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Risks set to rise as global regulation tightens

14th July 2004

Risks set to rise as global regulation tightens

As signs grow that global financial services firms are entering into a new phase of strategic growth, KPMG’s Financial Services practice has warned that clear understanding and close management of regulatory and reputational risk will be ever more important for the sector. With renewed activity comes not just the promise of reward, but the risk of failure.

Andrew Dinsdale, head of KPMG’s Financial Services practice in New Zealand, said: “Risks will be looming larger on every risk manager’s radar now that the sector is in expansion mode.

“As regulators around the world show signs of increasing stringency, regulatory risk has become, perhaps, the biggest risk of all. While those firms that manage risk effectively can expect to reap certain rewards – such as lower capital requirements through the Basel Accord – KPMG believes that there is much more scope for the regulators to offer more of a ‘regulatory dividend’ in the form of genuine incentives and rewards for high standards.

“Those that do not manage their risks will continue to face not only having to pay ever larger fines and compensation but suffering increasingly significant reputational damage as well. But the incentives and deterrents could be in better balance,” he said.

A new edition of the KPMG publication Frontiers in Finance entitled Regulation: all risk and no reward? highlights four key regulatory issues:

-the increasing globalization of regulation – there is an increasing degree of coordination between national regulators on policy, supervision and enforcement matters. The ripple effect should not be underestimated. On the other hand, detailed rules still differ widely from country to country. Both phenomena create extra risk for global groups

- regulators’ focus on effective corporate governance – regulators have made it clear that they will hold senior managers responsible for any significant regulatory failures in their organization

-rising consumer protection – we are moving away from the principle ‘caveat emptor’ towards the inverse principle of ‘seller beware’ – the onus is falling on personal financial services firms to ensure that customers buy the appropriate products

-convergence of regulation – there has been a trend, with some exceptions, for countries to merge their various financial regulatory bodies into a single regulator. Moves are being made to put all sectors on similar supervisory footings. This can result in an issue or expectation which arises in one industry sector rapidly extending across all other sectors

Frontiers in Finance examines risk as it applies to a whole range of regulatory areas, including financial crime, the compliance function, outsourcing, the Basel Accord, capital adequacy in the insurance sector, the European Single Market, and the growth of the financial services market in China.

Andrew Dinsdale said that dealing with regulation is definitely not a case of ‘all risk and no reward’.

“If regulatory risks are properly identified and managed, then the regulatory environment can be turned to business advantage. But as the stakes are raised by increasingly vigilant regulators – and consumer protection groups – it is essential that financial firms manage their regulatory and reputational risk as a major business and strategic issue, not just a matter of technical compliance, “ he said.


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