Financial sector regulation has multiplied and become more complex in the wake of the financial crisis. This is the case especially when it comes to EU regulation, but national legislative work is by no means unaffected. The Constitution of Finland requires more specific regulation of the rights and obligations of various parties, and this can easily double or even triple the amount of regulation in many overall reforms.
The objectives of regulation – promoting stability, preventing new crises, and improving consumer protection – are indisputably important. Regulatory enthusiasm, however, has gone too far. The upper management and boards of financial companies have to spend more and more of their time on ensuring regulatory compliance.
The level of detail and complexity has made it impossible for a single person to master all the standards that govern the operations of a bank or insurance company. A large number of experts is needed in the implementation of regulation and the preparation of various associated internal guidelines and reports. The risk that compliance with some highly specific regulation fails grows all the while larger. If a bank’s regulatory risk has surpassed its credit and market risks in importance, we should stop to consider whether we are on the right track.
Better regulation is high in the strategic priorities of Finnish Prime Minister Sipilä’s cabinet. The Government Programme states that no further national regulatory measures will be taken in connection with the implementation of EU regulations. Unfortunately, this does not seem to have been put into practice yet. Many recent financial sector projects have still included proposals for additional national regulation that run counter to the Programme. One of these concerns the implementation of the Payment Accounts Directive.
The European Union has also awoken to the reality of excessive regulation in the financial sector – at least in speeches. As for now, no obvious measures to cut back on regulation have been taken. The reason for this is that many level 1 regulations have authorised the drafting of level 2 regulations with their various technical standards. Their volume is added to by guidelines and opinions issued by European supervisory authorities. While regulation in a single subject area used to be measured in dozens of pages, it is now measured in the thousands. The sum total is a staggering amount of complex, detailed and technical regulation, all of which individual companies must comply with.
No wonder regulation has become not only a major deterrent for new companies entering the sector, but also a hindrance to the development of business operations.
We should put our heads together to figure out how we could make it easier for new innovations and companies to enter the market.
One potential solution – a regulatory sandbox – was recently introduced in the UK. Maintained and monitored by regulatory authorities, the sandbox is, in a sense, a laboratory that allows companies to test new business ideas in a less regulated environment. This is an interesting concept that would be worth considering also in Finland, although our Constitution will not allow regulators to grant exemptions from peremptory regulation. Moreover, consulting individual businesses does not entirely fit the role Finnish supervisory authorities have.
The Finnish sandboxes would therefore need to be built with legislation. The Government proposal for a crowdfunding act, currently being reviewed by the Parliament, is one promising example. The proposal seeks to promote crowdfunding by establishing a set of rules that are not as strict, for example in terms of investor protection, as they otherwise are for similar activity.
We hope this fresh and innovative approach will in the future reflect in all of financial sector regulation. It would be high time to take some of the burden off of traditional market participants, too.