G20 must help Financial Services promote economic growth: KPMG

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G20 must help Financial Services promote jobs and economic growth: KPMG report

KPMG urges regulatory bodies in the UAE to continue their efforts to ensure the regulatory environment encourages bank lending to SMEs, infrastructure and trade finance

  • New report presented to G20 proposes four recommendations for the financial services sector to boost growth and jobs
  • Warns that regulatory reform agenda may have passed the tipping point, where financial safety is now being pursued at a social and economic cost
  • The UAE regulatory bodies should be constantly reassessing whether the costs of additional regulation exceed the benefits

Dubai DIFC

A new KPMG report has called for the G20 to focus on the role the financial services industry can play in creating jobs and stimulating economic growth.

The report, Brisbane G20 summit: A new agenda for financial services, highlights that growth strategies already agreed by G20, such as increasing investment in infrastructure, can be accelerated by the financial sector.

The report also warns that the unintended consequences of the financial regulatory reform agenda are not being recognised. The reforms are being implemented inconsistently across different jurisdictions, and this has led to higher regulatory costs, greater uncertainty and reduced availability of financial products to help fuel economic growth. There is also the concern that the current environment has reduced the number of market participants; and this reduces choice and is not good to sustain competitive and innovative markets.

KPMG have also considered its global observations in the context of the financial services industry in the UAE.

The financial services industry, particularly the banking sector, has been one of the core engines for the UAE’s unprecedented growth, where they have fulfilled their role as providers of lending, trade finance facilities, investment and payment and settlement systems.

The UAE has witnessed the impact of the ever restrictive requirements of the global regulatory agenda as certain banks have re-assessed their activities in the UAE market to varying degrees.

KPMG would encourage the regulatory bodies in the UAE to continue their efforts to ensure the regulatory environment encourages bank lending to SMEs, infrastructure and trade finance, while still recognising the inherently risky nature of this business.

Luke Ellyard, Partner, Financial Services at KPMG Lower Gulf, commented: “The current global regulatory reform agenda is over-focused on the single dimension of promising ever greater safety, soundness and stability; however this regulatory burden has increased costs, reduced availability of financial services and reduced innovation in financial services.

“It is imperative that as various UAE regulatory bodies continue to look at adopting international regulatory standards, they are constantly reassessing whether these additional requirements on banks could take regulation beyond the ‘tipping point’ at which costs of additional regulation exceed the benefits to the wider economy specifically in terms of jobs and growth.”

Excessive regulation can damage the wider economy such that the net impact of regulation on economic growth becomes negative. A completely safe financial sector would be of little economic and social value; where disproportionate increases in capital requirements, and a regulatory framework that is insufficiently risk sensitive, could disincentivise banks (for example in developing markets such as the UAE) from investing in more advanced risk management approaches.

Globally, many believe this tipping point has already been passed, in particular in Europe, and KPMG proposes in its paper that regulators should:

  • Focus more on the cumulative impact of regulation on the financial sector and on the wider jobs and growth agenda;
  • Re-evaluate the cost-benefit analysis of some regulatory reforms based on the evidence of their outcomes;
  • Prioritize future reforms, and giving greater certainty on the timing for implementation;
  • Agree to reduce inconsistencies between national regulations which add cost and slow growth

Meanwhile, KPMG also called upon banks in the UAE, in particular, to intensify their efforts to introduce more cultural and behavioural change, so that regulators can more comfortably take a step back and focus on the potential causes of the next crisis, be this from different threats to banks such as fraud, systems failures and cyber security, or from non-bank activities within the financial sector.

Jeremy Anderson, Global Head of Financial Services at KPMG, commented: “The G20 needs to ensure balance between dealing with the crisis of yesterday or on building growth and jobs for tomorrow. We need a new relationship between the financial services sector and regulators which delivers increased stability while stimulating economic growth.

“At the same time banks, in particular, must intensify their efforts to introduce culture and behavioural change, so regulators can more comfortably step back. We must break out of this unproductive environment in which regulators believe they need to tackle everything because part of the sector cannot be trusted to play their part in improving standards.”

“We also still see too much evidence of localisation and inconsistent application of regulatory reforms across jurisdictions leading to higher costs and reduced availability of the financial services needed to promote recovery and growth.”

Anderson concluded: “The discussions and decisions taking place in Brisbane have the potential to stimulate investment which will create significant numbers of new jobs and as a result accelerate the global economic recovery. We urge the G20 to set the scene for a renewed contribution of the financial services sector to the global economic recovery.”

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