iosco on libor September 14, 2012
Posted by Bradley in : financial regulation , add a commentIOSCO has announced the establishment of a “Board Level Task Force on Financial Market Benchmarks” to be co-chaired by Martin Wheatley of the FSA (responsible for the UK’s Wheatley Review) and Gary Gensler of the CFTC. You can tell this is an important (Board Level) Task Force because all of its members are men.
The press notice states that:
Other international organizations and national regulators, such as the European Commission, UK Treasury, (Wheatley Review), Central Bank Governors of the Bank for International Settlement and the Global Financial Market Association, are also undertaking work on the benchmark issue.
The inclusion of the GFMA in this list of “international organizations and national regulators” seems a bit odd to me even though GFMA published a set of principles for financial market benchmarks a week ago. Much of the GFMA principles document is rather content free – a lot of high-minded language but not much apparent bite. The possible exception to this is the combination of record-keeping and independent review requirements for, among other matters, the calculation of the benchmark. If proper records were kept, and were discoverable in litigation, it would make it easier to figure out where any liability for rigging might lie. And this fact might discourage rigging. But although there’s not a whole lot of detailed substance to the principles there isn’t any less than you find in most transnational standards documents. The oddity is really in including the GFMA in this list as it’s not a national regulator, or an international organization in the same way that IOSCO and the Basel Committee are. It’s a private sector group. And given the failures in Libor etc seem to me mostly to have been failures of the private sector, including failures of governance at the BBA and in banks, that is a bit strange. On the other hand, given the recent focus on the culture of financial firms, the GFMA has a real incentive to be seen to care about standards.
the summer is over – financial regulation just gets more complex September 13, 2012
Posted by Bradley in : financial regulation , add a commentMore complex in terms of figuring out the costs of failures of financial regulation. Better Markets says the financial and economic crisis cost more than $12.8 trillion in GDP loss and GDP loss avoided because of emergency spending and actions by the Federal Reserve Board. And there’s more:
Then there are the enormous unquantifiable costs from the economic wreckage Wall Street caused from one end of our country to the other. For example, unemployment, bankruptcies, foreclosures, and underwater homes have destroyed many neighborhoods and communities across the country, while decimating the tax base of cities, towns, counties, and states. Added to that are the demoralizing and gnawing invisible costs of anguish, anger, depression, and often humiliation from losing a job and failing to provide for a family; being forced to move out of a home, often to move in with relatives or friends, but sometimes to move into a car or homeless shelter; watching your children get sick with no ability to go to a doctor or pay for a prescription; signing up for food stamps and having your children get free school lunches that you can no longer afford; having to break it to your children, who have worked so hard in school, that college is no longer affordable and they have to get a job, any job, as soon as possible; or your spouse finding out that you aren’t retired but working at a low paying, often minimum wage, job because you need the money. This list sadly goes on and on, including spouse, child, alcohol, and, too often, drug abuse.
More complex in terms of the development of transnational financial regulation. The EU Commission published proposals for the European Banking Union: a proposed regulation giving regulatory powers to the ECB, a proposed regulation amending the regulation establishing the European Banking Authority, and a Communication setting out a roadmap. And the Bundesverfassungsgericht is allowing Germany to ratify the ESM Treaty, subject to limitations with respect to the amount of the German contribution and requirements for the German Parliament to be informed.
And more complex in terms of assigning blame and sanctions. The FSA made an example of Peter Cummings, formerly of HBOS, fining him half a million pounds and banning him from holding any senior position in a UK bank, building society, investment or insurance firm “on the grounds that he lacks competence and capability” to act in such a role. The 92 page final notice notes a number of other factors in HBOS’ problems which it says mitigated the sanction imposed, including Mr Cummings’ giving up of a bonus. But the FSA says he should have improved controls, and notes a number of issues with the culture at the bank, including a “culture of optimism” and the fact that staff were encouraged “to focus on revenue rather than risk.” A full report into HBOS is to come out in due course (the notice says that work on the report had to follow enforcement proceedings, suggesting that no-one else at HBOS will be sanctioned). Mr Cummings criticizes the FSA for taking action against him alone at HBOS, saying the action “is tokenism at its most sinister.” Nils Pratley asks why the other directors are “off the hook.”
