Written by Chris McCullam on Tuesday 22 January 2013
Across the European Financial Services market lots of effort is ploughed into understanding the market to better inform regulation. As authorities consider and prepare regulatory changes they amass data, economic and social, to understand and forecast what impact that regulation might have on firms operating in their jurisdictions. By seeking information from market participants (consumer groups, product providers, investment managers, etc.) the regulators have to gauge whether the improvements offered by the regulation will outweigh the cost of implementation. They are, however, heavily reliant on the market participants having a good idea of the costs of change – the recent Consultation Paper (12/22) on Client Assets and Multiple Pools had only 4 respondents to the cost benefit questions with some costs estimated as between £30,000 to £5,500,000; which is quite a range from a small number of participants by anyone’s standards.
On a personal level I’m participating in a study at the University of Bath, my involvement centres around keeping a food diary, wearing a heart monitor and some tests in fancy machines to measure muscle and fat composition and distribution. All the data I collect, along with that of the other participants will be used to look at the effect of breakfast on metabolism and weight; trying to quantify whether having breakfast improves health or if those people who have breakfast also tend to do more ‘healthy’ things.
The collection of data by regulators is an important part of their work, for instance, ESMA initiates and coordinates stress tests to assess the resilience of financial market participants to adverse market developments; trends, potential risks and vulnerabilities are identified to feed into regulatory discussions. Recent proposals by the German regulator and European Commission were looking to add a tag or earmark to algorithmic orders so they can be identified as part of the mass of trade data already collected. The idea being to spot trends and intervene before market problems and consumer detriment can occur.
Data analysis seems to work better at instigating ‘corrective legislation’ after the event rather than stopping problems before they occur, a case in point being the AIFMD due to be in force in July 2013. After the well documented financial market problems of 2008-2010 it transpired that the Alternative Investments Market played a part in the problems; essentially due to liquidity and leverage positions within the various vehicles such as hedge funds, REITs, investment trusts, private equity and property funds. With Level 2 rules only being agreed just before Christmas 2012 and FSA Consultation Papers still with drying ink here isn’t much time in the next 6 months to run a consultation, assess the cost impacts and publish final rules. Fortunately, if that is the right word, being a maximum harmonising directive there isn’t too much room for regulatory manoeuvre in implementation. However, with such challenging timescales having robust information driven views of your business is key to identifying areas of impact and understanding that impact quickly and easily.
The advantage of a health study is that there are a large number of participants available, with homogenous internal workings, and some can be set into a control group to carry on as they are while others undertake a change; the benefits of that change can then be identified and understood in context before being promoted to a wider audience. Within the world of financial services regulation this luxury is missing; organisations operate slightly differently to one another, rules and guidelines need to be applied consistently and universally to avoid creating competition problems.
Fortunately I’m in the study control group of ‘normal’ people so don’t have to drastically change my routine to test any hypothesis, just record information such that this post was written with 280g of black coffee and 45g of Hob-Nobs. One small corollary is that by being measured one’s behaviour changes – no one really wants to write down they ate half a pack of biscuits over the course of a morning.
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