Is Financial Services Regulation hurting the people it is supposed to protect?

For anybody who has been working in Financial Services over the past decade, it would have been impossible to miss the tidal wave of new regulations being created and implemented.  This wave will likely continue for the foreseeable future.   

Just to be clear, some of these regulations was seriously overdue following the issues and poor behaviours of the financial disasters of 2008 to 2011.  But these regulations have caused many problems and challenges for firms which has had adverse knock-on impacts to end-investors (i.e. the people the regulation is trying to protect).

Firstly firms need to understand the regulations and what it means to their firm (as well as their suppliers and customers) to comply with them.  Once this is understood then often costly and complex operating model, legal, etc. changes will need to be implemented.  These changes also result in higher costs for day-to-day running (with the knock-on impact on firms’ profitability), an increase in complexity/risk around operating models and a general squeeze on innovation.

Furthermore, firms are being forced to change how they operate at a holistic level with changes to capital requirements, board composition, marketing approaches, cultural behaviours and investment strategies.

Additionally, some of the regulations have had some unintentional side effects; for example:

• The new regulation to monitor the risk profile of portfolios could result in firms putting funds in lower-risk investments which could harm their long-term returns. 
• Some of the new regulations were costly to comply with (such as central clearing of Over-The-Counter derivatives) which means firms could not use them which could impact clients’ investor’s investment returns.
• MiFID-II Cost and Charges reporting requirements have created confusion and inconsistency due to the different ways firms have interpreted the regulations. This means that it is hard (and sometimes impossible) for clients and distributions to perform any meaningful comparison. This is worrying because this was one of the main triggers behind the changes.

Therefore there is a real risk that all these well-intentioned regulations will stifle innovation (especially in product development) which would in turn negatively impact the end investors whom the regulation is designed to protect.