
Inflexible rules are made to be broken
Charles Dallara, the managing director of the Institute for International Finance in Washington, DC, pulls no punches in our cover profile this month. He says there are elements of the financial services industry that are broken, and need fixing. But he also believes regulators need to rethink their approach to supervision.
For example, he advocates a move to a more principles-based approach in the US and elsewhere, but thinks there is room for rules in some areas. He says, "There really is room and need in most supervisory and regulatory structures for a combination of both principles-based and rules-based. I don't think it's just a matter of retail versus wholesale. I think every good regulatory structure and system will need some overarching principles that guide it. Then, in certain selected areas, whether it's anti-money laundering (AML) or whatever, you will need a set of somewhat more definitive rules. I would say the trend is towards principles-based, and it should be towards principles-based, because of the complexity of the world we live in."
"The problem with rules," he continues, "is not their precision; it is their rigidity. This is what we see time and again – the prescriptiveness inherent in rules simply does not allow for the adaptability and evolution that is needed in today's rapidly changing financial marketplace. The more you build rule-based systems, the more you are in constant need of change, or you end up with serious segments of your supervisory and regulatory structure becoming anachronistic. I believe that we need to move out of detailed legislation and rules as soon as we can."
Dallara adds that jurisdictions that embed too much banking or financial services regulation in legislation are even more likely to have inefficient regulatory structures. "As we all know, it's difficult enough to get regulators to change one of their own rules. It's even more difficult to reopen legislative issues."
A case in point is the US's anti-money laundering framework. "Our money laundering regulatory structure is, to a significant extent, embedded in legislation and this inhibits practical application of a regulatory system that should be risk-based," he says. "It makes it all the more difficult to move towards both a risk-based and a principles-based approach."
And the problem is not confined to the US – it is a global one that the Financial Action Task Force is trying to address. He adds, "regulators need to regain control of AML regulation".
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Operational risk
Power play: how geopolitics is shaping op risk at G-Sibs
Op Risk Benchmarking: Geopolitics is a top five fear for G-Sibs, but most banks lack specialist risk staff and classical tools
Automating regulatory compliance and reporting
Flaws in the regulation of the banking sector have been addressed initially by Basel III, implemented last year. Financial institutions can comply with capital and liquidity requirements in a natively integrated yet modular environment by utilising…
No tick-the-box approach to compliance risks
Op Risk Benchmarking: G-Sibs share fear of regulatory run-ins, but lack common stance on modelling, KRIs and more
Bread-and-butter op risks at the top table
Op Risk Benchmarking: As G-Sibs are forced to do more, how can they avoid doing more wrong?
Op Risk Benchmarking: Inside the G-Sibs
New initiative scrutinises op risk measurement and management practices at the world’s largest banks
Sizing cyber: banks split on who owns and measures hack threats
Op Risk Benchmarking: G-Sibs split on risk modelling and management for IT disruption and infosec
Banks frequently breach appetite for top op risks
Op Risk Benchmarking: Five G-Sibs breached appetite in past year across four risk types, new research reveals
Investment banks: the future of risk control
This Risk.net survey report explores the current state of risk controls in investment banks, the challenges of effective engagement across the three lines of defence, and the opportunity to develop a more dynamic approach to first-line risk control