Prepare for Regulatory Reform by Shoring Up Compliance Programs: Financial Services Firms Need to Get Ready Now for a New World of National and Global Regulatory Requirements

By McGuire, Shealyn; Swiman, Gary et al. | The RMA Journal, May 2009 | Go to article overview

Prepare for Regulatory Reform by Shoring Up Compliance Programs: Financial Services Firms Need to Get Ready Now for a New World of National and Global Regulatory Requirements


McGuire, Shealyn, Swiman, Gary, Schneider, John J., The RMA Journal


Responding to a question during his Senate confirmation hearing in January, Treasury Secretary-designate Timothy Geithner summed up the U.S. financial market predicament in two sentences: "I believe that our regulatory system failed to adapt to the emergence of new risks. The current financial crisis has exposed a number of serious deficiencies in our federal regulatory system." Geithner could just as easily have been speaking about the deficiencies in the global financial markets. The effects that both U.S. and global regulatory deficiencies have had on the markets have been unquantifiable in terms of systemic risk.

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President Obama and other world leaders have responded quickly to the crisis by announcing plans for financial market reform and standardization. In their tone and statements, government leaders are leaving no doubt that both global financial markets and market participants will be required to implement and adhere to sweeping changes in compliance and risk management. While the required changes are still up for debate, the question remains how financial services participants (as they will become more broadly defined) can better prepare themselves for the impact of certain and strict global regulatory reform.

Calls to Action

With the 2008 financial meltdown, it became evident that supervision of the financial industry was outdated and that it might be necessary for unsupervised companies and financial instruments to be drawn under a larger regulatory umbrella. In the U.S., President Obama's response was in keeping with his view of government's responsibilities to stabilize macroeconomic and financial conditions for sustained growth, to promote transparency and openness, and to ensure fair competition. In his "economic road map," he outlined six key priorities to transform the financial regulatory system:

1. Provide the Federal Reserve with basic supervisory authority over any financial institution to which it makes credit available as a lender of last resort.

2. Develop and strengthen capital, liquidity, and disclosure requirements for all financial institutions.

3. End the balkanized framework of overlapping and competing regulatory agencies.

4. Regulate financial institutions for what they do, rather than who they are.

5. Crack down on trading activity that crosses the line to market manipulation.

6. Identify systemic risks to the financial system, no matter where they arise.

Since his election, President Obama has commented on the need for increased regulation to guard against conflicts of interest, to increase transparency, to ensure proper oversight of new and complex financial products, and to increase oversight of hedge funds and other types of alternative, nontraditional investment vehicles. In addition, his administration has signaled that credit rating agencies and mortgage brokers also will be subject to greater regulatory scrutiny.

A more specific call to action in the U.S. has been the reorganization of the regulatory structure, proposed by former Treasury Secretary Henry Paulson and endorsed by the Obama administration. If implemented, it would:

* Merge the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

* Enhance the ability of exchanges to increase their self-regulatory activities.

* Grant sweeping new authority to the Federal Reserve with respect to bank regulation, including oversight of any entity that receives government funding. Similarly, European Union (EU) leaders have united on financial market reform by agreeing to:

* Improve the regulation of financial markets.

* Bolster the International Monetary Fund (IMF).

* Take more punitive action against tax havens.

At the February meeting of EU leaders in Berlin, German Chancellor Angela Merkel spearheaded the effort to draft a formal, collective response to the crisis, stating, "All financial markets, products, and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile. …

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