Regulators, Mount Up.

Financial services media has been awash with stories and anecdotes about the mass exodus of staff from financial regulatory agencies around the globe. In Hong Kong, the SFC disclosed that it lost 12% of its employees in 2021 (with an astonishing 25% of leavers coming from the junior professional staff) while in the United Kingdom the FCA was forced to hire law firms and consultants to get through the crush of crypto firm authorisation applications and experienced a historic first when some staff members went on strike.

Adding fuel to the fire is a significant migration of experienced cybercrime investigators from public justice agencies to crypto firms at a time when government enforcement actions are finally taking off and agencies like the SEC are desperately trying to increase their crypto investigations capabilities. Similar regulatory staff movements in other jurisdictions are contributing to an unprecedented regulatory knowledge gap, which is sure to have far-reaching operational consequences for supervisory and enforcement bodies and the FinTech companies who fall within their orbit.

While we can surmise that this phenomenon is at least partially a result of the Great Resignation and the underlying forces of that movement, there are other key factors at play that are unique to regulatory agencies. In this piece we explore the dynamics of working for the regulator and why so many talented individuals end up burning out and moving on.

Behind the Curtain

For outsiders, there is often an aura of mystique around what happens within the hallowed walls of ‘The Regulator’ or ‘watchdog’ (a term beloved of some finance journalists and which always makes us think of short-haired German pointers). Having been on both sides of this relationship, we are reminded of the famous scene in the Wizard of Oz where the curtain is pulled back to reveal an ordinary man instead of an omnipotent and all-powerful being.

It is important to remember that, for employees, the regulator is just another workplace setting. And while some individuals join regulatory agencies as part of university graduate programmes, most regulatory staff tend to have a commercial background. They are often lawyers, bankers and management consultants from top-tier companies looking for meaningful work and a chance to escape 80+ hour work weeks.

This ‘poacher to gamekeeper’ dynamic occasionally draws criticism, but we think the benefits far outweigh the risks provided that any potential conflicts of interest are properly managed. How else are regulators to address risky behaviour and business practices if they do not understand the inner workings of the participants they supervise? Financial regulators need employees who understand how to exploit loopholes in the applicable regime — only then can they close policy gaps, identify potentially harmful activity earlier and design better controls.

Regulator Burn Out

While there has always been a steady outflow of regulatory staff who are lured by hefty pay increases in the private sector, focussing solely on compensation ignores the endemic issues that are unique to regulator employment. People who choose to work for the regulator tend to be the types who are less motivated by money and are more interested in impactful work and learning opportunities.

If money is not the sole driver, then what are the root causes of regulatory staff dissatisfaction? Based on our own personal experiences, we have identified the following pain points that ultimately lead to employee burn out.

1. Stress

Yes, we did just say that many people are motivated to take jobs with regulatory agencies because they are seeking a less stressful environment. But it is important to remember that a lot of these individuals have no inkling of what ‘normal’ working environments look like outside of an investment bank or law firm.

Once the honeymoon period starts to wear off, staff start to realise that they have merely swapped out one set of stressors for another. Instead of shareholders, they are now beholden to a plethora of key stakeholders ranging from top government officials to industry representatives to the consumers who will be seriously harmed if they make a mistake.

Regulators face a great deal of pressure to justify their policy initiatives, annual spending, performance metrics and overall public perception. This is a difficult balancing act, particularly when a sudden change of political regime or new government initiative can completely derail years of policy work or even threaten the very existence of the agency. Ultimately, some people decide that they may as well be properly compensated for such a high level of stress and head back out into the commercial sector for double the pay.

2. Lack of Accountability

There is no real rule book on how to be a regulator. As staff members are promoted and given more responsibility, they are required to make increasingly difficult decisions where there is no precedent or quality guidance available.

While it is natural that decision-makers fear being blamed for making the wrong choice (particularly when political or economic consequences hang in the balance), this can lead to a culture of decision avoidance and ‘passing the buck’ to other stakeholders. For example, you will rarely ever see published regulatory guidance that includes the names of the individual authors.

Another way in which regulators mitigate the risk of individual culpability is to take the ‘decisions by committee’ approach, which is why it is rather common to see bloated governance and project structures. This inevitably leads to extensive delays and duplication of efforts as the various teams, committees, and workstreams attempt to gain consensus and approvals from multiple key stakeholders.

3. Data Overload

Regulators do not have the luxury of the annual ‘Spring clean’. Data must be preserved in accordance with mandated recordkeeping provisions in various pieces of legislation. There is great awareness amongst staff that an email you wrote 4 years ago might end up as part of an official information request (or even worse, a judicial review).

And yet, in practice such data hoarding makes it far harder for employees to find key information in a timely fashion. Thanks to system migrations, team-specific filing conventions and no single ‘source of truth’, there is often a general despair amongst staff that successfully finding a specific piece of information is likely to be a futile exercise. One quickly learns that it’s easier to just ask your colleagues where something might be kept and hope you get lucky.

4. Bad Tech

While it is encouraging to see recent public commitments by various regulators to increase their technological capabilities, in practice regulatory agencies are unable to take an agile approach with technology solutions thanks to stringent IT security requirements and lengthy procurement processes for large IT contracts (which are often subject to public scrutiny and can bring negative attention if the provider runs into difficulties).

The introduction of any new system or tool requires a detailed internal project plan and a frustratingly long period of integration, data migration and staff training. This means that staff may have to wait several years from the time they request a particular tool or functionality and finally being able to use it. In that time, better tools may have emerged and key subject matter experts may have moved on to other roles.

