Regulators have to be prepared to innovate in order to deliver the sort of policy that effectively protects financial markets without too many negative side effects, suggests Investment Industry Association of Canada (IIAC) president and CEO, Ian Russell, in his latest letter to the industry.
In the wake of a recent annual conference of securities industry lobbyists held in Sydney, Australia, last month, Russell reports that he detected “an erosion of optimism about achieving a global regulatory framework that will lead to needed efficiencies and integrity.”
He notes that the annual conference of the International Council of Securities Associations (ICSA) focused largely on shortcomings in the global reform process. Among other things, it highlighted: the apparent failure to produce harmonized reforms in response to the global financial crisis within the G20, which may have “serious unintended consequences” in various areas, including global over-the-counter derivatives markets; that regulators have already failed to foresee another crisis, in the form of the London Interbank Offered Rate (LIBOR) scandal; and, that regulators continue to focus on rule-making at the expense of the underlying purpose of regulation.
“However, in the wake of the LIBOR scandal there is increasingly the view regulators must move beyond specific rules and principles to achieve better alignment between stated values and the values financial institutions actually practice,” he says in the letter. “Regulators must of course continue to rely on core rules and principles, but also must begin to judge culture at the firm level. This means that regulators move away from mechanical box ticking to a more holistic approach to compliance, and give firms with different business models much more flexibility in meeting compliance requirements.”
Russell notes that the global body for regulators, the International Organization of Securities Commissions (IOSCO), represents the best opportunity to alleviate some of the inconsistencies in global regulation, particularly in terms of the G20 agenda. To do this, it must start being more decisive and proactive, he suggests.
“The organization must move beyond its member-driven roots and focus on more effective decision making. It must become a ‘member-directed’ organization where policy decisions can be made at the staff and secretariat level, not requiring full member consensus,” he says. “It must effectively stop operating as a typical multi-lateral institution.”
While he concedes that IOSCO doesn’t have the enforcement power to ensure compliance with its proposals, Russell says that “peer review is still an effective instrument.” Additionally, he suggests that it needs greater operational focus, emphasizing regulatory harmonization.
At the same time, policymakers at the G20 are also still grappling with slow economic recovery. They have disparate, evolving views of how to deal with this problem, while also reforming securities regulation, addressing systemic risk, and avoiding unintended consequences, he notes — numerous challenges that may require some novel thinking, and greater resolve.
“These policy-makers and regulators must be open to new ideas and approaches and, perhaps more importantly, persevere in finding effective decision-making mechanisms to identify and implement consistent solutions to public policy and securities regulation,” he concludes.