Emily Vogl, Frank Vogl
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Leaders of Global Financial Services Firms Set Dialogue with International Regulators to Secure Far-Reaching Reforms
New Guiding Principles Agreed. Initial Agenda to Address Cross-Border, Enforcement, and Anti-Money Laundering Issues.
New York, December 13, 2006 — Leaders of major global financial services firms today released proposals for a comprehensive strategic dialogue with the regulators of the financial industry, including a set of key principles designed to frame relationships between regulators and the financial industry.
Dr. Josef Ackermann, Chairman of the Board of Directors of the Institute of International Finance (IIF) and Chairman of the Group Executive Committee of Deutsche Bank AG, stated, "We are now moving forward with a long-term, far-reaching dialogue between financial services firms and their regulators with the aim of developing more effective and efficient approaches to regulation. The principles that we are announcing today are designed to achieve a better overall international regulatory process on a sustained basis, as well as address specific issues of mutual concern to both the industry and the regulators."
A report containing the proposals was released today by the Institute of International Finance (IIF), the global association of financial services firms with more than 360 member institutions. The initiative is directed by the IIF's Special Committee for a Strategic Dialogue on Effective Regulation, which is co-chaired by Mr. William B. Harrison Jr., Chairman of the Board, J.P. Morgan Chase & Co., and Mr. Peter Wuffli, Group Chief Executive Officer of UBS AG.
Mr. Harrison said at a press conference, "Leaders of financial firms operating globally consider this strategic dialogue to be a major priority. We recognize that the issues are complicated and that they may take time to address fully. This is the first time that the global financial industry has developed and put forward a set of guiding principles to frame our relations with the regulators and to place them on a more consistent footing across the globe. In recent months we have had an array of informal discussions with regulators and we are encouraged by their receptivity to our initiative. Our work on application of the principles will stress three areas of particular importance - global coordination of regulatory policies; enforcement practices; and, anti-money laundering issues. Each of these reflects areas where we believe inefficiencies exist which can be addressed through a cooperative search for more effective means of achieving the regulatory goals involved."
Mr. Wuffli explained that, "We have recognized that the most constructive way to advance the mutually shared goal of regulatory efficiency in global financial markets is to move ahead with a dialogue between leaders of the globally active firms and the senior officials of the regulatory community. This will assure focus on the common objectives of supporting a vibrant, growing and competitive global economy and ensuring financial-system stability, while streamlining and improving the efficiency of regulation across national borders."
At the press conference, Mr. Wuffli said, "The principles in our proposal are based on a survey of IIF member firms as well as informal meetings with many regulators. The survey shows that there is concern about the growing complexity of regulations and areas where regulation requires a large amount of resources relative to the apparent results achieved. Approaches which involve inefficiencies and inconsistencies may undermine critical regulatory objectives with regard to the safety, soundness and competitiveness of financial services institutions, and the delivery of services to customers."
Mr. Wuffli added, "We intend to advance these principles in discussing a wide range of issues with the regulators and to work with them on implementation. This initiative will also complement other public-private sector discussions currently taking place and give momentum to steps to improve regulation that are already underway. In addition, our strategic dialogue initiative will complement the IIF's work on Basel II, liquidity management, and accounting, and give us a framework to consider other areas where high-level review is in order."
Mr. Harrison pointed out, "Critical issues of regulation of financial markets are now high on the agenda of U.S. authorities as well. It is significant, for example, that the United States Secretary of the Treasury, Henry Paulson, is taking a fresh look at the U.S. regulatory environment in the context of global financial markets. As we look to the strategic dialogue that we are pursuing we are encouraged, for example, that the Secretary should emphasize the need to find 'regulatory balance' that inspires the confidence of investors without imposing excessive costs or constraining growth."
Commenting on the origins of this initiative, IIF Managing Director Charles Dallara noted, "The need for a strategic approach to effective and efficient regulation reflects the recognition that there is an increasing contrast between the globalization of financial markets on the one hand while on the other hand regulation remains rooted in national policies. We are living in a period of exceptionally rapid innovation in the markets and in the industry. The tempo of change has placed pressures on regulators as well as firms to adapt to the new realities of globalized financial markets. We believe this dialogue can facilitate the process of adaptation by both regulators and firms."
