Tracey McDermott, Acting Chief Executive of the UK Financial Conduct Authority, acknowledged that the “intensity and volume of regulatory authority over recent years is not sustainable – for regulators or for the industry,” in a speech delivered last week at the annual City Banquet at Mansion House in London. She acknowledged that, if boards of financial service companies continue to spend the “majority of their time on regulatory matters… we will crowd out the creativity, innovation and competition which should present the opportunities for growth in the future.” In Ms. McDermott’s view, it is appropriate to re-evaluate all regulatory changes that have been implemented after a crisis (such as the financial crisis of 2007-2008) as “inevitably, among the many good and rational changes that arise… there will be some that don’t have the intended or expected impact.” However, she cautioned against too many changes lest the “pendulum swing too far in the other direction.” According to Ms. McDermott, regulators should focus on three principal objectives: (1) ensuring that applicable rules are enforced “fairly and decisively;” (2) competition is promoted; and (3) regulated firms don’t just comply with applicable rules, “but aspire to be better than that.” She said that such focus would constitute a “sustainable approach to regulation” that would break the seemingly traditional cycle of regulate and deregulate.

My View: Ms. McDermott’s commentary on the current regulatory environment is unusually frank for a leading regulator, as are similar remarks made last week by Timothy Massad, Chairman of the Commodity Futures Trading Commission. (See the article above entitled “Proposed Automated Trading Rule by CFTC Likely to Follow Already Existing Best Practices.”) Few would dispute that many of the legal and regulatory initiatives implemented following the 2007-2008 financial crisis were beneficial. However, the inconsistent approaches taken by conduct and bank regulators related to cleared derivatives – with the former promoting cleared derivatives and the latter penalizing banks for handling the same products – place banks and their customers in untenable positions. Moreover, the onslaught of particularized regulations, cross-border regulatory competition and the over-aggressiveness of many regulators to apply creative theories to prosecute seemingly trivial offenses has imposed significant extra costs on financial firms and their clients with unclear benefits. On the eve of clock adjustments in many countries worldwide, no one is seriously arguing a return in time to the pre-2007 regulatory environment. However, adjustments to regulatory approaches adopted since the last financial crisis should be considered – as suggested by Ms. McDermott – to ensure that financial services firms are able to provide robust services to their clients going forward, while requiring firms to maintain vibrant compliance cultures.