Financial Services Regulation Past the ‘Tipping Point’ and Holding Back Economic Growth, Says KPMG Report


Monday, June 24, 2013 by KPMG

A new report from KPMG argues that the volume of overlapping regulatory reforms affecting the financial services industry in Europe and beyond has taken us past the 'tipping point' - at which the costs of ever more regulation have begun to exceed the benefits.

'Moving On - The Scope for Better Regulation' contends that regulatory reforms have exercised a "substantial drag" on economic growth - while their impact on the safety of the financial system remains uncertain.

The report argues that additional regulation is not a 'free good'. It increases costs and reduces innovation in financial services. It reduces returns to investors and reduces economic growth. While a modest reduction in economic growth during normal times may be a reasonable price to pay to avoid financial crises, in the present challenging economic climate the weight of regulation is having a negative impact.

Giles Williams, partner in KPMG's Financial Services practice, said: "We need better regulation, more attuned to the needs of the wider economy, not 'more and more of everything'. We need to strike a balance between regulation and its impact on the wider economy; to re-focus on the importance of credit, trade finance and the management of risk by corporates for economic growth, international trade and development."

KPMG's report outlines ways in which all parties have a role to play in helping this rebalancing come about:

  • Financial institutions - need to make real and demonstrable progress in changing their culture and behaviours
  • Investors - need to recognise that the risk/reward landscape has changed and that return on equity expectations need to be adjusted accordingly
  • Regulators - need to take account of the cumulative impact of their multiple reform initiatives and of the uncertainty surrounding the many unfinished parts of the regulatory agenda
  • Politicians - need to recognise the importance of finance as a contributor to and facilitator of economic growth, and be more realistic about what regulation can achieve

KPMG's report also contains a number of practical policy suggestions for a better balanced regulatory approach.

The report can be accessed here.