“Not modest repairs at the margin, but new rules of the game.”

-U.S. Secretary of the Treasury Timothy Geithner in Congressional testimony on March 26, 2009, describing regulatory reform changes needed.

Most people would agree that one of the factors contributing to the current financial crisis was an inadequate regulatory regime for financial services activities. The reasons why the regulatory infrastructure failed are many and varied, including:

1. Segments of the industry and certain financial products were unregulated or under-regulated.
2. Regulatory schemes designed in much different (and simpler) times did not allow for effective oversight of large, complex financial services organizations.
3. Regulators failed to see and react quickly enough to signs that many financial institutions were aggressively growing risky businesses without proper risk management.
4. Regulators focused on individual institution risk and not systemic risk.
5. Existing regulatory requirements for capital, loan loss reserve provisioning, and valuation practices amplified rather than buffered the impact of financial shocks.

Regulatory reform for the financial services industry has become a topic of national and international debate. Many recommendations for revamping the regulatory regime have already been offered. Among those receiving considerable industry attention have been the January 2009 Report of the Group of 30 (Financial Reform, A Framework for Financial Stability¹); the de Larosière (European Union) Report², also issued in January 2009; the report of the Turner Commission³ in the United Kingdom in March 2009; recommendations first offered in current U.S. Secretary of the Treasury Timothy Geithner’s March testimony before the House Committee on Financial Services,⁴ and the four reports⁵ issued by the Financial Stability Forum in April 2009, in preparation for the April G-20 summit in London.

While each set of recommendations has its nuances, certain common themes have emerged. Among them are:

1. Gaps in regulation and supervision must be eliminated.
2. “Systemically significant” institutions must be subject to heightened oversight.
3. Financial institution regulation should be revised to be less procyclical.
4. International coordination and cooperation are imperative.

Over the coming months, if not years, we will see ideas offered and debated and regulatory changes effected in many countries. These will include changes in how financial services companies and financial activities are regulated as well as new laws and regulations addressing issues ranging from capital and liquidity adequacy to consumer protection. We will also see national regulatory bodies continue to strive for international consistency and coordination. It is impossible to predict the full extent of the change, but change there will be.

In the early stages of regulatory reform, we are encouraging companies to consider how regulatory changes are likely to affect their business and to respond proactively to changes that seem inevitable. In these uncertain times, organizations with strong risk management and an enterprisewide view of compliance will have an advantage because they will be better able to adapt and manage changing regulations, causing less disruption to their business operations.

Our risk and compliance professionals have worked with financial services clients around the world. We can help you evaluate and improve your existing risk management efforts. Our professionals create regulatory compliance solutions that align with your business strategy and risk profile. Our multidisciplinary team can ensure your technology infrastructure is supporting your objectives. We also can implement software and controls to improve performance and efficiency. In addition, we have communications professionals who can help you make the cultural changes necessary for effective risk management and compliance

¹Available for purchase at www.group30.org.

²Available at http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf.

³Available at http://www.fsa.gov.uk/pubs/other/turner_review.pdf.

⁴Available at http://www.treas.gov/press/releases/tg71.htm.

⁵Recommendations for Addressing Procyclicality in the Financial System, Principles for Sound Compensation Practices, Principles for Cross-Border Cooperation on Crisis Management and Update to the Report on Enhancing Market and Institutional Resilience available at http://www.fsforum.org/press/pr_090402a.pdf.