Regulatory Complexity within the financial services industry results from ever-changing compliance requirements as well as market dynamics. At Apiax, we define Regulatory Complexity as the number of regulatory restrictions a business or an organisation faces when offering a specific financial service within a given country. It is the landscape of rules and regulations that financial institutions must navigate, particularly for their cross-border operations.
Decision-making and risk management require an understanding of these complexities, however over the years, accurately assessing the complexity of a jurisdiction’s regulatory framework has been difficult.
In this post, we’ll explore what a Regulatory Complexity Calculator is, as well as its benefits and application in financial firms.
Measuring Regulatory Complexity: Different Approaches
Over the years, approaches to measuring regulatory complexity have relied on parameters such as the length of text, the number of rules and the number of updates.
For instance, researchers Haldane and Madouros examine complexity by counting pages in editions of the Basel Accords, and although this approach is straightforward, it does not provide insight into practical impact within financial institutions.
Colliard and Georg propose measuring complexity by counting rules and assessing logical connections within regulations, arguing that high-level language doesn’t always equal simplicity. However, this method struggles to link the regulation or rule and the effective impact for a financial institution.
Thomson Reuters ties regulatory complexity to the sum of updates in any given year and by linking complexity to the frequency of regulatory updates, the impact of regulations on business can be emphasised.
Despite these efforts, there is no consensus in the industry on which approach should be applied to measure regulatory complexity most objectively, and each approach lacks a direct connection to how regulations affect specific business activities in a given jurisdiction.
The Apiax Regulatory Complexity Index (RCI)
The Regulatory Complexity Index is the tool that calculates regulatory complexity of offering a specific financial service (for example marketing a credit card or offering investment management services etc. ) in any given country. We believe the complexity of regulation is not simply about text length or update frequency, but in the complexity of restrictions imposed on the business activities in a specific jurisdiction, thus, regulatory complexity should be evaluated within the context of a concrete business activity and service offering of a bank, a wealth manager or an asset manager.
Therefore, our approach focuses on two core parameters that directly impact the ease or difficulty of doing business in a jurisdiction:
- The country in question: What is the ease of doing business in that country?
- The service activity. How many restrictions are imposed on a financial institution when offering that service? For example, how easy is it for a bank to offer credit cards to a customer in country A? Does regulation require a licence to offer this activity? Is a customer categorisation or a suitability assessment required?
At Apiax, we use normalised rule templates to maintain Cross-border restrictions across 190+ jurisdictions in our rule repository, This allows our clients to quickly access cross-border restrictions for permitted activities, providing answers to the dos and don’ts on regulatory questions for the regions they operate in.
In calculating the RCI, we aggregate the data in our rule repository to generate an absolute numerical score that gives an overview of the selected country’s overall regulatory complexity landscape.
In addition to the overall RCI score of a country, the tool further gives other RCI scores that shed light on the most complex financial services and activities in that country. When a user views the overall RCI score for that jurisdiction, the tool also highlights the most complex financial service in each country. For example, the RCI score for the United Kingdom is 14882, and the most complex financial service is “marketing investment funds”.
Additionally, by selecting the “country details” tab a user can view the regulatory complexity score for individual financial services, such as promoting a financial institution’s brand, custody and payment services, providing investment advisory services, offering discretionary asset management services etc.
Key Benefits and Applications for Financial Firms
The RCI has been developed to equip compliance officers, strategy makers, and client-facing teams with a practical tool to:
Evaluate the regulatory landscape of any given country
The RCI provides firms with a quick view of the regulatory landscape of any given country.
Identify potential regulatory restrictions imposed on specific financial service
By showing service specific scores, the RCI enables firms to quickly identify and pay close attention to the more complex services.
Support strategic decision making
The RCI supports strategy teams in planning market entry and/or expansion through a quick country comparison of specific services and activities. This provides a preliminary view of where to prioritise efforts and resources, by highlighting, for instance, which regions have the most manageable compliance requirements for those services.
Enhance client consultations
For client-facing teams, quick insights into potential restrictions imposed on specific financial services can help facilitate meeting preparation and client presentations when exploring or recommending new services and activities to clients.
What does the RCI not cover?
While the RCI provides exact data on regulatory complexity in a given market, a low RCI number does not release financial institutions from clarifying the exact type of restrictions. This means that a financial institution must conduct a specific regulatory clarification to understand the scope, applicability and impact of a particular restriction before offering financial services in any market. Apiax can support financial institutions with such clarifications.
The value of the Regulatory Complexity Index
Regulatory complexity calculators have long been essential for understanding regulations, though historically no single solution has been universally accepted as objective and comprehensive. The Apiax Regulatory Complexity Index (RCI) aims to address these gaps, offering what may be the most effective approach to overcome the limitations of previous methods.
The RCI score is generated by evaluating two key factors: the country’s overall regulatory framework and the specific requirements applicable to each financial service. This produces an overall country RCI score, giving firms an initial view of how complex the selected jurisdiction might be, and in addition, the most complex financial service within that country.
The RCI is a valuable starting point and firms can use the tool to support their initial assessments of any given country during the strategic decision making to see where to focus efforts and resources. However, more in depth jurisdictional analysis of regulations and specific restrictions is required to make fully informed decisions.
Try the RCI for free and explore how it can support your firm’s compliance efforts.