Global Regulatory Outlook 2021 – The Future of Global Financial Regulation Read Our Findings Chevron

Global Regulatory Outlook 2020

The Regulatory Landscape Evolves

Every year, Duff & Phelps surveys key stakeholders from a wide range of global financial institutions on the current regulatory landscape.

Top Line Findings
  • Almost two thirds (64%) of respondents say the current regulatory regime is effective in preventing financial crime
  • But 33% say they spend more than 5% of annual budgets on compliance
  • New York (56%) surges ahead of London (34%) as world’s preeminent financial center
  • But 30% say UK has the most favorable regulatory regime for financial services, ahead of New York (26%) and Singapore (18%)
  • The war for talent (24%) and cost of compliance (20%) biggest challenges facing financial businesses
  • Almost half (47%) say investor demand will drive environmental responsibility in the financial sector, against 25% for regulation



Study the natural landscape for any amount of time and you quickly become aware of the range of powers that have shaped it. From seismic action to gradual erosion and the daily wear of wind, waves and rain -- It is layer upon layer of never-ending change. And we never know for sure when the flood waters might come.

As it is with nature, so it is with regulatory environment. Each year, as part of its Global Regulatory Outlook, Duff & Phelps conducts an online survey of financial services executives around the world to get their views on issues that are shaping and changing the industry.  

This year’s outlook report reveals a landscape that is the product of historic failures, but also continued innovation and challenges. And it changes still.

At Peace With the World

We surveyed 240 senior executives working in financial services across banking, asset management, hedge funds, private equity, broker dealers and a range of other business. They come from the U.S., UK, Asia and a number of other jurisdictions. Seven out of ten work for organizations with operations in more than one country.

Overall, our findings suggest a level of acceptance of the current regulatory regime. Close to two-thirds say that the current regime is effective in preventing financial crime (64%), for example—at least when it comes to their own territory. Even though fewer (34%) are willing to vouch that it is effective on a global level, this is a vote of confidence, and all the more remarkable given that, as we’ll see, they are not blind to regulations’ faults.

Moreover, those territories named as having the most favorable regulatory regimes—notably the UK (30%) and U.S. (26%)—are among the most mature. There is also a strong home bias: executives were most likely to name their domestic jurisdiction as having the most favorable regime.

On these findings, those surveyed would seem relatively satisfied with the current regulatory regime.

UK Loses Out to U.S. as Preeminent Financial Sector

More than half in this year’s GRO survey (56%) say they consider New York to be the world’s preeminent financial sector, against just a third (34%) for the UK. That’s a stark turnaround from last year, when the respective figures were 42% and 53%. London has lost its crown.

It is difficult to avoid the suspicion that three years of uncertainty since the Brexit vote in the UK has contributed to this fall from grace. Of course, if this is the primary reason, then the resolution of the UK’s departure could see London bouncing back—and its government is likely to fight strongly for a sector that contributes about 7% of the UK economy’s output and £29 billion in tax revenues.

Trade talks with the EU are just beginning, however, the survey suggests a significant lack of optimism. When asked what city they expect to lead in the next five years, respondents see both London and New York losing ground. While the decline for New York is relatively modest, with half (50%) still expecting it to be the leader, confidence in the UK’s future is far weaker. Just 22% predict London will still be the major force in financial services at the end of the period.

If there is any consolation for London, it is that relatively few see Paris or Frankfurt making great gains. Rather, it is emerging centers in Hong Kong, Singapore and, particularly, Shanghai that are expected to see the major growth. That may worry the U.S. just as much as the UK.

Within Asia, Shanghai looks to have the brightest future, according to respondents. No one says it is the preeminent center today, but, looking five years ahead almost one in ten (9%) see it taking the lead. That’s well behind those who still think New York or London will dominate, but it’s well ahead of those naming Singapore (5%) or Hong Kong (4%). Of the latter two, it’s also worth noting that 18% say Singapore currently has the most favorable regulatory regime for financial services—well ahead of Hong Kong (11%).

Overall, it’s notable that close to one in five (18%) see and Asian jurisdiction leading the financial world in five years’ time.

The Costs of Compliance

This apparent enthusiasm requires explanation given the costs regulation has imposed on business. According to one estimate, U.S. banks’ expenses increased by more than $50 billion a year after the passage of Dodd-Frank, as a result of increased salary expenses as well as auditing, consulting and legal fees.1 And that is just one—albeit major—regulatory reform to come out of the financial crisis, and just one part of the financial services sector.

If the crisis has not upset businesses ability to build, its impact has certainly made the foundations work more costly.

There are, of course, significant challenges in any attempt to calculate the cost of compliance, and little standardization in how it is done. Perhaps if there were, the financial services sector could have mounted a more robust defense to some of the changes it has felt burdened by; it could at least have come forward with credible and widely accepted costings for proposed regulations to weight against the potential benefits. Regardless, there is a clear trend upwards.

In our GRO report from two years ago, a fifth (21%) of business said they expected compliance spending to account for less than 1% of annual revenue. By last year that had fallen to one in ten (9%), although this time we asked for compliance spending as a percentage of overall budget. This year only about one in 17 (6%) say they’ll spend less than 1% of their 2020 budget on compliance. The proportion spending more than 5%, meanwhile, is one-third (33%).

