Dear financial services regulator…

Ever since the financial crisis, regulators and policy makers at both the national and international levels have pushed through a number of measures to minimise the risk of another great crash. While some of these measures were clearly necessary, others have been more contentious. In a recent survey conducted by the Economist Intelligence Unit, European financial services executives made their views clear: a majority of them identified regulation as the biggest risk facing their industry.

We asked a few financial industry leaders to spell out their regulatory concerns and their wish list for regulators. Here they are, in no particular order:

Curb excessive regulation

Peter Watson, chief operating officer for Europe at Robert W. Baird, a mid-market investment bank specialising in mergers and acquisitions, worries that “regulators are simply jumping at the whim of their political masters,” and bemoans “the presumption that financial services companies are unprincipled, and that all their employees are dishonest and greedy.”

Excessive regulation may be populist but it could end up doing more harm than good, thinks Massimo Tosato, executive vice-chairman and global head of distribution at Schroders, a global asset management firm. “We welcome regulation which protects the consumer, but some proposals simply lack business logic,” he says. “Take the EU idea to limit bonus payments for individual employees to the same level as their salary. That could just increase our fixed costs for employees, without changing their total compensation, so what good will that do the consumer?”

Make regulation consistent

Consistency across the range of regulatory initiatives is vital in the effort to minimise the risk of another crash, yet many elements of the regulatory response remain quite inconsistent. That’s the case with prudential regulation—which seeks to improve companies’ financial soundness—and regulation designed to protect the consumer, according to Roberto Nicastro, group general manager at Unicredit, an Italian bank.

“Basel III [global regulation] requires banks to hold more capital, but much consumer regulation militates against this objective,” he says. “For example, in some countries, there are caps on the interest rates which banks can charge; and, in Italy, if a mortgage customer is not happy with the rates he is paying, he can simply switch to another provider without any penalty, entailing a substantial prepayment risk for us because we have already committed ourselves to long-term funding for the mortgage.”

Harmonise regulatory regimes

The lack of harmonisation in financial regulation across European countries (and the rest of the world) is another cause for concern for many. “Regulation on the same issue can be very different in substance in various parts of the world, and even within Europe itself; even when it isn’t, implementation dates can vary enormously,” says Scott Moeller, professor of finance at Cass Business School in London.

When it comes to trans-Atlantic partnerships, better coordination across banking systems is high on the wish list of industry leaders. The US Federal Reserve is considering the introduction of new rules requiring that the US operations of foreign banks hold more capital and liquid assets. Such fragmentation can pose serious risks to the global economic recovery: McKinsey, a consultancy, reckons that fragmented banking systems could trim global growth by almost 0.5 percentage points a year.

Keep it simple

The complexity of some of the new rules in itself poses a threat to the safety and stability of the financial system. For example, the American Bankers’ Association described the so-called Volker Rule as an “enormous, highly complex and burdensome rule”. The new regulation, which aims to prevent deposit-taking banks from making risky trades on their own accounts, is close to a thousand pages long.

Massimo Tosato, executive vice chairman of Schroders, believes that Britain would be the biggest loser if Europe ends up with a patchwork quilt of regulatory frameworks. “Although its language and time zone will always remain attractive, London would find it extremely difficult to remain the financial centre of Europe if it stood outside the EU bloc and lost its ability to influence the wider debate and policy decisions.”

Interviews conducted by David Bolchover.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.