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Graham Bishop’s Personal OVERVIEW -
After the immense build-up, the leaders of the G20 countries succeeded in reaching agreements that are likely to have profound implications for the regulation of financial services during the next few years. However, many leaders seemed to have had reservations about fiscal stimuli and already the cheques seem to be slower in arriving than the flow of grand funding commitments to the IMF.
“Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis”, the Leaders of the Group of Twenty stated and agreed to build “a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector”. They agreed to establish much greater consistency and systematic co-operation between countries, and the framework of internationally agreed high standards. Amongst the more specific measures, they intend to push international standards onto “unco-operative jurisdictions” and tax havens to deal with “securities regulation, market conduct and prudential supervision....”
These plans are to be implemented by expanding the FSF and re-naming it the Financial Stability Board. It will promote and help co-ordinate the alignment of international standard setting activities to address any overlaps or gaps and clarify demarcations in light of changes in national regulatory structures relating to prudential and systemic risk, market integrity and consumer protection, infrastructure, and accounting and auditing. It will collaborate with the IMF in conducting Early Warning Exercises. So the FSB will be the key body in promoting changes in financial regulations and the old FSF issued several reports addressing pro-cyclicality in the financial system, principles for sound compensation practices, and principles for cross-border co-operation on crisis management.
The EU had already launched its reform process – with the de Larosiere group (DLG) report and the US followed suit when Treasury Secretary Geithner outlined the new rules for the US financial system focusing first on containing systemic risk. Certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime, and Geithner outlined the role of a single independent regulator with responsibility over systemically important firms and capital payment and settlement systems. Analysis should not be limited to banks or bank holding companies, but could include any financial institution that was deemed to be systemically important. The US may have the capacity to act as a single political entity but it may remain bedevilled by turf wars as Fed Governor Tarullo promptly made a bid for part of the single regulator “A good case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems”.
However, the EU will not breathe life into the DLG Report without major debate and Bundesbank President Weber underlined the need for further international regulatory co-ordination but complained about the asymmetry of powers and responsibilities the DLG report would create. The Bundesbank supports the evolutionary approach to strengthening co-operation among national supervisors through colleges and the creation of a new European Systemic Risk Council (ESRC). The European Financial Roundtable called on the EU to strive to avoid unilateral regulation or rescue packages and to preserve a level playing field – and there should be no room for national discretions, options and gold plating for financial regulation. But both called for more clarification.
The divisions become more apparent when considering the upgrade of the 3L3 committees as the Bundesbank has strong reservations because it would create an asymmetry of rights and responsibilities. The financial crises made clear that finally it is the national fiscal authority and the national tax payer who has to pay the bill, Weber said. Nonetheless, the informal ECOFIN meeting supported the creation of the ESRC and agreed on the need to approximate the powers of the supervisory bodies and strengthen their independence, while ensuring convergence of rules, standards and sanctioning powers between the Member States - as suggested in the DLG report.
Though the EU congratulated itself on having pushed through much of its agenda at the G20 meeting, there was some disquiet about the route taken by the US’s FASB on fair value accounting immediately after the US signed up to international co-operation. Ministers called on the IASB to co-operate closely with the FASB to immediately address the issues and CESR agreed with EFRAG that the initiatives taken by the FASB do not appear to be consistent with previous joint announcements which have emphasised the importance of working co-operatively and in an internationally co-ordinated manner.
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In the meantime, the legislative business of the EU continues to move forward quickly as the end of the EP’s term approaches:
• EP and Council agree on Solvency II: Parliament and Council agreed on a common text on Solvency II to have the new legislation approved before the end of current legislative term.
The new legislation sets up supervisory colleges made up of the various national supervisors responsible for a group and its subsidiaries to facilitate co-operation, exchange of information and consultation between the supervisors. It also sets up a new system for supervising groups of insurance companies, by making one of the authorities take on the role of group supervisor with a leading role in monitoring cross-border companies and involving all supervisors in the decision-making process concerning group issues.
But the much-desired group support regime will have to wait, so two years after entry into force, the Commission was requested to put forward a legislative proposal to improve, if necessary, the application of some aspects of the Directive, including the co-operation of supervisory authorities within the colleges. Three years after entry into force, the Commission will have to propose legislation to enhance group supervision and capital management within a group of insurance.
CEIOPS released no less than twelve consultation documents on its first set of advice on Solvency II - Level 2 implementing measures, including on the SCR standard formula, on own funds, the approval of internal models, and on special purpose vehicles. CEIOPS will consult on two further sets of advice on Level 2 measures, likely at the beginning of July 2009 and in autumn 2009. So the work programme continues at a frenetic rate!
• EP and Council agree on CRA legislation: Parliament and the Council delegations reached an agreement on the new legislation on Credit Rating Agencies. It provides for a greater role for CESR, which will be in charge of registering CRAs and would provide a single point of entry for the submission of applications. CESR should receive applications for registration and inform competent authorities in all Member States and will also make this information available to the public.
National authorities will take the decision on CRAs registration and compliance with the rules and on the possibility of withdrawing an agency's registration should the rules be breached. Moreover, a college of supervisors, representing the 27 Member States authorities, will also be established, to provide a platform for an exchange of supervisory information among national authorities and to improve co-ordination of their activities. The agreement is regarded as a first step forward and the Commission is asked to report on its application by July 2010 with a view to possible new proposals for further streamlining.
Non-European ratings will have to be endorsed by an EU agency, established according to this new regulation. This agency will be responsible for determining and monitoring on an ongoing basis whether rating activities of non-EU CRAs comply with the requirements.
• Czech Presidency reaches agreement on cross-border payments: The Committee of Permanent Representatives (COREPER) approved a proposal for a new Regulation on cross-border payments. The new Regulation extends the principle of equal charges to direct debit forms of payment. Another important innovation is the establishment of procedures for out-of-court settlement of consumer disputes in the area covered by the Regulation. The new Regulation will strengthen the protection of consumer rights and encourage the development of a modern and efficient system of payments in the EU. It will be directly applicable in all Member States as of 1 November 2009.
• In the same vein, the ECB will not accept delays in SEPA and a “mini-SEPA” for cross-border payments only is not acceptable. For EU consumers, these are vital steps in creating a genuine single money that can be used as easily throughout the EU as at home. So SEPA providers are to ensure their operational capability to send and receive SEPA payments, and to offer users SEPA instruments that correspond to instruments otherwise offered with legacy euro payment instruments for both sending and receiving domestic and cross-border payments within SEPA. Moreover, the Commission and the ECB issued a joint statement providing further clarification to encourage the European Payments Council to launch the SEPA Direct Debit scheme on 1 November 2009. In particular, the Commission made clear that a multi-lateral interchange fee for direct debit transactions does not seem justified for efficiency reasons and therefore does not appear compatible with EU anti-trust rules.
• The Commission is consulting on securities law – focussing on the necessity to improve the EU-wide legal framework for securities holding and transaction and on how future EU legislation in this field could address the issue. This consultation covers the entire scope of the future legislative initiative, and questions concentrate on the most important technical aspects. Clearly, this will influence all clearing and settlement issues as well as the future business of custodians.
This legislative period may be drawing to a close but the reality is that the next five-year term of Commission and Parliament will be equally as momentous. In part, this will be detailed rules of already agreed policy. But it will also need to be co-ordinated at the G20 level as a new wave of supervision sweeps across global markets. That will present practitioners with a new degree of difficulty in keeping abreast of proposals.
Graham Bishop