成人头条

There is a saying “using a sledgehammer to crack a nut.” The point here is not just that a sledgehammer is over-engineered and a very costly way to crack a nut. It also won’t work. You will likely smash the nut entirely rather than just remove its shell. So it’s worse than a nutcracker, and in fact pretty useless, as well as more costly.

What has this got to do with proportionality and regulation? Well, I often read regulatory documents that include the following sentence:

“the level of detail in the analysis should be proportionate to the nature, scale and complexity of the firm”

What does this actually mean? Just stating that firms should comply with your rules in a proportionate way doesn’t make the rules proportionate. It’s not enough to just say it. 

Before I get into some suggestions for a better way, let’s dig a bit more into the problem. Why should regulations and supervision be proportionate? Is it all about costs and fairness? Smaller firms are more cost constrained and pose fewer risks, so let’s give them a bit of a break and let them spend less because they can’t afford it? Half of this is true - smaller firms inevitably have lower budgets. However, the bit I don’t agree with is that a simpler or more streamlined approach is weaker or a sort of concession. I don’t believe that regulations should be simpler or less costly just to give smaller firms a bit of a break. 

In banking regulation, I would argue that proportionality is all about the appropriateness of the rules. I don’t believe that regulations designed for large banks should necessarily be seen as the gold standard or best practice. I don’t agree that in an ideal world, small firms would implement them too, if only they could afford it. Rather, I think that rules for larger banks just don’t work so well and could even be harmful at times. Like trying to crack a nut with a sledgehammer. 

The reason in my mind that we need simpler, different or fewer rules for smaller firms is about tailoring the rules to the firms to which they apply. So proportionality is about ensuring that the rules are appropriate for smaller as well as larger firms, and to take account of varying business models. 

Much of the suite of rules that apply to banks are derived from the Basel framework. There is often little science behind the calibration of the ratios other than being linked to what feels about right for larger banks. It is also worth remembering that large banks have very different dynamics in the market. They have more ability to compete on price and more market buying power, such as with third party providers. So this isn’t just about cost, it’s about many other things such as whether the firm is a price-maker vs price-taker, whether they have buying power when negotiating contracts, and the unique characteristics of their business models e.g. plc bank vs mutual building society or credit union. 

Another thing I sometimes observe is supervisory guidance that is written for one segment of firms e.g. a large plc bank, but then smaller firms are encouraged to use it as a reference point even though it doesn’t technically apply to them. This practice is unhelpful at best. Lengthier, more detailed guidance doesn’t mean it is better. If certain parts of a document are relevant to a smaller firm, then this should be re-packaged and consulted upon before applying them to a different groups of firms. Consultation is an important part of the policy-making process to avoid unintended consequences. It should never be skipped by applying regulations to firms that are out of scope, no matter how informally.

Consultants have a useful role to play here too. They could be much better at advising firms on a proportionate approach rather than a one-size-fits-all approach. This would also help with some of the capacity constraints within consulting and audit firms, if they were able to conduct their internal and external audits in a more proportionate way. I hear stories in small firms where the external audit team outnumbers the finance team for several weeks at year end because of the regulations. That doesn’t feel proportionate on any measure. 

So, what would be a better approach? I’d like to propose a few principles:

• To be genuinely proportionate, regulations must be fewer in number or different in nature (whether that is calibration, complexity or just less onerous to implement) i.e. you can’t just say “apply these rules proportionately” because no-one will know what that actually means, and inevitably it will lead to a highest common denominator view of best practice. A good example here is the PRA rules that apply to credit unions that are significantly simpler than the Basel framework, and rightly so. The removal of Pillar 3 reporting for non-systemic banks and building societies under the PRA’s Strong & Simple project is another good example. 

• Assurance work should never outweigh the operational work. What do I mean by this? Let me give you an example. If a team is subject to a supervisory review or outsourced internal audit, the amount of work they do and the cost shouldn’t outweigh the operational capacity of the team or function they are assessing. Nor should they take up so much of the team’s time with questioning and data requests that they cannot perform their day job. This could add more risk by distraction than it mitigates. I add one caveat to this. If a team is chronically under-resourced then that in itself could be an audit or supervisory finding. If that’s the case then that’s the issue that needs addressing first and the audit or review can be fast-tracked and avoid the detailed review that will only produce findings that everyone is already aware of.

• Proportionality should be monitored, assessed and mitigated. Regulators themselves have internal teams to monitor the quality of supervision, a bit like three lines of defence. These teams could be given an objective to monitor not just the quality of supervision but whether it has been applied proportionately. The same should be true in the audit profession.

• Firms should only refer to regulatory rules and guidance that is designed for them, not guidance written for larger firms (no matter how informally).

• External consultants and auditors need to be part of the solution not part of the problem. Their structures and incentives should promote rather than hinder proportionality.

All of these measures should help smaller firms to focus on what really matters, without going down regulatory rabbit holes. The measures should not be read as de-regulatory. Proportionality is not about giving smaller firms a break. Proportionality is about the rules being appropriate to the firms to which they are applied, and avoiding issues of inappropriate read-across or over-reviewing. 

Avoiding using a sledge hammer to crack a nut.