7 new trends in post crisis financial regulation

The role of regulatory authorities and entities is a subject that continues to prompt close scrutiny in the aftermath of the global financial crisis, with ongoing debate on what regulators need to do to pre-empt a similar crisis from occurring in the future. Exploring the latest trends in global financial regulation, the Capital Club, Dubai’s premier private City Club and member of the ENSHAA group of companies, welcomed Paul Sharma, Managing Director with Alvarez & Marsal and co-head of the firm's Financial Industry Regulatory Advisory practice, to share his unique insights. Based in Alvarez & Marsal’s London office, Paul has been a senior financial services regulator in the UK for 20 years, having held senior positions including Deputy Head of the UK's Prudential Regulation Authority (PRA), Executive Director of the Bank of England, Member of the Basel Committee on Banking Supervision (BCBS), Executive Committee Member of the International Association of Insurance Supervisors (IAIS), Chairman of the BCBS’s Macro-Prudential Group and the IAIS’s Financial Stability Committee, Joint Committee Member of the three European Supervisory Authorities (Banking, Insurance and Securities Markets), and Chairman of its sub-committee on risk.
Speaking about the evening, Capital Club General Manager Emma Cullen remarked, “Dubai’s recovery following the crisis has been impressive. That said, we cannot deny there are some very important lessons to be learnt. As the meeting place for top echelons of Dubai’s business community, we believe strongly in keeping our Members abreast of all developments that can affect their businesses, which is why we were extremely pleased to be able to welcome Paul Sharma to the Club. His extensive experience as a senior international regulator of the financial sector, truly puts him in a commanding position to comment on the developments in financial regulation.”
In his highly informative talk, Mr Sharma identified seven trends in global financial regulation that he has observed, pivoting around the emergence of a new regulatory paradigm that has seen the rise of the discretionary regulator and implementation of regulations beyond depositor, policyholder, or investor protection.
“The focus has shifted. Simply complying with the rules is, while still fundamental, no longer the main concern. What regulators are now more concerned with is whether or not an institution’s actions present a risk to their regulatory objectives,” states Mr Sharma. “It is now much better understood by regulators and politicians that a bank failing can do harm not just to that bank’s customers and shareholders, but has consequences for the stability of the financial system as a whole and therefore for the performance of the real economy” he added.
Elaborating on the current regulatory environment he explained, “Institutions will be held accountable for not complying with the rules, whether or not their compliance can be proven to have resulted in misconduct, because non-compliance fundamentally poses a risk to regulators’ objectives. No amount of compliance alone can get you right with the regulator if your actions result in bad customer protection or financial crime prevention outcomes.”
Mr Sharma further stated that, “The days of caveat emptor – let the buyer beware – is dead. Regulators are increasingly of the opinion that customers are not fully rational and, therefore, believe that banks should be responsible for their customers’ bad decisions – not the occasional idiosyncratic bad decision taken by an occasional customer, but systematic or widespread bad decisions taken by customers. Regulators hold the belief that banks should only be making money when their customers have good outcomes, and should not be making money when customers have bad outcomes.”
In discussing these trends, Mr Sharma also touched on the role that Islamic banking products can play in increasing customer centricity, remarking, “Islamic banking products that aim to capture the spirit and achieve the theological purpose of Shari’ah law and not just formal compliance with the rules, have the potential to be very powerful in the context of addressing the Regulators and society’s concern for responsible customer centricity. Unfortunately, Western regulators still have limited understanding of Shari’ah compliant products.”
Mr Sharma concluded the evening with a comment that, “Firms are required to have stronger systems, greater financial strength, and better control. Having stronger ex-ante control is an absolute must, but it will not gain you any credit if something goes wrong. The ‘I did everything I could reasonably be expected to do’ defence no longer holds.”