Data Delusions: Why the Industry Should Worry About Deregulation
Following on from @Lyndon Nelson's recent article on the deregulatory bills in the King's Speech, their prioritisation of growth, and the unacknowledged trade-offs involved, I want to explore why industry should be extremely wary of such initiatives that, at first glance, appear to be a win. Much of what seems to be proposed, in fact, is likely to be far more costly for regulated firms, in both the short and long term, than is generally understood. There are better options.
Let's focus on what is perhaps the most obvious target for those in the deregulation camp, the regular data that the regulator requires industry to provide. This has been a bugbear from time immemorial, and, as a villain, it has a lot to commend it. While new data requirements are regularly added, old ones are rarely, if ever, withdrawn, and much of what the regulator collects is rarely looked at, let alone analysed. Fixing this must be simple; just eliminate the data that the regulator uses the least.
But the equation is nowhere near as straightforward.
Most obviously, other regulators might still require some of that data - the EU, US, etc. – and, because it's cheaper to run a single reporting system than several, firms with an international footprint often gear their systems to the highest set of requirements. So, the UK decommissioning this data would look good on the UK regulator's scorecard, but it would save these firms nothing.
Regular and standardised data returns are unpopular in the industry because they entail a high upfront cost to build the requisite systems. Once built, however, these are cheap to operate. Less standardised reporting might save some of this initial spend, but it inevitably leads to more ad hoc requests, in which the regulator requires firms to provide one-off or temporary data sets to respond to a particular situation. Because firms are unlikely to have the systems needed to collect such data to the regulator'sspecifications, the exercise becomes more 'manual', and the cost of each individual request is high. These will quickly add up. A reporting world more dependent on ad hoc data will almost certainly be much more expensive for firms in the long run.
A regulator without the right data exposes society to serious consequences. Data can fail a regulator in two ways. A return that looks redundant in calm times may be cut, only to be sorely missed when a crisis arrives, or the capability may simply never be built in the first place.
Take liquidity. Before the financial crisis, the UK did not ignore it: large banks were subject to a stock-liquidity regime requiring high-quality assets against severe stressed outflows, calibrated well beyond anything previously experienced. The flaw was that this was only ever meant to be the first of several pillars. The others — foreign-currency liquidity, contingent liquidity, and what we would now call operational resilience — became bogged down in negotiation and were never completed. A regime designed to be comprehensive was left partial, and a widespread conviction that the world had changed removed any urgency to finish it. When the crisis came, the gap was exposed at great cost, and the regulator was rightly criticised. We can easily imagine how regulators would look if they had just discontinued a report that would shine a similar light on the next crisis.
In addition, the timeline for negotiating, formally consulting, and then implementing a new data report spans several years. All in all, there is no incentive for regulators to voluntarily relinquish information that took a long time to obtain. Everyone agrees that the present situation is far from ideal, and the cost to the industry is many billions, a good portion of which is unnecessary. So, are there better alternatives to cutting data returns and declaring success? Well, there are definitely better paths to travel…
One of them is to start looking at the system as a whole - the forest rather than the trees.
Today, almost nothing pushes either side to take that whole-system view. When the regulator seeks new information – on an activity that has grown quickly, say, or become more complex – the industry argues the number of items down to reduce its build cost: ask for ten, be offered eight. The regulator, under persistent pressure to control its own budget, often finds it easier to accept the smaller set and pick up the rest later through ad hoc requests. Each side has minimised the cost it can see; the system as a whole pays more.
Nor are ad hoc requests the cheap fallback they appear to be, even for the regulator, and not only in money. Asking for data signals concerns. After a shock – the closure of the Strait of Hormuz, say, or a sharp move in prices – a regulator that suddenly asks a firm for its specific exposures may find the firm reacting to the request itself, cutting lines or positions before anyone yet knows whether there is a real problem. Standing data carries no such signal; a system that relies on ad hoc collection cannot replace it without incurring costs.
Beneath all of this lies a question of visibility. The regulator's own budget is a single, scrutinised number – in the UK, it's long been expected to stay flat in real terms and, at times, in nominal terms – so it behaves quite rationally by minimising its own spending, even where a modest outlay would save industry many times that amount. The regulator can even require a firm to commission and pay directly for an independent 'skilled persons' report – a section 166 review – when the same work done by its own staff would fall on the general levy. Firms resist the direct charge far more fiercely than the levied one, though both ultimately land on the industry, and the latter is usually higher. It is the visibility of a cost, not its size, that too often drives the argument.
It is not that the cost to industry goes unmeasured. Every new requirement carries a cost-benefit assessment, weighing whether its benefits justify its cost. But that assessment is always incremental – each requirement judged on its own. What no process attempts to weigh is the standing cost of the whole regime. Each tree is inspected; the forest is no one's responsibility.
Looking at the whole cost base would involve recognising the data system as a shared public good, much as we treat payment systems. The result would be a partnership model between industry and regulators, with Government oversight, that would consider the total system costs of change rather than focusing predominantly on the regulator's budget. Such a collaborative arrangement would also be better positioned to add or subtract data sets in a considered way, based on what's needed at the time, and to do so much more quickly than at present. As a bonus, this would ease regulators' fears of losing hard-won data they might someday need.
We've not seen such a partnership successfully built in any primary jurisdiction. Efforts in this direction exist, such as the Bank of England and FCA's Transforming Data Collection programme, but none have yet delivered. However, given the existing level of cost and dysfunction, such a partnership wouldn't need to work anywhere near perfectly to reap billions in savings. It would also produce a more focused and nimble system, better able to adapt to future developments and respond to future crises. That must be worth aiming for.