Financial Reporting and Regulatory practices in Europe
20-23 May, 2001 - Altavilla Milicia (Sicily, Italy)
Abstract
The Impact of Regulation on Financial Services Companies.
Kim Soin
Analyses of regulatory systems tend to follow two main approaches. The first approach is
dominated by economists and seeks to build models of the economic impact of varying forms of
regulatory intervention (Morgan and Soin, 1999) term this the cost-benefit approach to
regulation. The second approach tends to be the preserve of political scientists examining the
degree to which regulatory systems are ‘captured’ by those whom they are supposed to be
regulating - this can be termed the regulatory capture approach. Morgan and Soin (1999) suggest
that a third approach is necessary which takes seriously the complexities of the internal
organizational features of both the regulators and the regulated companies - the organizational
approach to regulation. It is argued that this approach has to take into account the fact that
organizational features (like compliance cultures) are directly affected by national contexts. For
example, the rules of financial disclosure are radically different in Germany and the UK. The
organizational approach emphasizes that both the regulatory bodies and the regulated companies
are complex social spaces within which actors construct meanings that make sense of their roles
and activities in changing contexts. At a simple level, this notion emphasizes the need to
consider the range of perspectives on, and interests in, regulation based on the structural position
of actors within organizations. Certain actors are more powerful than others in articulating a set
of values and practices for the organization as a whole; this is revealed in conflicts and
arguments within organizations over the nature of regulation. Similarly, certain organizations
play a more influential role than others in constructing the system of regulation. Hancher and
Moran (1989) use the idea of the ‘regulatory space’ to describe the complex field of actors and
interests that participate in the construction of a regulatory system. Morgan and Soin (1999)
argue that this concept needs to be extended to emphasize the internal dynamics of the
organizations within the ‘regulatory space’ and develop this argument by reference to the
evolution of regulation in the context of UK financial services. Morgan and Soin concentrate in
particular on the regulation of personal financial services, i.e. life insurances, unit trusts,
pensions and other forms of personal investment sold through retail banks, building societies,
insurance companies and brokers. Within this regulatory space, there have been four main
categories of organizational actors - the government, the regulatory authorities, the financial
services companies and the consumer lobby groups - that have been influential in constructing
the regulatory system. In the first phase of the study Morgan and Soin (1997) concentrated on
the regulators and the regulated companies. The focus was on how the organizational structure
of the regulators and the regulated companies affected the emergence of the regulatory system.
In brief, the complex and fragmented structure of the regulators in the period up to the formation
of the Financial Services Authority by the Labour Government in 1997 created confusion and
uncertainty about how it was to work. Similarly, the internal structure of the regulated
companies meant that adaptation to regulatory changes was slow and variable between and
within companies. From an organizational perspective, therefore, the regulatory system emerges
as an example neither of ‘efficient regulation’ nor ‘regulatory capture’. Instead, Morgan and
Soin (1999) argue that it is necessary to examine the national and international processes within
and between organizations that shape the evolution of regulatory systems.
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In the early stage of this research, Glenn Morgan developed a preliminary theoretical framework
to investigate the question of how compliance behaviour is currently linked to business practice
and the business decision-making process in financial services. Two possible models were
hypothesised:
An “alignment” model in which companies would buy into the principle that “good compliance
is good business”. This model emphasises high compliance standards in the long-term belief that
this will create better business performance.
A pragmatic adjustment model, which posited a fundamental gap between everyday business
activity and compliance behaviour, which occurred in a more ad hoc and contingent mode. The
emphasis here is on minimising cost and disruption to existing business practices.
Both these models were heuristic, in the sense that the researchers did not expect that either
would exist in a pure form, but rather that behaviour could be understood as falling on a
continuum between these two poles. The researchers undertook a first empirical study, to
evaluate the range of current approaches and attitudes to compliance in the Financial Services
industry by means of a series of questionnaires, in order to shed light on issues of compliance
good practice, the effectiveness of regulatory strategies and the nature of the compliance culture
within particular companies.
The Survey
Questionnaires were completed and returned by 15 companies (including bancassurers, full
insurers and IFA insurers) in order to ascertain attitudes towards the regulatory system.
Results
The findings indicated that there was no clear pattern of general compliance practices either
within or across companies, although there are some similarities or regularities at the level of
certain functional areas (e.g. sales management). However, it was apparent that this was a
greatly under researched area, and the participating companies responded to these preliminary
findings in a highly positive way. It was apparent that there was widespread enthusiasm for
further analysis into the compliance culture within companies, in order to gain a better
understanding of the benefits and costs of different approaches to compliance, and to frame
recommendations for best future practice in terms of compliance.
I would like to try and develop some of the ideas discussed here in relation to two particular
areas. The first area is to consider how (possibly accounting) regulation is perceived and
constituted in different European countries and the implications for the transfer of financial
information. And, second, to explore how regulation (as a control mechanism) is embedded and
enacted in organisational contexts
In addition, given that we are now in an era in which regulatory and accountability issues have
become increasingly high profile there are a number of other areas that are of interest:
1. To work on the elaboration of theoretical understanding of the impact of regulation as a
control mechanism in different national contexts. This builds on work I am currently
undertaking in relation to the transfer of management accounting and control practices in an
international context (Scheytt, Soin and Metz, 2001).
2. To theorise regulation in connection with organisations and the significance of this area for
organisations particularly in relation to accounting regulation.
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3. To broaden my research and engage in comparative work, in particular looking at
international regulatory standards, their emergence and the degree to which regulation becomes
national. Furthermore, I would like to explore the effects of EU legislation and regulation and
how this impacts on, and indeed supersedes state legislation and regulation.
4. To examine multi-national companies and their ‘compliance practices’ in different national
contexts.
References
Hancher, L. and Moran, M. (1989) ‘Organizing Regulatory Space’, in Hancher, L. and
Moran, M. (eds.) Capitalism, Culture and Economic Regulation, (Oxford: Clarendon).
Morgan, G. and Soin, K. (1997) ‘The Impact of Regulation on Financial Services Companies:
Survey Results’. Report presented to the Financial Services Forum, FSRC, UMIST
Morgan, G and Soin, K (1999) ‘Regulatory Compliance’ in Morgan, G and Engwall, L (eds),
Regulation and Organisations, London: Routledge.
Scheytt, T., Soin, K., and Metz, T., (2001) ‘ Exploring Notions of Control Across Cultures: A
Narrative Approach’, The Management Centre Working Paper Series, King’s College London.
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