Whether in terms of budget or revenue, the increasing proportion spent on compliance is a worry for businesses. In fact, the cost of compliance is among the biggest challenges, with a fifth (20%) of executives identifying it as the top issue for their firms. Just under a quarter (24%), meanwhile, named the war for talent—a challenge to which the increasing need for skilled compliance workers has undoubtedly contributed, according to recruitment professionals.2

Love to Hate

Given these costs and the other challenges compliance presents, the sanguine attitude of those working in financial services may seem surprising. It is probably explained by a few factors, though.

Among them is, first, acceptance that much of the regulation is necessary, if unpleasant. Few would argue that a regulatory response to the crises was not called for, for example. Related to this is the recognition that investors—and particularly the high value institutional investors—demand tough regulatory regimes and, for the most part, prefer those jurisdictions that provide them.

Two points should give us pause for thought, though, before we invite further regulatory interventions. One is the impact on competition and services. Big banks and other financial services giants may well be willing to shoulder the regulatory burden to reassure their large institutional clients. However, both smaller organizations and low margin consumer businesses are likely to suffer. The decline of small community banks and closure of thousands of branches in the decade following the crisis is perhaps the most visible manifestation of this already taking place.3

Second, it’s worth bearing in mind that it’s easy to overstate acceptance of the settled order. After all, even on the question of its efficacy in preventing financial crime, one in five (20%) say regulation is ineffective both domestically and globally. Moreover, when those surveyed were asked to name a financial regulation that they would want to see scrapped, the answers covered practically every major regulation introduced in the past decade:

Looking Forward

Those making these complaints are, of course, unlikely to all get their wish. Despite presidential campaign pledges and limited reform in 2018 that eased controls for smaller banks, as well as some changes for all banks in 2019, President Trump has yet to repeal Dodd Frank. And MIFID II isn’t going anywhere.

Nevertheless, it seems that the wave of regulatory reform in response to the financial crisis has slowed to a trickle. To mix metaphors, the dust has finally settled, and regulators are now taking stock.

In some cases, this may mean limited reform (though probably not repeal) of the regulation put in place. But it also means legislators are now taking an opportunity to look to the challenges of the future, not just the mistakes of the past. And this is where the more gradual changes and longer-term trends will influence the future regulatory landscape.

Two areas most obviously stand out.

The first is technology. The global fintech market is expected to grow at a rate of over 13% annually over the next few years.4 The rise of challenger banks, app-based services, robo advisers and other fintech start-ups and disruptions are transforming traditional financial services sector players, too, as changing customer expectations drive investments in technology and digital services.

This poses challenges for regulators; it’s no surprise that “innovation, data and data ethics” is one of the FCA’s key priorities in its most recent business plan.5 It’s also a challenge for firms.

On the one hand, we see financial regulators keen to strike a balance between protecting consumers and encouraging innovation: the FCA has its regulatory “sandbox;” the SEC, its Strategic Hub for Innovation and Financial Technology; and Hong Kong and Singapore are licensing their first digital-only banks. In November, Hong Kong also launched an opt-in licensing regime for cryptocurrency platforms.

On the other hand, EU legislators and data privacy regulators have not always proved as understanding of the sector’s particular needs. It’s notable that the General Data Protection Regulation (GDPR)—not actually a piece of financial regulation—was among those that more than one survey respondent said they’d like to see repealed. It is estimated to have cost UK banks an average of £66 million, and—complain some—makes compliance with other rules more complicated.

“[It] can get in the way of investigating risk of potential money laundering/fraud,” said one respondent.

Forging a New Landscape

The second area in which we’re likely to see the regulatory landscape evolve, meanwhile, is—fittingly—environmental, social and governance (ESG) issues.

It is, in fact, not regulation that’s perhaps the greatest driver for firms’ focus on this issue. When asked what factor will have the greatest influence in making the financial sector a more environmentally responsible, almost half (47%) said it would be investor demand, while another 18% said it would be the industry’s own desire for change. Regulation will have an influence, though, and a quarter said it would be the key driver (see figure 6).

There’s clear evidence of this: in the last year we’ve seen the FCA require workplace pension providers’ independent governance committees to report on the firms’ ESG policies, as well as members’ ethical concerns and stewardship. In the U.S., SEC Chairman Jay Clayton has warned of the dangers of short-termism in firms being “inconsistent with the investment objectives of our Main Street investors,” and questioned the efficacy of current thinking on ESG disclosure.6 Hong Kong’s Stock Exchange is also proposing greater disclosure on ESG issues on companies listing, but is being met with some resistance.7

Perhaps most worryingly for financial services, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has been scrutinizing the accuracy and adequacy of disclosures of ESG investment funds.8 It is also to be among the OCIE’s priorities for the coming year.9

We are, it is true, at an early stage when it comes to regulatory scrutiny of ESG policies. Nevertheless, there will likely be increasing regulatory interest in the substance behind financial firms’ claims—and growing risks for those for whom ESG is more of a marketing gimmick than a business approach.

As with the emerging regulatory approaches around technology and digital services, firms should pay attention to these first trickles of regulatory intervention.




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