In financial services, for example, prior to 2008, deregulation was in ascendance together with far greater homogenisation of regulation across borders, enhancing globalisation. Since the crisis, governments have become far more sensitive to local control over their financial systems and the data fuelling them – understandably.
What are the mechanics of this return inwards? There are two major forces: investment sentiment and regulation. The latter tends to drive the former but sentiment obviously can drive regulation.
In Australia, the Royal Commission into financial services and superannuation will engender more regulation. The impact will be quite explicit.
Often however, regulation is more like a current underneath rather than an obvious wave.
Incoming trade war
Consider the internet: increasingly there are concerns we are heading towards a new Cold War, this one between the US and China, where alignment is not a military construct but a digital one.
Are you with the US and hence part of an ecosystem not treated equally under Chinese regulation? Or with China whose technology giants are increasingly banned from certain businesses in the US and allied nations?
Facebook, Google, Amazon and others are already facing – and facing increasing calls for more – regulation, notably in Europe and most significantly over questions of privacy and market power.
Already, various models from a more interventionist regulatory history are being drawn upon: should these digital giants be broken up like Standard Oil and The Bell System before them?
Should there be a version of the Glass-Steagall Act for tech? Glass-Steagall was a US law establishing barriers between the retail banking and investment banking and broking operations of banks. Its repeal in 1999 is considered by many to have contributed to the excesses leading to the 2008 financial crisis.
Asset or currency
The idea of a Glass-Steagall for big tech came a week after the US Federal Trade Commission created a task force “dedicated to monitoring competition in U.S. technology markets”.
Each of these and many other regulatory interventions, as well as responding to often justified civil dissatisfaction, will reshape industries.
While technology will undoubtedly continue to be a seismic force, how those forces play out will be at least steered by regulation. Take cryptocurrencies, spruiked by their promoters as a way to avoid the established financial system.
According to the global banking regulator, the Bank for International Settlements, “the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks”.
“While crypto-assets are at times referred to as ‘crypto-currencies’, the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. Crypto-assets are not legal tender, and are not backed by any government or public authority.”
While the BIS via its Basel reforms has been intent on more global regulation, anti-global regulation and supervision in financial services has been a major factor in banks simplifying their businesses and even withdrawing from some markets and jurisdictions.
Whatever the impetus, new regulation adds layers of complexity and risk – even if that may well be a price worth paying.
Simple solutions, complex problems
As Sabine Lautenschläger, a member of the Executive Board of the European Central Bank, said recently “we must remember that Basel III is targeted at a financial sector that is very complex. It is a grave mistake to believe that there are simple solutions to complex problems”.
A good proxy for the new rules proliferating is the amount of money being devoted to so-called regtech – regulatory technology – on the premise companies will have to become vastly more efficient and responsive in this domain.
The latest data from RegTech Analyst shows in 2014, 54 per cent of a total of 125 deals were focused on cyber security, identification and compliance regulation. By 2018 that had reached 58 per cent of 164 deals.