It is no surprise that the volume of regulatory activity has been steadily climbing since the financial crisis. But part of the story actually is what you don’t see – a huge spike after the passage of Dodd-Frank, whose implementing rules were generally required to be in place by the end of July 2011. While there certainly has been a rise year-on-year in total activity, roughly 80 percent of Dodd-Frank rulemaking remains to be completed. The rise in Dodd-Frank activity in December 2010 was largely attributable to proposals made by the SEC and CFTC, not final rules.
Despite the fact that over 60 regulatory events occur each day – everything from a speech which may signal the direction of a new regulation to a final binding rule – most of the work has yet to be done. In many cases, firms can’t even begin preparing for a new rule until the basic definitional issues have been established. When final rules begin to come out, firms will be scrambling to implement several major new rules simultaneously.
Additionally, the major regulators in the US, UK, Australia and Hong Kong together account for only 20 percent of activity. Firms that focus solely on these regulators will run the risk of missing important changes from other sources. Put differently, for every regulatory change made by one of the major regulators, there were four from the rest. This illustrates the magnitude of the challenge facing firms and the need for firms to keep abreast of what is going on in each of their markets.
Lastly, the fact that we see activity in all regions of the world does not mean that the rules being written will be the same or even similar. For example, capital requirements are being addressed by international agreements (Basel III), while others, like OTC derivatives regulation, are probably being slowed by attempts to coordinate efforts. Some areas, like hedge fund and rating agency regulation, are proceeding largely independently of each other.
To the extent that firms have to address topics differently across markets, the level of spending is bound to rise resulting in less money that the firms will have available to lend, invest, and execute on the core activities that are necessary to revive the global economy.
