Regulatory divergence costs financial institutions 5-10% of their annual turnover

In a survey of more than 250 experts and leaders at financial institutions throughout the world’s major financial centersit was found that regulatory divergence costs financial institutions 5-10% oftheir annual turnover (on average). This consumes scarce senior management time, as well as capital, that could otherwise be focused on identifying emerging risks in the financial system.
Ultimately, these costs are a barrier to international growth:more than $780 billion annually in costs to the global economy are conservatively inferred by the findings, according to a report based on the survey by the International Federation of Accountants (IFAC) which was conducted together with Business at OECD
Regulatory divergence refers to inconsistencies in regulation between different jurisdictions, which may reasonably arise from cultural differences, domestic policy priorities, or other factors. However, in the financial sector, the need for interconnectedness and the free flow of capital mean these regulatory divergences can often represent more of a burden than a benefit for the economies involved.

According to the report, experts and leaders participating in the study point to practical problem areas, andsuggest actionable steps to curb the impacts of financial regulatory divergence,

including aligning regulatory definitions, increasing awareness and coordination in regulatory reporting requests, and enhancing transparency in rule making, monitoring, and enforcement processes.

Some of the key findings were:

• Regulatory divergence is resulting in material and increasing costs in the financial sector globally, consuming on average between 5-10% of annual turnover.
• Over the past five years, 51% of financial institutions have had to divert resources away from investment in risk management activities as a result of regulatory divergence, including senior management time and capital.
• Regulatory divergence represents a moderate to substantial barrier to most financial institutions’ international growth.
• The costs arising from regulatory divergence are more material to smaller institutions.
• Divergence in competition law, market based regulation, and product regulation/consumer protection cause the most material costs.
• Inconsistencies in supervisory interpretations and practices, fundamentally different regulatory
frameworks, and different regulatory or data definitions are the most significant inconsistencies.

“Every dollar spent on managing incoherent regulatory reporting requests is a dollar that isn’t put back into the economy through lending,” according to a Banking Risk Management Officer in the US,

Respondents recommended regulators and international organizations could better address the impacts and costs of regulatory divergence by:
• Enhancing international cooperation among regulators, including in how regulations are interpreted, monitored and enforced, and exchanging information between regulators.
• Increasing overall alignment in rules, regulations and standards; and increasing adherence to global standards.
• Improving alignment in regulatory definitions internationally.
• Increasing awareness of how other regulators are enforcing and monitoring regulations in order to avoid duplicating reporting requirements and processes.
• Enhancing transparency by international organizations in developing new rules and regulations.
• Developing greater clarity in rules and regulations.

The report can be downloaded here.