While I specialise in bank regulation the more I see of it, in general, the less I believe in it. I tend to spend a fair part of my time trying to mitigate its worst effects. A good example of this is what I call reverse regulatory capture – where the stronger the regulation the more the banks (and any other regulated entity) tend to start trying to run their enterprise to please the regulator, rather than to please the stakeholders in the business and the less real thought they put into .
This tends to happen with the more black letter regulation, where exact processes are required, rather than the more principles based frameworks where outcomes are mandated. For example, a black letter regulation will insist on such things as certain headers and text being in a customer information document, rather than saying the document must inform the customer of all relevant pieces of information in relation to the product.
The problem is that it is easier to comply with black letter law than with principles based ones. On the new anti-money laundering legislation, for example, putting in a 100 point check, as under the old legislation is easy – you do not need to think. If the headers and text of your document are prescribed you can do it from a template even if the template makes no sense in relation to this particular product.
A principles based approach, though, forces you to think. This can hurt. It also provides less regulatory certainty – how do you know you have done enough? The problem is typically trying to know exactly what you need to do to comply – using AML again, completing a risk based assessment is easy – getting it right and proving you have done so to the regulator is hard.
The business benefits of a proper risk-based assessment, though is (or should be) clear – the business knows their customers better at the end of it and should, therefore, be able to better meet their needs and increase their profit margin on dealing with that customer. If they are a serious risk it is better to know before it becomes a real problem, rather than just a risk.
The old regulations, then, tended to drive the wrong behaviour – because you had done the 100 point check there was no regulatory need to know any more about your customers – you could now deal with them. The principles based method, though painful, should give much better business benefits – if you have the courage to believe that you have done enough to satisfy the regulators.