Sometimes it appears that regulation is the world's biggest growth 'industry'. Lawyers, accountants, auditors and compliance officers are benefiting from the compliance boom sustained by the weekly or even daily announcement of new exposure drafts, consultation documents and reporting standards. Ironically, the institutions that were established to protect consumers and investors are themselves unregulated and out of control. On a national and international scale, the body of standard setters and regulators affecting business practice seems to grow unabated, yet their decisions affect our business processes, our information systems and ultimately affect our competitiveness.
According to Martyn Jones, a senior Deloitte technical partner, the 'penny may be dropping' that all of this regulation is deeply unpopular and damaging. He told FSN that "The European Commission is rather like a large oil tanker – it has unstoppable momentum and is difficult to steer in another direction. To a certain extent we are still suffering from a post-Enron view of regulation, which believed that more regulation reduces the cost of capital by increasing transparency of reporting and creating higher standards of compliance and integrity. As such EC Commissioners such as Frits Bolkestein encouraged a full agenda of company law reforms."
"Whilst Charlie McCreevy, the new European Commissioner for Internal Market and Services has quite a different view of regulation, the oil tanker syndrome means that it will be a quite a while before industry sees the benefits of a new approach", says Deloitte's Jones. "McCreevy seems to want move beyond the 'lets react to Enron' phase and institute better regulation that has undergone a more complete impact assessment and for which the costs and benefits are more fully understood," he adds.
In a speech at the London Stock Exchange at the end of last year, McCreevy said, "I want to make life easier for our companies. When I finish at the Commission, there is just one question I will ask myself: have I helped to create a better, simpler and lighter regulatory framework for doing business in the EU that works? And have I blocked some of the more extravagant ideas that business might otherwise have been burdened with? That is my personal benchmark."
One interesting illustration of McCreevy's fresh approach is the decision to present the bulk of the measures in the form of a Regulation rather than a Directive. This may seem like a technicality, but it is much more than that. Unlike Regulations - which have direct effect - Directives have to be implemented into national law. Sometimes, there is considerable variation in the way this is done. The result is unnecessary market fragmentation.... in 20 or more languages. "I want to avoid imposing 25 different sets of rules on our firms – or require investors to understand 25 different sets of minutae different from one market to another," says McCreevy.
In a reference that could have applied to the Operating and Financial Review (OFR), the UK's implementation of the EU Accounts Modernisation Directive, McCreevy's has declared his intention to discourage EC Member States from imposing extra burdens on a National basis through 'gold plating' "I want our consumers to benefit from the same level of protection whether they choose a foreign investment services provider or a domestic one," he said.
"Politicians may be getting the message," says Jones, pointing to Gordon Brown's clumsy decision to abort the OFR as a recent example. "It's going to be difficult to change things. There is a whole industry of people whose whole livelihoods depend on lots of rules," he told FSN
But unless there is a drastic change in approach, the present regulatory environment threatens our competitiveness. "You only have to look at the impact of Sarbanes Oxley s404 to see what a devastating effect over-regulation can have. Foreign listings in the US have all but dried up as a result, whereas the AIM market is positively burgeoning," says Jones.
The European Software Houses Association has also experienced a more positive and business oriented attitude from the EU Commission. It was formed just last year, to represent the interests of the European Software Industry. According to the Association's chairman, Jeremy Roche , who is also CEO of Coda Group Plc, the EU has been very accommodating and is listening to the concerns of the IT industry. "They seem to be keen to understand the views of business people and seem genuinely concerned to get any new legislation right," he told FSN
"Our primary focus is to strengthen the competitive positioning of the European software industry for example through exploiting opportunities for research and development as well as influencing legislation around the protection of intellectual property. The software industry is a major employer yet it is very fragmented, comprising lots of relatively small players that do not know each other and certainly do not have a body to represent their views," he added.
Whilst the Association is driven by the software industry's needs, Roche concedes that there they will inevitably get drawn into the broader issues of regulation that need to be implemented through their software, such as IFRS, though he stresses the need to work with National bodies as well.
John Taylor of Cartesis, one of the most recently signed up members of the European Software Houses Association agrees that there is a need to look at the regulatory burden more broadly for its impact on end users. He told FSN, "The problem is that the regulators themselves do not understand the systems impacts of their proposals and the politicians certainly do not. Whilst most of the proposed regulations go through a consultation process, many of the respondents are compliance professionals who are not necessarily qualified to comment. It is therefore not surprising that IT departments and even finance professionals are taken by surprise when the final impact on systems is understood."
A yawning gap is emerging between the standards setting process and the downstream implications for systems and processes with no single organisation apparently capable of tabling cross industry concerns or providing guidance. Thus it is left to individual companies to shoulder not only the burden of the regulation but also the rising costs of implementing un-coordinated developments.
It is the lack of co-ordination which is perhaps most damaging. Most companies set an information systems strategy based on their known and anticipated trading, competitive and regulatory environment. Ultimately, this drives information needs and the development of systems architectures to satisfy them. Therefore new and unanticipated requirements are almost always costly to implement unless they happen to fall into existing systems and process frameworks. The failure of Gordon Brown to recognise the true cost of implementing regulation was almost certainly one the factors that angered so many businesses when the OFR was first introduced and also when it was abandoned without notice.
McCreevy's stance on regulation is refreshing but it remains to be seen whether his views are widely accepted or whether they will be submerged by the weight of the professional compliance industry. In the meantime, there appears to be little cause for celebration or optimism that the situation is going to change in the near term. Unless regulators make an effort to truly understand the systems and process costs of their proposals businesses will spend more time on tuning their systems for compliance than competitive edge. It would be some consolation if anyone in business really believed that consumers and investors would be better protected. The truth is that uncontrolled regulators in Europe and to some extent in the US are stifling creativity and competition. Ultimately, it is the rapidly growing economies of China and India that will be the benefit from an over-regulated Europe .
