The power struggle over financial regulations

Ross McGee
Ross McGee

Handling financial assets comes with a huge amount of responsibility. Life savings, investment in companies and more are all at stake when managed by others. As a result, regulations regarding their handling is both common and often welcomed by individuals and businesses alike.

However, the protection which financial regulations like CASS, MiFID II, and AML offer are strangely not always present across every financial medium. Their lack of universality, paired with the UK government recently signalling a reluctance to impose regulations on the Buy Now Pay Later (BNPL) industry, has raised questions about their necessity. Are financial controls more harmful than they are beneficial? Do they scupper innovation? Do existing ones go too far?

In this blog we will therefore explore the extent to which financial red tape is a hinderance and deliver solutions to enable productivity and innovation no matter what regulations must be complied with.

Why are financial regulations important?

Some might argue otherwise but the vast majority of those within the financial sector, and those outside of it, will agree that financial regulations are important. After all, their primary aim is to ensure the stability and integrity of financial systems.

How they achieve this is through protecting assets, stamping out fraud, demanding comprehensive audits and ensuring high management standards. To not take such action would allow the world of finance to become a modern day Wild West. That’s why governments or authoritative bodies view financial regulations as highly significant.

What problems can financial regulations cause?

Whilst the primary aim of financial regulations is to stop problems from arising, some industries believe that their mere existence is an issue in itself. Arguably, the entire cryptocurrency industry – a way to conduct financial transactions without being reliant on banks or governments – became established due to this.

With guidebooks for financial rules never being a short read, it isn’t difficult to see why certain businesses would be against comprehensive and strictly enforced regulations. They can cover hundreds of pages to ensure that every single circumstance (no matter how unlikely) is accounted for. For business which they are imposed upon this means:

  • Taking the time to understand every rule
  • Investing significant funds to comply with regulations
  • Facing fines which are even greater than implementation costs should they not comply

In terms of time and actual money spent this all adds up; in 2021 alone, financial institutions spent $213.9 billion to make sure they were compliant with financial crime laws. In reality, they had no choice but to. This is clear by the significant fines which are handed out when breaches occur. For instance, Santander received a financial penalty of over £100 million late in 2022 for repeated anti-money laundering failures.

Now key players from the BNPL industry are opposing being regulated, no doubt due to the significant costs they will be forced to pass onto their customers. Their threat to quit the UK market if “heavy-handed” regulations are imposed has in turn created a problem for both the government and the FCA. Should they press on, they will lose a multibillion-pound industry and risk angering the population during a cost-of-living crisis. Or, failure to draw up regulations will place other rulings under scrutiny, potentially undermining their authority. Undeniably, despite their good intentions, financial regulations are therefore problematic.

Financial regulations working at their best

Even though some industries might wish to stay away from financial regulations, they evidently have their place. The best way to illustrate this is to examine real instances of financial calamities and their erasure following regulations being imposed.

For example, in 2008 the world experienced the worst financial crash in modern times. In response, the Dodd-Frank Wallstreet Reform and Consumer Protection act was passed by the US Congress. Now, consumers are protected from predatory lending, there is a greater degree of vigilance over financial institutions, and banks can no longer make speculative investments amongst other rules.

Another noteworthy instance is Basel III; an additional response to the Global Financial Crisis of the late-noughties. These rulings work to ensure that banks are prepared to endure liquidity crises and times of financial distress through holding greater securities in reserve.

In the wake of the financial crisis it was evident that such regulations were required. Fortunately, their implementation has prevented any similar economic disasters.

Regulations: as regular as clockwork

Despite the reluctance of BNPL firms and the crypto-industry to become regulated, just like taxes, you can always bet on financial controls being created. If not today, it is highly likely that in the future these industries will have rules imposed upon them. Plus, even if this doesn’t arise, there is every chance that rival, alternative industries will form with regulations and safeguards in place. Already this is being seen through the creation of Central Bank Digital Currencies.

Why? Because the majority of people like security. In fact, with the 2008 financial crash still fresh in the memory, as many as 9 out of 10 people believe it is important to regulate financial products and services.

With this in mind, every firm which handles money or financial assets must be compliant with regulations should they wish to sustain the trust of their clients. From wealth management firms to insurance companies, banks to online gambling platforms, compliance is an unnegotiable priority.

Expectation might be that compliance is costly; however, this doesn’t always have to be the case. Thanks to automated reconciliation software like Aurum which generates real-time insights and complete audit trails, financial regulation becomes a tick box exercise which is easy to complete.

To make sure that the foundation of your financial operations is built on trust, book a demo with Aurum Solutions today to see how we can help you meet your industry’s financial regulations

Ross McGee
Ross McGee

Content and Community Marketing Manager

Author page

Ross McGee is a marketing manager at Aurum Solutions who deep dives into financial processes, technology, and best practices to share insights that help finance professionals of all levels maximise their potential.

Get started. Together with Aurum.
It’s time to automate your reconciliation.
Request Demo
Related resources