Divergent financial regulation costs $780bn a year

The current patchwork of global financial regulations is costing $780bn (£549bn) a year as a result of inconsistencies between different jurisdictions, with smaller institutions more likely to experience additional costs, according to research from the International Federation of Accountants (IFAC) and Business at OECD (BIAC)

They examined the cost of regulatory divergence by taking the pulse of more than 250 regulatory and compliance leaders from major global financial institutions. The results quantify the impact of fragmented regulation in terms of material economic costs, financial system risk, and barriers to economic growth.

The results suggest regulatory divergence costs financial institutions between 5% and 10% of annual revenue turnover. Half (51%) of respondents said resources have been directed away from risk management due to the costs associated with diverging regulation.

The costs of regulatory divergence are felt most strongly in the capital markets sector, with 92% of respondents indicating material or very material costs, followed by banking (76%) and professional services (66%).

IFAC and BIAC suggest the $780bn price tag is a conservative estimate, with smaller institutions (annual turnover less than $100m) twice as likely as their larger counterparts to experience very material costs.

Fayezul Choudhury, CEO of IFAC, said: ‘There is clear evidence that reforms implemented since the last financial crisis have resulted in fragmentation that consumes valuable resources, including those that could otherwise be focused on de-escalating the risk of the next crisis

‘In particular, the competitive disadvantage for small and medium sized institutions should serve as a wakeup call for policy makers.’

BIAC and IFAC recommend enhancing international cooperation among regulators, increasing overall alignment in regulation, and ensuring transparency in international rule-setting to mend the fractures caused by regulatory fragmentation.

Regulatory divergence cost, risks, impacts: an international financial sector study, is here.

Report by Pat Sweet

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