What is it about springtime that stirs our desire to clean our homes, garages and closets? With warmer weather and longer days, we long to declutter with the hope of simplifying our lives and keeping only those items most important to us. And it feels so wonderfully therapeutic!
Early in our marriage, my wife and I decided to spring clean and hold a yard sale to rid ourselves of the unnecessary items we had gathered as single individuals over the years. As the pile on the sidewalk grew, I noticed most of it was mine … albums, posters and general “dude stuff.” That is when I realized there was a new sheriff in town. In my wife’s mind, she was cleaning out what was no longer important … my stuff! I guess what is important is in the eyes of the beholder.
Finding efficiencies
We have a new sheriff in town in Washington as well. US President Donald Trump is fulfilling his campaign promise to bring the idea of spring cleaning to the government through the Department of Government Efficiency and other initiatives. Just like with my wife and I, strong differences of opinion exist among Americans on what government spending should stay and what we should pile on the proverbial sidewalk. However, the need to address government spending is not in dispute. Our annual deficits near $2 trillion, and our national debt approaches $37 trillion. That’s $106,000 per American!
As we look for efficiencies across the government, we should look in our regulatory “closet” and identify the clutter. We have not had a regulatory spring cleaning for a long time.
In my mind, we have come to the end of a regulatory super cycle that began with the Great Financial Crisis of 2008. Over the last 15 years, governments have placed layers and layers of regulation on financial firms, some certainly justified but some excessive and overly prescriptive. The compliance costs of these regulations have a real impact on our economic growth and productivity.
Pencilling out the numbers
One of FIA’s members, Nasdaq, estimates that regulatory rationalization could produce between $25 and $50 billion in potential efficiency gains for banks. That would free up an additional $1 trillion in lending capacity globally. Importantly, we can accomplish this by simply making our regulations more fit for purpose, without adding risk to the system.
Anecdotally, another of our members estimates his business dedicates 90 percent of its budget to regulatory compliance, leaving only 10 percent for growth. Imagine if we could flip that ratio and what it would mean for our global markets and economy.
Interest in simplification goes global
The good news: globally, there is an openness to make regulatory systems more efficient and smarter. The recent elections in the European Union, United Kingdom and US brought to power political parties focused on reducing regulatory burdens, increasing competition and unleashing growth.
EU leaders, like President Ursula von der Leyen and Commissioner Maria Luís Albuquerque, have made it their agenda to raise the economic productivity of the EU by simplifying their regulatory systems. In the recently published Competitiveness Compass, the European Commission sets out its vision to cut red tape and simplify EU rules. A series of Omnibus packages and the recently released Commission consultation on the integration of EU markets mark the first chapters in the quest to reduce barriers for growth.
UK Prime Minister Keir Starmer and his Labour Party have also pushed for growth that includes regulators streamlining regulation. And the Chancellor of the Exchequer, Rachel Reeves, has met senior figures from a wide range of UK regulators to outline plans to cut the administrative cost of regulation on businesses by 25%.
President Trump went big with his 31 January executive order, Unleashing Prosperity Through Deregulation. This requires any federal agency to repeal 10 current regulations to promulgate a new one. The new chair of the Securities and Exchange Commission and Trump’s nominee to lead the Commodity Futures Trading Commission have signalled their respective agendas will focus on efficiency, smart regulation and a more traditional enforcement regime.
Focusing on smart regulation
FIA has been working with its members to gather and advance a “smart regulation” agenda that simplifies and lessens the burden on the industry without increasing the risks to our financial system. Through several of FIA’s working groups and committees, we will bring forward proposals to return to a fit for purpose regulatory regime globally.
Regulatory reporting offers one area of focus. Since 2014, the number of data streams supported by the CFTC has nearly doubled. Do all 273 data streams have a valid regulatory purpose? Good question. The growth of reporting also increases the cyber risks to the agency and industry, increasing costs on both parties to protect this proprietary information.
CFTC-Supported Data Streams Received from Industry
The EU has an even greater reporting burden. Since 2008, the alphabet soup of regulatory reporting requirements has established a piecemeal approach that has resulted in siloed reporting regimes, each requiring an individual dataset to achieve the respective and similar objectives. We see this through the European Market Infrastructure Regulation, Markets in Financial Instruments Directive II/ Markets in Financial Instruments Regulation, Securities Financing Transactions Regulation and Regulation on Wholesale Energy Market Integrity and Transparency. What a mouthful, let along burden to our industry.
We are confident that there is scope for streamlining requirements in order to remove duplication, reduce those unnecessary burdens and reconsider areas where the cost of reporting exceeds the supervisory benefit.
The guiding principle should be to limit reporting to information that is genuinely essential for regulatory authorities to perform their duties.
Regulators should work with the industry using an “outcomes” mindset and clearly state the goal when collecting certain data. If the regulator lacks a goal or already collects the data through another channel, we should consider eliminating the requirement. We also need to unleash technology in these efforts. Cloud computing, artificial intelligence, tokenization, blockchain and smart contracts offer options to help simplify and streamline how governments collect and analyse information from the private sector. We need to work smarter, not harder.
This will take time, let’s start today
There is no silver bullet here. It took years of rulemakings to get us where we are today, and it will take time to assess and rationalize the system. But it’s good to see both policymakers and the industry aligned in this simplification goal in a global way. If we can redirect compliance costs into investments, even on the margins, we can increase productivity and standards of living across the board.
What will happen first – the regulatory spring cleaning or my opportunity to finally create a man cave with the posters, albums and dude stuff that I’ve been hiding in my attic? It is a toss-up, but both are needed!
