Trawling through yesterday’s Bobsguide, I came across this piece reporting on an FSA release on the costs of compliance with the new Markets in Financial Instruments Directive (MiFID) for UK banks and other market participants. Essentially, the FSA is estimating the up front costs to be between GBP 870 million and GBP 1 billion, with ongoing costs of GBP 100 million. The benefits, apparently quantifiable, are calculated at GBP 200 million per annum.
If we use the upper figure (has anyone ever seen a project of this nature come out at the lower figure?) and, assuming this is correct, it gives us a 10% internal rate of return for this project. In other words, if this was not a compliance project no bank would do it, as none of them would set an IRR threshold of 10% for a large and complex project.
Who, then, benefits from this?
The banks and other financial institutions in Australia have been hit with a plethora of regulations over the last few years
decades. Like banks in most of the world, the deregulation process
which got underway in Australia in the 1970s and hit its stride in the
1980s, freed up the banks’ lending policies and allowed the banks to
genuinely compete for the first time for many decades. This brought
about a real change in the way that the banks do their business and
innovation, price competition and, yes, excitement followed.
The regulators, though, seem to have been making headway again since the mid-1990s, with almost every change in the law bringing new requirements back into banking.
Some of the changes have made sense (for example the Basel Accords), particularly where they have forced greater openness and transparency on the banks, but some have been little more than a waste of time and paper, or have gone way too far (for example the Australian Financial Services Licensing regime).
To me, the good regulations have worked because they set international standards, a framework, that allow banks to interact together in a more efficient, trusting, manner. The fact that no country can be forced to take them on means that, to be accepted, they need to go through a long and, at times, difficult consultation process to get the broad agreement needed.
The ones with less clear benefits seem to be those that are simply imposed by the standards setters, regardless of the wishes of the regulated. The AFSLs are a case in point. There are some questionable operators out there giving out financial advice to people who do not know enough to know they are being told something that is not suitable for them. The question is, though, do you need a comprehensive licensing regime to stop them – and will it in fact stop them? I think the number of scams initiated since then provides a clear answer to that question.
I think it would be difficult to quantify the costs of the bulk of the regulation imposed on the Australian industry over even the last few years – it would certainly be in the hundreds of millions of dollars, if not considerably more. Have the consumers really derived that much benefit from all of this?
2 comments
1 December, 2006 at 13:38
Colin
The general sense in North America(n) banks is that the rules went too far. In Canada there a whole new set of beaurocrats seemingly inventing new rules as they go along. Having said that, most have the correct inspiration, that is to protect consumers, and we all too easily forget the bank crashes in the 80’s.
The other comment I would make is that Banks generally (there are key smart exceptions) treat the rules as rules, rather than opportunities to lever for added value. I look at the Wells Fargo “Spending Report” which is clearly leading edge. But I would speculate that the genesis of the source data used in that report might well have been required for anti terrorism financing reporting, so why not collect the data, and generate customer benefit as well.
1 December, 2006 at 14:15
ozrisk
Colin,
In response to your first paragraph I would say I agree and add (overstating a little bit) “…but the road to hell is paved with good intentions.”
On the second I would again agree, particularly wrt the AML / CTF position. The automated data mining capacity needed for a large bank to comply with this should yield priceless information about the customers, you just have to ask it. The same pattern recognition algorithms that pick up suspicious changes could also pick up marketing opportunities. Done correctly, this should allow for much better targeting of marketing spend to customers that actually need it.
Most of them will waste it, however, seeing this as just another compliance project. A real shame.