Financial companies have to deal with an increasing number of laws and regulations. Manouk Fles, Chief Legal & Compliance of Blanco, argues that these regulations sometimes overshoot the mark and advocates for more dialogue between the sector, the legislator and the regulator. This would also prevent the development of a box-ticking culture, which can be counterproductive in terms of achieving the objective of legislation and regulation.
More regulations since the financial crisis
Especially since the financial crisis, more and more laws and regulations have been created for financial companies. The motivation of the legislator is obvious: these rules must prevent new abuses. The pendulum seems to be swinging ever further in the direction of regulation. And it is not only investment funds and wealth managers that are affected by increasing legislation. For example, the requirements for investment firms under the national regime have become stricter since MiFID II and obligations are arising for new market parties such as crowdfunding platforms and crypto providers.
Most of this legislation and regulation, however, has had an unmistakably positive impact on the sector. There is more transparency with regard to products and costs, and customer interests are generally better served.
Regulations sometimes overshoot the mark
However, rapidly evolving legislation sometimes fails to take sufficient account of the reality of financial companies. An example to illustrate this: besides developers of financial products, independent wealth managers also have the obligation as a distributor to record a positive and negative target group of products, even if it concerns a simple product with low risks. These kinds of administrative obligations tend to lead to a box-ticking culture, whereas the focus should be on tackling the problem. The problem is that financial undertakings develop and/or offer products that are not suitable for entrepreneurs and consumers, as has happened in the past with interest rate derivatives.
In addition to the volume of legislation, its drafting and implementation sometimes also leaves something to be desired, as is the case with the recently enacted sustainability legislation for example. Although it is a good thing that this legislation tries to counteract ‘greenwashing’, there is still a great deal of uncertainty about the definitions and implementation of this legislation. This leads to frustration and confusion. The lack of clarity and the heavy demands for sustainability definitions can lead to sustainability receiving less attention because it is too complicated and costly to comply with the legislation. As a result, sustainability ambitions are unintentionally undermined by unclear or strict legislation.
More dialogue within the sector
The current thinking is that abuses must be prevented by tightening existing rules and adding new legislation and regulations. However, the sector must ensure that this approach does not lead to false security and a box-ticking culture. Let’s make sure that market parties (continue to) take responsibility and do business in an ethical and socially responsible way.
Self-regulation is not the answer, but more contact between market parties, the legislator and the supervisor in an earlier policy phase will hopefully ensure that new legislation and regulations do not overshoot their mark. This is not only desirable for healthy asset management but, with a view to sustainability legislation, also for people and the environment.