The Department of Business Prevention

Let’s talk today about compliance in the financial industry. This topic seems to come up a lot lately.

I hear complaints from brokers on the sell side, most of whom don’t have kind words to say about their main regulatory overseer, the Financial Industry Regulatory Authority — even though it’s supposedly in the pocket of the financial industry. I got an earful the other night from some folks I met near the New York Stock Exchange after the close. I hear about it as well from institutional investors on the buy side — as well as almost every guest I’ve had on the Masters in Business podcast series.

Their complaints are often very specific — there’s this rule and that rule and it’s almost impossible to figure out exactly what it is the regulators want us to do and not do.

But there’s also a bigger and more overarching complaint: The regulatory pendulum after the credit crisis has swung too far, in part as a result of the broad lack of trust in Wall Street among both the public and policy makers. This is stifling the creativity and initiative essential for the vibrant financial industry needed in a modern economy. If that’s the case, we should not only be worried, but pay attention to what people who work in the business are saying about this.

Conversations with people throughout the industry reveal several consistent themes:

  1. The new compliance regimes consume an ever larger share of the resources in banking and finance.
  2. Compliance and legal departments have grown much more than other revenue-producing parts of financial companies; in some cases, these parts of financial firms have doubled or tripled in size while other divisions have been cut or eliminated.
  3. Organizational risk aversion has risen to the point where it is now counterproductive.

If you are reading this, then it is likely that the business you are in includes the rational assumption of risk in order to obtain a proportional reward. That is the essence of finance, be it investing, trading, investment banking or underwriting. Capital is deployed with expectations of some anticipated rate of return and some possible risk of loss. This balance between risk and reward is crucial to the proper functioning of the financial system.

Ever since the financial crisis, all interested actors — investors, regulators, policy makers, corporate executives, bankers and brokers — have taken steps to avoid a repeat. It is parallel to Homeland Security’s attempt to prevent another huge terrorist attack on a par with 9/11. This maximalist posture solves some problems, but in the process it creates others.


Continues at Maybe We Clamped Down Too Hard on Finance



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