libor: commission consultation September 5, 2012
Posted by Bradley in : consultation, financial regulation , add a commentThe Commission has published a consultation document on the regulation of “indices”, with comments due by November 15th. The “target group” for the consultation is “[c]ontributors to, providers of and users of indices and benchmarks.” The document suggests that recent proposed changes to the market manipulation regime may not be sufficient to address the problems the libor/euribor scandal identified:
changing the sanctioning regime alone may not be sufficient to improve the way in which benchmarks are produced and used. Sanctioning does not remove the risks of manipulation arising from the inherent conflicts of interest linked to the production and governance of benchmarks in their current form. This consultation seeks to assess how to improve the production and governance of benchmarks. Benchmarks should accurately reflect the economic realities that they are intended to measure and should be used appropriately.
sec: final rules on conflict minerals and payments by resource extraction issuers August 23, 2012
Posted by Bradley in : financial regulation , add a commentThe SEC adopted two final rules yesterday, on disclosures with respect to conflict minerals (proposed in December 2010) and on disclosures of payments resource extraction issuers make to governments (also proposed in December 2010). Statements by the Commissioners raised questions about whether the SEC should be involved in requiring disclosures about either of these matters, given that the purpose of the disclosures is not primarily about informing investors but is about illuminating the actions of governments and achieving humanitarian objectives. Daniel Gallagher said (with respect to the resource extraction rules (he also critiqued the conflict minerals rules)):
As an independent agency, the SEC should have played a significant role in informing Congress about the pitfalls of mandating rulemakings that are not germane to our mission….In any event, even if I had no objection in principle to efforts to achieve social and foreign policy objectives through the disclosure requirements of the securities laws, I am not able to support this rule today, because the analysis is incomplete. The costs this rule will impose are clear enough. Its intended benefits, by contrast, are socio-political and aspirational in nature, worthy but indeterminate – although they are presumed to justify all costs. And certain key discretionary choices made by the Commission’s rule will have the effect of increasing the rule’s burdens….we have no reason to think the SEC will succeed in achieving complex social and foreign policy objectives as to which the policymaking entities that do have relevant expertise have, to date, largely failed.
With respect to the conflict minerals rules, Troy Paredes said:
We all want the violence in the DRC to end. Unfortunately, the adopting release does not offer a reasoned basis for concluding that the final rule will help bring this about, and there is cause for concern that the hardship and suffering could worsen if the outcome is a de facto embargo. Accordingly, I caution against any sense that the need for action to abate the humanitarian crisis is allayed because of the rule the Commission is adopting today.
Luis Aguilar took a very different view. For example (with respect to conflict minerals):
Today’s rulemaking is the culmination of a careful and comprehensive process and a clear Congressional directive. The Commission has faithfully administered its judgment and expertise, as the independent agency tasked by Congress to implement Section 13(p). The rule under consideration today is in the interest of investors and the public interest.
Looks like the set-up for the lawsuits.
fsa replacing mis-selling with no-selling August 22, 2012
Posted by Bradley in : consumers, financial regulation , add a commentIn a consultation paper published today (comments requested by November 14) the FSA states:
We have found that the majority of retail promotions and sales of unregulated collective investment schemes (UCIS) that we have reviewed fail to meet our requirements, exposing ordinary investors to significant potential for detriment. This demands action. We are proposing to intervene in the market by changing our rules to ban the promotion of UCIS and close substitutes to ordinary retail investors in the UK.
Many sellers of these funds are not ensuring suitability and do not understand the relevant rules, so the FSA proposes to ban sales of unregulated collective investment schemes and “close substitutes” (including traded life policy investments) to “ordinary retail investors” (sales will be possible to sophisticated investors) (including investment through Individual Savings Accounts, self-invested personal pension schemes, platform services etc) reflecting a change in approach to stop problems arising rather than dealing with problems after they have arisen (and this includes restricting possibilities for regulatory arbitrage). The FSA says:
We are making the judgement that the benefits of improving customer outcomes for most retail investors outweigh the costs to the minority for whom they may be suitable.
Retail investors who genuinely seek out the investments will be able to buy them – the FSA’s concern is with respect to problematic financial promotion.
Under the heading “Who Should Read this Consultation Paper?” the CP says it will be of interest to consumers and consumer organisations. In terms of its subject matter, that is clearly accurate, but the document is not drafted to be accessible to those who are not used to navigating the complexities of the FSA’s rules.
libor – treasury committee preliminary report August 18, 2012
Posted by Bradley in : financial regulation , add a commentIs here. The report notes a “naivety” on the part of the Bank of England and a “dysfunctional relationship between the Bank of England and the FSA… to the detriment of the public interest” and adds to recent debates about whether the UK is behind the US in dealing with issues of financial regulation (an issue also raised by the Standard Chartered Affair):
The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal LIBOR investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets.
