By Tomek Jankowski
A friend was once driving down a long, rural interstate in New York when he was pulled over by a state trooper. It turned out that one of his headlights had died. He got off with just a warning, but after pulling away and driving for just a couple of miles, he was pulled over again by another state trooper.
Realizing the previous state trooper had already spoken with my friend, he also let him go with a warning, and my friend drove off. However, it wasn't long before he was pulled over a third time, this time by a local cop. When the officer approached my friend's door, the cop asked while suppressing a laugh, "Are you the guy who keeps getting pulled over for that same headlight?"
This is something akin to the situation financial services companies find themselves in today, only with a twist. It became rapidly clear as the economic crisis spun out of control in 2008 and 2009 that new regulations were coming, and those expectations were not disappointed. Governments around the world rose to the anger their constituents felt as jobs were lost and homes foreclosed on, and sweeping new regulations were enacted. Some were carefully thought out, but others more resembled what could best be described as "shooting from the hip."
It was thought—hoped—that after the populist political dust settled somewhat, a more rational and carefully considered approach would be taken, and there would be some quiet rationalizing and tinkering with the new changes to alleviate some of the most onerous provisions. That thinking was mistaken. The regulations are here to stay, and if anything we find four years after the crisis that even more new regulations are likely coming. It turns out governments and many financial services customers like the new regulations—for what they understand of them—and are quite happy to watch financial services companies squirm. Granted, in some countries in particular, financial services companies by their own admission piled up a very poor record of customer service.
Still, what's even worse than the new regulations for banks and others financial services companies is that regulators have become far more aggressive, and have even taken to occasionally reinterpreting older laws on the books in interesting and innovative new ways, making it almost impossible to anticipate regulatory issues. It's as if you were driving down a rural road at night, doing your best to comply with all laws, but you kept getting pulled over for infractions and rule violations that were changing while you were driving.
And the threat isn't only to banks, as Deloitte discovered when New York State regulators investigating a banking client decided recently to invoke a rarely-used rule written in 1892 to force the consulting firm into a non-incriminating settlement. This new environment just about begs regulators to become activists.
Banks and consultants could choose to view this as a major threat to financial services (and the attendant consulting community), but what would that achieve? In truth, we now know that regulatory compliance will continue to be a part of every bank's strategic outlook indefinitely, and so as consulting firms help financial services companies internalize the latest changes, they themselves will need to similarly elevate their relationships with regulators and make internal compliance structures an integral part of their organizational DNA.
Tomek Jankowski is a Senior Analyst and Lead for Financial Services Research for Kennedyin Consulting Research & Advisory (KCRA). For more information,visit www.kennedyinfo.com/consulting.
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