Risk & Compliance Managers, Private Equity (PE) firms, Hedge Funds, Credits firms and Consumers, in the USA and global financial markets are going to remember this week for a long time to come due to the epic changes in the financial regulation and supervision. The latest US proposal on financial regulatory reform does skew towards tighter regulation.
In the EU summit starting June 23rd, a tighter financial market regulation is being discussed with 2 extra mandates for EBC – a European Systemic Risk Council and a body to set standards for closer supervision of banks, insurers and other firms.
Albeit the US proposal is still evolving and subject to congress approval, but here is a quick summary of the 7 key areas and the possible impact on Regulatory Risk Management and compliance functions:
- Consumer Protection Regulator: The UK FSA took a lead with having TCF (Treating Customer Fairly) approach but US has gone one step ahead with this new proposed agency with oversight over mortgages, credit cards, savings accounts and annuities.
Impact: World of retail financial services would have new tighter regulatory requirements.
- Executive Pay:Investors to have a greater say in executive pay Impact: Link of executive pay to risk management
- Private Equity and Hedge Funds Regulation: Under Federal regulation. Impact: Demand for Risk Management & Regulatory compliance professionals in Hedge Funds and PE firms.
- Mortgages & Asset backed securities: Firms need to hold a portion of the loans they package and sell. E.g. 5% for ABS firms. This contrasts with the 20% proposal in EU. Impact: Huge change in business models of many firms that are essentially in mortgage origination business to move to portfolio risk management business. Also big impact for the underwriters of asset backed securities as they need to retain a 5% stake to improve asset quality.
- OTC Derivatives business model: All standardized contracts derivatives contracts to be traded on regulated and transparent venues such as exchanges or electronic marketplaces and cleared centrally to reduce risk. Impact: Deeper integration of Derivatives business with exchanges; Greater emphasis on Risk management at exchanges; Emergence of Clearing houses as a critical Risk management institution.
- Insurance Supervision – Possible Single Federal Regulator instead of a distributed regional state regulators networks. Impact: Streamlined and efficient regulatory reporting
- Financial Services Oversight Council – A consolidated group comprising all regulators to oversee systemic risk. Impact: Less confusion on who does what.
Sai Sireesh is Director of Risk Management & Compliance Strategy & Solutions, Worldwide Financial Services for the Microsoft Corporation. Mr. Sireesh has over 18 years of global experience across Risk and Compliance Consulting, Financial sector Strategy and blueprints execution. He has worked in North America, Australia, Singapore, Malaysia, Philippines, Thailand, Indonesia and India, is a regular contributor to the Journal of Regulation & Risk, and has authored several global research studies and articles.