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uk, eu, financial regulation December 3, 2009

Posted by Bradley in : financial regulation , comments closed

The struggles in the EU over the shape of financial regulation look a little different now that internal market commissioner is to be Michel Barnier (i.e. not one of those free-wheeling anglo-saxons). The UK’s financial sector has taken exception to criticism of the anglo-saxon model (see, for example, the reaction of British Bankers’ Association here). Meanwhile the Council approved changes to the EU regulatory framework with a view to getting the Parliament on board quickly. The UK’s Treasury Select Committee argued recently that rushing this proposal through wasn’t desirable, in part because:

It is not clear how these proposals relate to global initiatives for regulatory reform.

How much the European approach to financial regulation will change with these developments is as yet uncertain. How will European financial regulation compare in the future with that in the US, and how will it fit with the G20 commitments to harmonize approaches to financial regulation?

uk financial services bill November 19, 2009

Posted by Bradley in : financial regulation , comments closed

The Bill, introduced today, contains provisions which would make the FSA responsible for ensuring financial stability, about remuneration, recovery and resolution, and short selling. The Bill includes new enforcement provisions including provisions for a collective proceedings. The Bill also provides:

6A Enhancing public understanding of financial matters etc
(1) The Authority must establish a body corporate (“the consumer financial education body”) whose function (“the consumer financial education function”) is to enhance—
(a) the understanding and knowledge of members of the public of financial matters (including the UK financial system); and
(b) the ability of members of the public to manage their own financial affairs.
(2) The consumer financial education function includes, in particular—
(a) promoting awareness of the benefits of financial planning;
(b) promoting awareness of the financial advantages and disadvantages in relation to the supply of particular kinds of goods or services;
(c) promoting awareness of the benefits and risks associated with different kinds of financial dealing (which includes informing the Authority and other bodies of those benefits and risks);
(d) the publication of educational materials or the carrying out of other educational activities; and
(e) the provision of information and advice to members of the public.

But a schedule to the Bill includes an odd requirement that the new consumer financial education body must have regard to “maintaining confidence in the UK financial system; and … maintaining the stability of the UK financial system”. How could a consumer body hobbled by such a requirement effectively educate consumers?

cra regulation in australia November 19, 2009

Posted by Bradley in : financial regulation , comments closed

It’s hard to be CRA these days. As ASIC acts to remove protection of CRAs from liability (by requiring consent of a CRA for ratings to be included in sales literature (note: the ASIC press release is headlined “ASIC gives credit ratings agencies improved control over ratings use”), the FT reports that S&P (like Moodys) is withdrawing from the Australian retail market. ASIC’s new rules require CRAs to be licensed and subject to requirements which broadly track those which are being applied in the EU and the US. But ASIC requires firms which are involved in the retail market to be involved in an approved external dispute resolution scheme and it is this requirement the S&P Press release describes as critical to its decision:

Standard & Poor’s managing director for Australia and New Zealand John Bailey said, “We are supportive of regulations that strengthen transparency and oversight and improve market confidence. There is, however, a need for international consistency in regulatory oversight because ratings are issued and used globally.
“In terms of the requirements for a retail licence, we are concerned that membership of a local EDR scheme would interfere with the analytical independence of our rating opinions and undermine the global consistency and comparability of ratings.
“This scheme could change the substance of a rating and result in the creation of dual credit ratings – an Australian “EDR” domestic credit rating and a “rest of the world” credit rating. Because the local ombudsman would effectively be second guessing S&P’s analysts, we believe this would ultimately create investor confusion and harm financial markets.

A reminder that it’s not just the substance of the rules that matters, but also how those rules are to be enforced. Meanwhile, the EU Commission announced that had issued a statement of objections with respect to S&P’s practice of charging for the use of ISINs by EEA firms, arguing that it was in breach of Art. 82 (abuse of a dominant position).

cras in the eu October 21, 2009

Posted by Bradley in : financial regulation , comments closed

The CRA regulation is dated 16 September 2009 and should be published in the Official Journal soon. CESR is now providing feedback on its consultation on a central repositary (15 responses all from the CRA and banking sectors) and a new consultation (deadline for comments 30 November, 2009) with a really catchy title: “Guidance on Registration Process, Functioning of Colleges, Mediation Protocol, Information set out in Annex II, Information set for the application for Certification and for the assessment of CRAs systemic importance”.

new eu financial regulation proposals October 21, 2009

Posted by Bradley in : financial regulation , comments closed

The EU Commission has published a Communication on derivatives regulation (the link is to the draft version). And there’s a new Communication on Cross-Border Crisis Management in the Banking Sector, focusing on early intervention, resolution and insolvency, which raises a number of interesting questions, for example about how to address issues of the rights of shareholders in failing banks and how to ensure integrated treatment of multinational corporate banking groups in insolvency. Views are sought by January 20, 2010. The Communication is 18 pages long, and there’s a 53 page working document and a 74 page impact assessment. These 140 or so pages are distilled into a 2 page citizens’ summary which seems to be more about PR (we’re doing something) than about trying to solicit meaningful comments from the public.

financial inclusion October 20, 2009

Posted by Bradley in : financial regulation , comments closed

The UK Government is congratulating itself on having reduced the numbers of the unbanked (although the report points out that some of the “improvement” results from recharacterizing the status of some survey respondents (people who did not state whether they had a bank account had been treated as being unbanked and are now not so treated)). The press release makes it sound as though people who open a bank account get a whole range of automatic benefits. But that isn’t exactly what the report says. Poorer people who need to control carefully the expenditure of small amounts of money may not have access to some of the ways in which wealthier people save money (such as by using direct debit). This is sort of obvious. For example:

