likely to continue. As many as 85% believe their tasks will be just as onerous over the next five years.
Regulatory intervention and complexity is now more far-reaching than ever before. For instance, the first Basel Accord of 1988 had only seven risk categories and required banks to make seven calculations; in contrast, the most recent Basel III gives rise to more than 200,000 risk categories and could require about 200 million calculations, according to Bank of England chief economist Andrew Haldane.
A recent survey by Thomson Reuters found that regulatory matters are consuming large amounts of companies’ board time, and are expected to continue to cost more money.
Indeed, as many as 80% of respondents to our survey said regulation had increased the cost of doing business, 66% replied that it was impeding their ability to grow and 63% that it was affecting their opportunity to innovate.
As one respondent noted, Regulation could “…kill first world entrepreneurship culture. There needs to be less regulation but more principles-based responsibility on business and business leaders.”
But, as wide-ranging as the new regulatory measures are, perhaps the most challenging aspect is their inconsistency and fragmentation across different jurisdictions.
The failure to adopt harmonized regulatory approaches and standards hurts cross-border investment and trade.
“There are instances where local jurisdictions have a set of regulations prescribing differently to global regulations,” said a survey respondent.
That view was shared by 36% of our sample who agreed that the approach to regulation between different regions in which their organizations operate is either inconsistent or not at all consistent. More than 46% regarded collaboration between different regulators as ineffective.
Clearly, there needs to be a more harmonious and aligned framework internationally. It is unhelpful to businesses and the global economy if the regulatory approach is piecemeal or contradictory. This is particularly true in a market like Hong Kong which serves as a hub for investment and trade involving multiple regulatory languages, accommodating multi-national companies.
Cooperation among regulators, and effective, focused steps by international bodies such as G20, are essential in order to resolve incoherence between international regulatory mandates and their implementation by individual countries.
In the first instance, this means establishing agreement about consistent principles for the best quality, most effective regulation, and next identifying where divergence occurs and remedying inconsistencies.
In order to achieve these objectives, there must be thoughtful and thorough analysis that respects the public interest, and which includes the perspectives of regulators themselves, business leaders, academics and expert professionals.
Ahead of the next crisis, now is the moment to capitalize on our awareness of the need for good regulation, and to come together to find a way forward that powers global innovation and growth. Left unchecked, complexity and fragmentation will not only hamper further economic progress and recovery, but may mean hazards giving rise to the next crisis go unforeseen and unmitigated.
Fayez Choudhury is chief executive officer of the International Federation of Accountants