Regulators move in, innovators move out
Regulation, regulation, regulation. Following corporate scandals in the US and mis-selling cases in the UK financial sector, bankers are so loaded down with rule books they can hardly move.
This is great for anyone with a compliance qualification, of course, and if you have done a spell in Eliot Spitzer’s office, you’ll be in demand. The Banker recently interviewed leading compliance officers on Wall Street and came across two who could play the Spitzer ace.
“The company thought they needed someone to help navigate the regulatory landscape,” explains Eric Dinallo, head of the regulatory group at Morgan Stanley, who is a former Spitzer deputy. Beth Golden, global head of compliance at Bear Stearns, who had a spell working for the New York Attorney General, says: “Many of the questions regulators are asking are very good questions but it can be difficult resource-wise to address and resolve every issue all at the same time.”
Most senior bankers would probably regard that as classic understatement. Both in terms of cost and time, regulation is becoming ever more burdensome for banks. But the real issue is whether it achieves what was intended: to protect the investor. Investors clearly don’t think so, as those that are able to, focus their efforts on areas as far outside of the regulator’s arena as they can get. Together – traders, entrepreneurs and investors – have built themselves an alternative market characterised by innovation, flexibility and high returns: all the things that regulation is slowing down in the public markets. Numerous winning traders have quit mainstream investment banks to start hedge funds and do the things that the banks, under regulatory surveillance and with their reputations to protect, are too scared to do. Smart investors have followed them.
Private equity has developed into such a big business that the assumed goal of an exit into a public market is now the last (rather than the first) thing on anyone’s mind. Firms can change hands three or four times, with major investment profits at each turn, before leading to the dreary conclusion of a listing. Companies that do list go for alternative investment markets that have less onerous regulatory requirements than the main boards, such as London’s AIM.
What regulatory zeal has achieved is to push innovation outside their grasp, and to make it more difficult for small investors to participate in decent returns. Well done, guys.