5. Information Silos

Market participants often assume that all regulatory staff have access to the same information, but this is simply not the case. Rather, the overly complex internal structures and reporting lines of many prominent regulatory agencies prevent the efficient flow of information to key stakeholders and actively discourage informed decision making. This divide is particularly apparent between regulatory policy teams and roles that are more public-facing (e.g., authorisations, monitoring, enforcement, etc.).

There is nothing so disheartening to a regulatory team as spending months working on a project only to discover that another department or agency is also looking into the same issues. Duplication of efforts and frequent fundamental differences in approach (even within the same organisation) can destroy staff motivation and delay meaningful progress.

6. Red Tape Fatigue

You will be hard-pressed to find anyone who has worked a longer stint in a regulatory agency who has not suffered the dreaded ‘red tape’ fatigue. This is a special category of worker burn-out and is a natural consequence of years-long policy reform projects and the constant sense that agency mandates can change at a moment’s notice if there is political regime change.

Many regulatory staff are innate problem solvers and after benefiting from unrestricted access to senior business leaders and regulatory policymakers, they cannot help but see how they can deploy their knowledge and skills in a commercially strategic role. This can be particularly empowering for staff who have suffered the demoralising effects of decision making inertia by their line managers and other governing bodies.

Tips for Regulators

There are no quick fixes to any of the endemic issues we have outlined in this article, and each agency will have its own political nuances to tackle. However, we do have some thoughts on steps regulators can take to fill in knowledge gaps and keep their staff happy and engaged.

1. Recruit Boomerang Employees

It is not uncommon to see ‘boomerang’ staff who return to the gamekeeper’s lodge (often in a more senior role) after a stint as poacher armed with new skills and perspectives to share. Regulators would do well to embrace this phenomenon and adopt the industry practice beloved of the Big Four and investment banks (i.e., the ‘alumni’ network) by keeping tabs on their former employees and actively recruiting from this pool. After the recent spate of crypto lay-offs, we think it likely that there are some excellent candidates looking to return to the relative safety of the regulator.

2. Implement Better Training

Senior leaders need to understand that the learning curve is tremendous for new regulatory staff. Even industry veterans need several months to make sense of internal procedures, departmental responsibilities, and an endless stream of acronyms before they are ready to make meaningful contributions. New hires must also up-skill on highly technical areas that they might not have had much exposure to in their previous roles.

Few agencies have a holistic and unified approach to training new employees. Rather, teams are left to design their own onboarding programmes and much of the real training happens on an ad hoc basis and learning on the job. This leads to a disjointed knowledge base within teams and an overall lack of confidence amongst staff who do not feel they are adequately prepared to offer advice in each of the areas they oversee.

Ongoing training is similarly overlooked, even though financial services is a constantly evolving industry with frequent technological and legislative changes. Agencies cannot produce subject matter experts without devoting sufficient planning and resources to continuous learning. Where expertise cannot be found in-house, it is vital that external training providers are brought in to cover off key knowledge gaps.

3. Eliminate Information Silos

Meaningful change will not happen unless information silos are banished and staff feel empowered to engage with other teams, agencies, and industry participants. While this is more challenging than ever considering the proliferation of geographically distributed teams and hybrid work models, it can be achieved through well-designed staff onboarding programmes, project governance mandates, inter-agency secondments, graduate programmes, and industry-inclusive policy initiatives.

Ultimately, regulatory staff should have as much exposure to the work of other teams and related agencies as possible. We cannot expect sensible policy outcomes when staff leading legislative reform efforts have had no exposure to actual business practices for the industries they oversee. The same can be said for license assessors, who should also be participating in monitoring visits of licensed entities to better understand their operational realities.

Regulators must do better at managing the flow of information and actively encourage cross-functional projects and assignments. This ensures that policy teams are exposed to the most current consumer and business feedback, thereby reducing the likelihood of information silos and promoting understanding of the functions of other teams within the agency and their strategic objectives.

4. Embrace Change Without Fear

People who seek new opportunities and challenges often have a different risk tolerance than their more cautious colleagues who prefer to stay with one company and avoid the unknown at all costs. Over time, this dynamic has created regulatory agencies that are ever more cautious in their approach to risk-taking.

Regulators should take care not to shift towards being overly risk-adverse, as this can only lead to the inability to operationally support innovation in products and services. We do not think that innovation should be limited to businesses. Regulators need to feel empowered to pivot when strategies are not working as intended. Similarly, industry needs to understand that the fear of making serious mistakes runs on both sides. If gamekeepers and poachers embrace this knowledge, they will be able to move forward in the attainment of a common goal.

Key Takeaways

It is essential that regulatory agencies have sufficient resources to meet the needs of the financial markets they oversee. Lack of qualified staff means that regulators cannot adequately monitor participants, mitigate known risk areas, or develop strategies to tackle the perimeter (i.e., the regulatory ‘no man’s land’ where arbitrage and fraudulent schemes are most likely to be concentrated). The accumulation of such unaddressed risks ultimately leads to the instability of markets, poor consumer outcomes, and the stifling of innovation.

Regardless of the root causes, most will agree that there is no end in sight to the regulator brain drain of the last couple of years. Market forces like stagflation and increased competition for personnel with FinTech experience could not have come at a worse time for regulatory agencies and their inflexible hiring budgets.

As regulators continue to grapple with their staff recruitment and retention strategies, we predict that firms will continue to suffer longer application assessment times and a lack of clear and timely guidance from regulators for the remainder of this year and probably well into 2023. We encourage industry leaders to seize this moment and take a proactive role in addressing the growing knowledge gap and shaping the future of FinTech regulation.