I’VE INVARIABLY BEEN rather mean to regulators in my writings. Not because they’re an easy target, but because the barrage of banking regulation and its waves of unintended consequences they’ve set in motion aren’t just focused on yesterday’s crisis – they have started to fragment the banking and related sectors and will end up rendering less joined-up and ultimately more expensive solutions for clients.
It’s by no means either clear or obvious – to me at any rate – that gutting certain whole market segments or products of dealer or allocated capital capacity through punitive capital requirements is a good thing. Nor is it certain that we’ll end up with a robust defence against the effects of whatever causes the next crisis, which could derive from anywhere, including some sort of chronic cyber attack. Or that the supervisors who sit on the front line stand any realistic chance of being able to properly supervise what the politicians and policy wonks bung into the statute books.
Bankers and the banking lobby circuit have been complaining vigorously and with reason about the massive costs of complying with new rules, and have also raised concerns about their lack of clarity, the un-coordinated and parochial approach of most domestic regulators, the political posturing and supercilious approach of international government and regulatory agencies, and the general hot air around the bank regulatory agenda and the onerous and hugely expensive reform agenda it has unleashed. But of course banks would complain, wouldn’t they?
Bankers and the banking lobby circuit have been complaining vigorously and with reason
I’VE OFTEN WONDERED if regulators live in implementation-at-all-cost bubbles that fail to take into account consequences or common sense. Which brings me back – finally – to my original point: I was delighted to see snatches of the reported comments made by Martin Wheatley, chief executive of the UK’s Financial Conduct Authority at AFME’s European Market Liquidity Conference, held last week in London.
I’ve always thought Wheatley to be a smart cookie and I reckon he deserves credit where credit’s due for his comments. The issue of global regulation is particularly sensitive to London’s status as the world’s pre-eminent financial centre, so fighting for sense to prevail isn’t just a case of protecting UK Inc – it’s protecting London as a place in which global businesses conduct global business.
“What we don’t want to do is to create an environment where people see London or the UK as a hostile place to do business,” Wheatley said.
He is painfully aware of the downsides of regulators creating unintended consequences with unknown outcomes, so his caution that regulation should be forward looking, proportionate and not seek to fight the last war were spot on. He’s wary of the consequences of MiFID II and of the quantitative cap the EU is planning to impose on dark pools equity trading.
On that, he said: “I can’t tell you how we are struggling with the practicalities of how we would supervise and monitor that … certainly you don’t want to throw European markets back into the kind of pre-industrial wilderness of maybe 20 or 25 years ago when it was very difficult to trade a pan-European basket of equities.” Lovely.
WHILE I’M ON this broad subject, I did note a couple of pushbacks on planned European regulation in the past few days. I’m not sure they amount to any sort of pullback from the sinister pendulum of over-regulation but still…
So the planned imposition on European money market funds of a minimum 3% capital buffer has been ditched by the European Parliament’s Economic Affairs Committee. Since it would have rendered many of them uneconomic, is common sense; as is adding steps to make it more difficult to yank cash out during times of distress, imposing liquidity requirements and concentration limits.
The second item revolves around the perhaps more material issue of ESMA proposals to force brokers to disaggregate research and execution. Markus Ferber, the European Parliament’s line-man on MiFID II, backed by Cora van Nieuwenhuizen, a member of the Economic and Monetary Affairs Committee, is pushing back on the proposals as he reckons they’ll undermine the research model to the detriment particularly of SMEs attempting to access the capital markets. Facilitating capital markets access by SMEs is, of course, is a central theme of Capital Markets Union.
The FCA, for its part, reckons the current aggregated model has inherent conflicts of interest and that separating them would not only (by definition) improve transparency but competition too. However, the over-riding feeling about this is that it will naturally lead to attrition in research budgets and coverage.
It’s true that there is a dramatic over-supply of pointless me-too research around large-cap stocks. And even if the linear correlation between large-cap research coverage and investment banking wallet was optically broken years ago; the concentration of trading volumes and the commissions available on large-caps suggest the over-supply is not going to reduce any time soon. But that’s another issue altogether. Disaggregation won’t, in my view, lead to demand for high-quality SME research. And it’ll lead to huge additional operational burdens at both the vendor and client ends.
In a battle of regulatory battles and skirmishes, I’ve got to say such common-sense developments are to be welcomed. Who wins the war, though, is anyone’s guess.
