Financial Regulation and Compliance: How to Manage Competing and Overlapping Regulatory Oversight, + Website

Foreword

Few topics in finance are more confusing to outsiders than regulation. There are many among us who understand financial valuation and even the technical intricacies of the esoteric contingent claims analysis, copula functions, and risk mapping algorithms. But the supervision and regulation of banks, much less securities firms, tend to make the eyes of most financial analysts glaze over.

Yet the compliance function is one of the most important, and valuable, functions in any financial institution. Compliance is more than just records retention. As recent crisis-era litigation has shown, managing compliance properly can help reduce vast legal costs later. While we may not want to admit it, compliance creates value.

The problem is that not many people – whether they be financial practitioners, policymakers, or sometimes even compliance professionals – really understand compliance. Part of the problem is the unique path dependence that has created a fractured supervisory structure with some delineations by institution and some by function, creating considerable regulatory overlap. Even understanding who is responsible for what, in any real sense, after accounting for “primary” supervisory responsibility, can be massively confusing.

This became apparent to me when I began to advise staff at the European Union (EU) Parliament on their own reforms to financial regulation. At the time the U.S. was (and is still) urging them to just adopt U.S. institutional features, which ...