In December 2008 the Taskforce published a report on direct debit energy payments. We found significant risks to promoting monthly direct debit payments to low-income households, which often manage their money on a weekly basis. Our report also noted that direct payments do not provide households with the same control over their energy consumption and payments as pre-payment meters. Since then, a report by the Creative Environments Network found that “[fuel]rationing behaviour and being in debt with fuel suppliers were closely related to a household’s financial behaviour”.. This work suggests that it may be unrealistic to expect low income households to take advantage of discounts available for monthly direct payments. Government and service providers may therefore need to consider new ways to reduce transaction charges for more frequent bill payments by poorer households.

It’s not just about the bank account.

money in europe: crime, religion, gender October 15, 2009

Posted by Bradley in : financial regulation , comments closed

Money laundering: The Court of Appeal held that the UK’s Financial Services Authority has the power to bring private criminal prosecutions in circumstances where it does not have statutory powers of prosecution; the EU’s financial committees (CEBS, CESR and CEIOPS) published a report on the EU Member States’ implementation of EU money laundering rules; the UK’s Treasury began a consultation on UK money laundering regulations in two parts: one directed to “professionals familiar with the Regulations and their implementation including policy makers and commentators, Regulated Firms, Supervisors and academics”, and the other directed to customers (it should be noted that the Treasury kindly concedes that mere consumers are allowed to respond to the more technical questions in the first document as well as those in the document addressed to them).

Sukuk: As Luxembourg, France and the UK vie to be attractive European locations for Islamic finance, and in particular for the establishment of sukuk, the FSA published its feedback document on its consultation on how to regulate sukuk in the UK, noting that it proposes to exempt alternative finance investment bonds from treatment as collective investment schemes and regulate them as debt securities (this treatment is not to apply to sukuk that have equity type features.

Women and money: the House of Commons Treasury Committee held a hearing yesterday on women in the city; there’s some interesting material in the written evidence, but the oral evidence session was apparently more lively.

sec proposes to expose rating agencies to liability October 8, 2009

Posted by Bradley in : financial regulation , comments closed

Yesterday the SEC published proposals to require the inclusion of information about credit ratings in registration statements, together with a concept release in which it proposes to subject rating agencies to a risk of liability under section 11 of the Securities Act (removing the protection currently given to such opinions when given by NRSROs). There are a number of reasons for the rather elegant proposal, but I like this one a lot:

… we believe that when credit ratings are used to sell securities, investors rely on NRSROs and other credit rating agencies as experts and that it may be appropriate for our liability scheme for experts to apply to them. In our view, NRSROs represent themselves to registrants and investors as experts at analyzing credit and risk. Investors rely on the information provided by credit rating agencies for a key part of their investment decision. NRSROs describe the credit ratings that they provide as opinions with respect to the registrant or security of the registrant, and the Commission notes that other professionals provide opinions upon which investors rely, such as legal opinions, valuation opinions, fairness opinions and audit reports, and we treat these opinions as subject to the Securities Act’s provisions for experts, including our requirements that registrants include the consents of such professionals if their reports are referenced in registration statements. It appears to us that NRSROs and other credit rating agencies are experts similar to other parties subject to liability under Section 11 and that it may no longer be consistent with investor protection to exempt NRSROs from the provisions of the Securities Act applicable to experts.

market abuse and the new tough fsa October 8, 2009

Posted by Bradley in : financial regulation , comments closed

The FSA yesterday censured two Dresdner traders (Darren Morton and Christopher Parry) who sold Barclays frns with inside information that Barclays was about to issue new frns on better terms (having been sounded out about the new issue). The traders said they believed that their acts were consistent with market practice, but the FSA said that their belief was “not reasonable” and that they were “cheating”. The decision to censure in this case reflects in part that the traders made no personal profit on the trades. But the FSA suggests that it may act more forcefully in such cases in the future.

The Telegraph suggests that the decision to censure the traders actions resulted from the moderating influence of the FSA’s Regulatory Decisions Committee, and the Independent suggests others who are subjected to enforcement action in future may decide to take their cases to the committee rather than settling with the FSA. CityWire’s Morning Line calls this:

a new low – an almost laughable riposte to Hector Sants’ warning in March this year that the City should be ‘very afraid’ of the regulator.

The Times comments:

Not only is it very embarrassing for the FSA, it sends precisely the wrong message about the City’s ethics and regulation at precisely the wrong time. With the City under attack from all sides, and the FSA threatened with extinction by the Tories, the last thing they need is to provide more ammunition to those who say they learnt nothing from the financial crisis and are determined to return to business as usual.

This case illustrates something that seems to be being lost in all of the debates over financial regulation – setting up regulators who can be effective involves complex questions of institutional design and about the people who are made responsible for running the system.

(Meanwhile, the SEC, also under some threat because of past regulatory failures, is aggressively pursuing its case against Mark Cuban, appealing to the 5th Circuit).

details of sec rules and proposals on credit rating agencies October 6, 2009

Posted by Bradley in : financial regulation , comments closed

The SEC published yesterday the details of the rules (together with proposals) on credit rating agencies it announced on September 17 to reduce reliance on ratings.