The proposals published today by the IIF highlight key guiding principles for the strategic dialogue, including:
- Fostering mutual trust and respect for judgment as the foundation for effective regulation;
- Encouraging collective market-based solutions whenever possible;
- Prioritizing global coordination as an essential part of any jurisdiction's regulatory process;
- Supporting a meaningful legislative dialogue with input from both industry and regulators;
- Recognizing that effective and efficient regulation requires assessing policies and new initiatives dynamically;
- Promoting contingency planning as an ongoing, joint obligation of the public and private sectors; and,
- Ensuring proportionate enforcement that is consistent with efficient and effective regulation.
Mr. Dallara added that, "The crucial issue now is to encourage regulators around the world to embrace these principles and to work with the industry in translating them into concrete approaches in particular areas of concern."
The IIF stressed that key concerns that will be central to the strategic dialogue include:
- The ability to serve customers better can be hindered by legislative, regulatory, and enforcement uncertainty, and by excessively prescriptive approaches.
- Overly detailed regulations may not be well suited to maintaining regulatory effectiveness as market practices evolve rapidly.
- Inconsistent regulations and uncoordinated supervisory practices across borders and also across sectors diminish regulatory efficiency and can create unnecessary burdens for both regulators and firms.
- Regulatory safeguards are threatened when the same rules for market conduct, risk management, and customer protection do not apply equally to regulated and unregulated firms offering comparable products and services.
- Legislative and regulatory processes that do not include adequate industry and other stakeholder input during the conceptualization and rule-making processes may not maximize efficiency or may result in unintended consequences for customer service and the economy.
- Some enforcement actions can create disproportionate effects that may have broader negative regulatory or economic implications for the entire industry.
Benefits and Next Steps
In discussing the expected benefits of the dialogue, Mr. Dallara said, "There is significant opportunity to make regulation more effective by identifying and rectifying duplicative or counterproductive practices or approaches, especially for firms operating internationally. This is essential for the largest and most innovative firms in the capital markets and to strengthen an environment of competitiveness for regulated financial institutions."
While the IIF envisions an ongoing dialogue on application of the guiding principles and on specific issues, the following three topics have been identified as being of priority concern going into 2007.
Cross-border issues. Increasing challenges have arisen because of the rapidly increasing need for firms to deal simultaneously with multiple national regulations, reflecting the development of financial-services groups into truly global entities, the advent of Basel II, and changes in accounting, securities and insurance regulation. Borderless solutions to regulatory questions will need to be pursued to address many regulatory problems in both developed and emerging economies. One goal of the strategic dialogue will be to address home-host issues to secure better understanding, trust, information-sharing and allocation of responsibilities among regulators.
Enforcement. The IIF's Special Committee stressed, in particular, that enforcement actions need to be taken in concert with considered regulatory strategy. The secondary effects of enforcement actions on generally compliant firms need up-front consideration. Enforcement actions against bad actors are clearly necessary in the interest of the entire industry. But enforcement decisions should not "move the goalposts" by de-facto changing rules or widely understood interpretations of principles without consultation. Nor should they be taken independent of regulatory policies and practices. When changes in rules are needed, the industry should have the opportunity to be consulted, and, if change in fact proves to be necessary, should be given time to make necessary adaptations in an orderly manner. The strategic goal of enforcement actions should be clearly identified, the intended incentives to future behavior clearly understood, and the alternatives of less-disruptive means to provide these incentives examined.
Anti-money laundering. The IIF's Special Committee believe that countering money laundering and terrorist finance is a top priority. Vital issues of crime and security have, however, resulted in a host of detailed requirements which are not producing results in an efficient manner. This is a complicated but high priority area where a sustained dialogue could take a top-down look at requirements that have grown up very rapidly, with the aim of improving efficiency in this crucial area.
Emily Vogl, Frank Vogl