Betting on the contest between bulldozers and ostriches.

I know, I know....the title sounds like one of those joke cartoon football matches or the opening to a bad joke. Well, in a way, it is a bad joke, but in this instance I am talking about the current tussles between the finance industry and it's regulators.

Over the last week or so I have attended a number of forums, working groups, plenary sessions and breakfasts that all have a bearing on the topic one way or another. The composition of the groups has differed with little overlap, but overall has included representatives from the industry, consultants, suppliers,trade bodies and a few self-confessed geeks. I have observed some common themes and a few messages that can maybe carried between them.

While The City has always been a pretty collaborative place, I have seen these types of groups spring up before. The causes are primarily two-fold and this case I think both apply. In no particular order, the first is when the industry is overwhelmed and/or confused by the demands placed on it to change. In these instances the firms try and become part of a wider and hopefully more effective lobbying body; lobbying whoever they need to. The second is when consulting firms and suppliers are trying to ramp up engagement and rustle up business. This may sound cynical, but when everyone is busy and understand matters the level of talk diminishes.

So what have I seen this last week or so?

#1 A common and unanimous agreement that there is an incredible amount of change descending on the finance industry in the next couple of years and much of it is unco-ordinated and riddled with inconsistency. Examples are Dodd-Franks, FATCA, LEIs, EMIR, solvency II, etc. This change is in varying degrees of detail and clarity, with little joining it up.

It was reported that the accusation that regulators are not working together was true. While at the highest level they are all looking to implement the intent and spirit of the international agreements, when one looks at then drafting of detail and subsequent implementation they various regulators are working in silos with "local" influences and interests clearly seen.

#2 A good proportion of attendees believed they can lobby the regulators to dilute the impact either by softening rules or widening exemptions. There are however those who have been closer to the regulators who say little or nothing is up for discussion and that the announced changes WILL happen. This was captured in the comment that the regulators view is that the industry has had its chance and mucked it up, so now the regulators are in charge....end of. Of course the regulators answer to politicians whose attention is firmly placed upon public sentiment and future electoral chances. There is as we know little sympathy for banking and, by association, for the wider industry, so the chances of regulators being directed to soften their approach are microscopic.

#3 An ex-regulator pointed out that regulators measure their professional success, by reference to other regulators. They are not driven by a desire to make the markets better or to help firms do business. Instead their gauge is how many elements of regulation have they enacted. This is the predictable outcome, almost 30 years on from the start of modern regulation. At the start many who went to staff the new regulatory bodies came from the industry and had a founding in and links back to it. Now most of the regulators are "career" regulators, who have done nothing but regulation and whose ambitions are either within the regulatory or political arenas. The moral is not to expect the regulators to think like or be particularly interested in issues outside the drafting and enactment of regulation and the satisfaction of their political masters.

#4 The reality of the "new world" will be rather different than the original architects envisaged. A prime example is that in trying to de-risk the derivatives market the expectation was that there would be one or a small number of linked clearing houses. It looks now that there will be a plethora of clearing houses as many jurisdictions a requiring a local solution. This means that the new world will be much more complex than expected and there will still be residual risks as a result.

#5 There was a recognition/interpretation that there is a unwritten design to deflate the derivative market through the new collateral rules. Less acceptable collateral and increased demand for what there is, will raise the cost of trading.The feeling is that this was seen by regulators and governments as the most acceptable market to impact (ie not equities or fixed income). It was felt that many still see this as a back office issue, but it was clear that the impact will be much more marked on front offices than many currently expect.

#6 One constant view is that this will add cost to the manufacturing and management of financial products, costs that will all be passed on to the consumer, but like #3 this is not a concern of the regulators in their search for the holy grail of transparency and consistency.

An analogy that was used was that of security at an airport. It is not hard to see that were every passenger required to be totally naked (transparent) then the risk of terrorist attack on a plane would be much reduced, BUT it would certainly discourage many from flying at all. It seemed very apt!

So back to the title....I used it as it seems that the regulators will be as relentless and irresistible as bulldozers, while many in the industry are still hoping that if they adopt a stance akin to that of an ostrich, ie head in sand, then the demands will dilute and be delayed. I think I know who I would back.