Canadian financial institutions can gain a competitive advantage by making regulatory compliance a higher priority, according to a new report released today by consulting firm Deloitte.
“Financial institutions are holding themselves back,” the report states, arguing that companies that fail to make compliance a big part of their business strategy miss opportunities. “[Financial Institutions] respond to regulatory change re-actively rather than pro-actively, and don’t often consider its strategic implications.”
Financial institutions face increasingly tough regulations in the post-financial crisis world. The international Basel II protocols, implemented in 2009, increased requirements for capital ratios, risk assessments, and disclosure. A follow-up to those standards, Basel III, is scheduled to be implemented in 2019. Stricter standards have come from within Canada too; The Office of the Superintendent of Financial Institutions (OSFI), Canada’s regulator for financial institutions, has increased regulation by tightening mortgage rules and looking at so-called “bail-in” provisions, which would help avoid taxpayer-funded bailouts for the largest banks.
As a result of stricter global and domestic regulatory standards, financial institutions have put together compliance teams to help their departments meet the requirements.
The Deloitte report, entitled “Seizing the Regulatory Opportunity,” predicts the regulatory environment will continue to be strict in the near future, in part because incidents like the Libor scandal – in which a group of banks manipulated the key overnight lending rate – continue to reinforce the need for regulation.
Despite the importance of regulatory compliance, it is often viewed by financial institutions as costly. Jeannot Blanchet, a Strategic Business Advisor at Deloitte, says thinking of compliance as a “necessary evil” hinders companies from taking advantage of opportunities. “If you build compliance closer to the business, you build quicker and more efficient decision making,” Mr. Blanchet said. He added that good compliance practices can boost a company’s understanding of its own business, and result in more sophisticated data and metrics, and stronger communication between departments.
Mr. Blanchet cited the success of a European client he worked with that integrated the operations and business teams with its finance and accounting departments, so that the understanding of how compliance affected the company wasn’t kept within a silo. By learning the regulatory framework better than its competitors, the company was able to gain a competitive edge. “They built a market for themselves,” said Mr. Blanchet.
But getting ahead of the curve on ever-changing regulation is “easier said than done” for financial institutions, said Scott Liao, an Assistant Professor at the Rotman School of Management.
While Mr. Liao agreed that companies should focus more on the benefits of tighter regulation, he said that because regulation follows crises, it’s “almost impossible” to anticipate. “Unless you’re able to foresee the next crisis, you’re unable to change your behaviour,” he said. He added that regulators need to stay current and have the political capital to make the regulatory changes needed as quickly as the financial world evolves.
Mr. Blanchet warned that the greatest regulatory risk is complacency, which can render existing regulations outdated. “We’ve been doing so well, but in the meantime we’ve seen big institutional changes,” he said.
Mr. Liao agreed that complacency is a significant risk, but that knowing the right amount of regulation in the right area is not always easy. “Nobody knows the answer until the next crisis hits.”
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