And the committee suggests it may have been misled:
It remains possible that the entire Tucker-Diamond dialogue may have been a smokescreen put up to distract our attention and that of outside commentators from the most serious issues underlying this scandal.
(Update: Here is the link to the volume reporting the oral evidence).
back to libor August 13, 2012
Posted by Bradley in : financial regulation , add a commentLast week I was here:
Now, back in Miami to the Wheatley Review of Libor Initial Discussion Paper, published on Friday, with responses requested by September 7.
perceptions and misperceptions: theatre and the commission July 27, 2012
Posted by Bradley in : financial regulation, life , add a commentThis week I went to see The Transit of Venus by Eric Northey at the 24:7 Theatre Festival in Manchester (UK) (today is the last day of the festival). The play was described as
a very cerebral, intelligent piece of writing, which unfortunately results in an overly highbrow performance which lacks any real emotional engagement on the part of the audience.
It is an intelligent play, but I thought the issues it raises of the relationship between science and religion are more than just cerebral issues. And I am not sue this is just because I live in the USA where evolution sometimes gets to be so controversial. Anyway, I thought the characters were believable (I was most impressed by Nathan Morris).
I saw A Midsummer Night’s Dream, a Filter Theatre Company production, at the Royal Exchange. This was like no production of the play I have seen before – in a good way – it was extremely lively and very very funny, but at the same time the actors sometimes spoke the lines in new ways that made you think. It’s on until 4th August.
Meanwhile the Commission announced that it would be changing the EU’s market abuse rules to deal with manipulation of key benchmarks (and there are proposed new provisions for the proposed regulation and for the proposed directive). No public consultation on this – the deliberations on the main measures are ongoing and have been for some time, and in one sense the changes may seem relatively small. and it allows the Commission to seem to be acting quickly to restore confidence.
“poor rules, poor theory, and poor institutional structure” July 20, 2012
Posted by Bradley in : financial regulation , add a commentFrom Adair Turner’s speech in Manchester. He says we shouldn’t get distracted by individual cases of bad behaviour (although there do seem to have been a lot of those, and not just in the UK). He blames the financial crisis on:
three major policy failures: poor rules, poor theory, and poor institutional structure.
* We had totally inadequate rules on bank capital and bank liquidity, which had been agreed by apparent experts from regulators and central banks across the world; rules which allowed banks to run with levels of capital which we now consider a fraction of that required to ensure a stable banking system.
* We also had a flawed theory of economic stability — supported by many apparent experts in economics faculties throughout the world — which believed that achieving low and stable current inflation was sufficient to ensure economic and financial stability, and which failed to identify that credit and asset price cycles are key drivers of instability.
* And in the UK certainly, but also in some other countries, we had an institutional structure of responsibilities which left an underlap between an inflation-targeting central bank and a rule-driven regulator — with no-one clearly responsible for assessing the big picture risks and no-one equipped with the tools to address them.
These references to “apparent experts” are provocative. But for the future, how will we distinguish between apparent and real experts? There’s not much prospect we will stop looking to “experts” for answers.
He also discusses the problem of how to encourage bank lending to aid recovery. In a way it is not surprising given what is happening in Europe to see a financial regulator thinking about economic policy together with financial regulation (I have just been working on a paper on the situation in the EU which notes this connection) but in another way it is rather new and strange. He says:
The FPC’s ability to consider policy options in an integrated fashion, taking into account central bank liquidity insurance when designing prudential liquidity policy, is therefore peculiarly important in deflationary times.
financial services consumers panel recommends changes to uk financial services bill July 19, 2012
Posted by Bradley in : consumers, financial regulation , add a commentIn a press release yesterday the FSCP argued that Legislators must force cultural change in financial services. The FSCP Briefing on the Financial Services Bill states:
The key changes the Consumer Panel would like to see are:
– a duty of care for those providing financial services;
– a requirement for the Prudential Regulation Authority (PRA) to take into account the views of consumers by responding to representations from the Consumer Panel;
– a requirement of access for all consumers to financial services;
– an increase in the transparency of financial services regulation by empowering the PRA and Financial Conduct Authority (FCA) to disclose information about the financial services firms they regulate;
– effective competition powers for the FCA to allow it to deliver its statutory objectives; and
– a requirement for the regulators to undertake full and robust cost benefit analysis when developing new rules