Regulation may be a burden for banks but consultants and IT firms are turning a profit from their woes. However, Chris Skinner questions whether bankers are too quick to throw money at the problems in search of a quick fix.

We have suffered a great deal of consulting hype over the past decade – from Y2K to the euro. And what happens next? We get regulatory change: IAS39, Basel II, Sarbanes-Oxley, MiFID. The list seems endless.

Between national, international and global regulatory change, the banking industry sits battered and bruised while consultants and technology firms rejoice by making a mint out of bankers’ regulatory misery.

By way of illustration, the European Commission’s securities markets legislation, MiFID, is estimated to cost about €10bn in technology change for European banks in 2007. SEPA, the new euro payments structure driven by regulatory change, is estimated to cost a further €4bn. Basel II has already cost European banks about €4bn and that is by no means the end. And the beast of Sarbanes-Oxley is estimated to have cost American business €1500bn alone.

And where is all that money going? Well, an awful lot seems to be going to consultants. Most of the large consulting organisations’ revenue grew by 15% or more in 2004 – and most of them would admit that this growth has been created through the fears of regulatory change.

This anxiety is present because regulatory change does not entail just a little tinkering to products and services. Due to governments’ fears of another Enron and aspirations for a new Europe, the regulatory changes currently being introduced require a complete overhaul at banks.

‘Overhaul’ heralds the arrival of consultants offering expert advice on compliance. Supposedly, these consultants know all the things banks have to do to ensure they will not get fined. I doubt whether half of them know their Basel from their elbow.

Add to the consultants all the techies working together and producing ‘Sox-in-a-Box’ and ‘Basel II-ready’ systems which, if we are honest, are the same old systems with new dressing.

The result is a lot of banks buying whatever they can get their hands on as a quick fix to their regulatory pain. But regulatory pain cannot be fixed with spending a few euros here and there.

So what are we going to do about it? Are we going to continue to be sucked into the claims that our advisers can take away all of our regulatory headaches? Or are we going to wake up to the fact that if we really tried – really, really tried – we could actually implement regulatory change ourselves?

Chris Skinner is an independent financial commentator (www.balatroltd.com)

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