Treasury and finance professionals report that regulatory risk
is among the few factors that will have the greatest impact on
their organization's earnings over the next three years, according
to the 2013 AFP Risk Survey, sponsored by Oliver Wyman, to be
released February 27.
Fully two-thirds of survey respondents report that regulatory
risk is "difficult" or "very difficult" to forecast, making it the
second most challenging risk to assess among 20 specific risks the
survey asked about-behind only natural catastrophe risk. Even among
treasury and financial professionals who indicate that their
organization has robust risk assessment capabilities, nearly
three-quarters report difficulty assessing and forecasting
regulatory risk.
The prominence of regulatory risk for senior treasury and
finance professionals today reflects the uncertainty surrounding
financial regulatory reform that has been a reality since the
2008-9 financial crisis-uncertainty exacerbated by election
politics and Congressional gridlock in Washington, DC. The
Dodd-Frank Wall Street Reform and Consumer Protection Act
introduced 2,000 pages of new regulations, some of which have yet
to be implemented even as the effects of others are still being
realized.
Regulatory risk takes many forms. AFP members are familiar with
the ongoing debate over additional reforms of money-market funds
(MMFs). In an attempt to increase transparency in financial
markets, regulators and legislators-principally the Treasury
Department's Financial Stability Oversight Council (FSOC) and the
Securities and Exchange Commission (SEC)-are weighing elimination
of the stable net asset value of MMFs in favor of a floating net
asset value (NAV). The proposed change could alter the
classification of a money-market fund from a cash equivalent to
short-term investment. Yet the new regulation could also affect
treasurers' willingness to invest in MMFs and even preclude their
ability to do so under some investment policies. The change could
affect their portfolios, day-to-day operations and bottom line.
Many corporate investors already are looking at alternative
investment vehicles for their cash.
The significant resources required to implement financial
regulation make forecasting regulatory change an imperative, yet
the level of uncertainty-from discerning intentions through
complying with new requirements-often leaves this risk very
difficult to assess and manage proactively. But regulatory risk is
one of many risk management challenges financial professionals must
engage in their forecasting and planning. Read more about how
financial professionals are managing risk in the 2013 AFP Risk
Survey report.