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credit cards February 11, 2008

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The UK’s Office of Fair Trading (this month is scam awareness month over there) has published a credit card comparisons report. It seems that 70% of UK consumers do not shop around for credit cards, and, as usual, wealthier people are likley to be more effective at looking after their financial interests. The report encourages the FSA to add coverage of credit cards to its moneymadeclear website, which would:

have the advantage of having almost complete market coverage, be run by a trusted organisation, and allow consumers to list products by their ‘cost of credit’ based on their typical usage.

The OFT recognises that establishing the service doesn’t necessarily mean that consumers would use it:

We also identified that a price comparison website was not a complete solution, however, as approximately 39 per cent of UK households do not have access to the internet. Additionally, there is a danger that consumers might not use the website if it is not sufficiently well advertised or sign posted.

Not a complete solution, indeed. The report suggests that older people and people in lower socio-economic groups are less likely to shop around – but the same people are also less likely to be active internet users. This solution is least likely to reach those who need it most.

framing financial regulation February 5, 2008

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I’m working on a range of issues relating to regulation in the financial services industry right now, including self-regulation and lobbying by financial firms and their trade associations. When a large French bank ignores questions raised by an exchange about strange trades, ending up with a loss of over $7bn, that raises some questions about the effectiveness of regulation and, in particular the bank’s internal systems. The sub-prime mess, too, prompts the question why no-one seems to have realised there were problems. In the run-up to the collapse of the credit markets, banks in the US were lobbying hard to keep regulators off their backs. I’m particularly interested in the ways that the multi-level nature of financial regulation (federal, national and supranational, regional etc) allows financial firms to manage the regulatory system to their own advantage. I have just been reading some comments by trade associations on the Committee of European Banking Supervisors’ proposals to amend its consultation procedures. The BBA said:

We would …suggest that CEBS considers, prior to the launching of formal consultation, a further refinement of its practices. This would be the holding of ad hoc roundtables with market practitioners, ahead of the launch of a formal consultation.
The purpose of these would be to obtain specific technical observations on a particular issue from a wide range of market participants, in an informal, but transparent way. This would then in turn inform CEBS Members ahead of themselves developing a view about a particular issue. We recognise that the Consultative Panel already undertakes an important role in relation to inputting market feedback into CEBS, but we are not entirely convinced that this is always sufficiently focussed on ensuring that a complete and well-considered market view prevails. The BBA has substantial experience of organising these industry roundtables and we can assist CEBS in their development.

LIBA, ISDA, SSBA and FASD joined together and said much the same thing:

we would encourage CEBS in the strongest possible terms to build on its informal mechanisms as much as on its formal procedures. Transparency of thinking at an early stage is one of the most powerful tools in achieving proposals that work well for all parties. Secondly we also ask CEBS to consider, when embarking on any stream of work, whether the Consultative Panel is as fully and as widely representative as it needs to be for that specific issue and to identify ways in which industry experience and input can be supplemented. Informal hearings are a good mechanism providing that there is some structure and industry has a clear view of the kinds of issues on which CEBS wishes to understand their attitudes.

These comments date back to June 2007. The real question is how would CEBS react to such statements today?

presidents February 2, 2008

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For primary season: Jonathan Coulton’s presidents song:

What (who) is next?

mutual recognition January 31, 2008

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European arrest warrants have run into problems in some Member States of the EU in the past (there is a useful resource on the European arrest warrant here). Yesterday the House of Lords (Lord Hope of Craighead) emphasised that the framework decision requires mutual recognition:

The question whether there is a case to answer on the conduct that is alleged in the European arrest warrant is not one that can be examined in the requested state. An inquiry into that question is contrary to the principle of mutual recognition on which the Framework Decision is founded.

There is a hint of discomfort from Baroness Hale of Richmond:

while I agree that every issuing State should do its best to comply with the requirements of the Framework Decision, it seems equally important that every requested State should approach the matter on the basis that this has been done: in other words, in a spirit of mutual trust and respect and not in a spirit of suspicion and disrespect. For better or worse, we have committed ourselves to this system and it is up to us to make it work.

financial risk outlook January 29, 2008

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As Americans ponder the state of the economy over their kitchen tables, the FSA publishes its Financial Risk Outlook for 2008. Last year’s version had pictures of buildings and bridges, and 2006 was architectural too. This year’s document is full of transport-related pictures, including one of an escalator (a down escalator (!)) at around the point where last year’s outlook had an attractive archway. There is a colourful picture of traffic lights to relieve the gloom. Some of the risks that the FSA notes relate to the position of consumers. For example, the FSA notes declining confidence (among consumers and market participants, and likely problems associated with high levels of consumer debt. The FSA also states :

Our assessment so far is that, while many firms have made progress on building the fair treatment of customers into their culture, there is little evidence that firms’ work on treating customers fairly is translating into improved outcomes for retail consumers.

regulatory terminologies January 22, 2008

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From Appendix D to the (UK) Hedge Fund Working Group‘s publication, Best Practice Standards and their Future Development (analysing the legal status of the standards) I learned that the standards constitute industry guidance which is not confirmed by the FSA and which therefore doesn’t establish “sturdy breakwaters”:

FSA confirmed industry guidance will be accorded “sturdy breakwater” status. This means that the FSA will not take action against any regulated firm that has adhered to confirmed industry guidance in force at the relevant time. However, the absence of “sturdy breakwater” status for the Standards does not mean that we believe they are in any way “sub-standard” for their purpose. Real practical protection for managers should we feel be provided in that where all relevant firms were acting on the basis that the Standards were reasonable, this should in our view inform any proper interpretation of that the FSA Principles required.

The standards seem to be designed to help firms avoid civil liability rather than regulatory enforcement.

The FSA’s November 2006 Discussion Paper on Industry Guidance distinguishes between regulatory safe harbours and sturdy breakwaters, and, it appears, there is industry guidance which does not establish even sturdy breakwaters. Surely this sort of guidance requires a nautical designation too? Perhaps a floating breakwater? A shipping lane? A buoy? Or a levee?

[Later: Mario Draghi, the Chairman of the Financial Stability Forum, said he liked the document.]

ftas oppose legal harmonization January 18, 2008

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I have an ongoing interest in how financial trade associations engage with multilevel financial regulation. Today a body which calls itself the Joint Associations Committee (it describes itself as being “sponsored by: European Securitisation Forum (ESF), International Capital Market Association (ICMA), International Swaps and Derivatives Association (ISDA), London Investment Banking Association (LIBA) and Securities Industry and Financial Markets Association (SIFMA)) responded to the EU Commission’s request for comments on the idea of harmonizing rules on ‘substitute’ retail investment products. As today was the deadline for submitting comments it is likely that the response was timed to make it difficult for anyone to respond to the arguments in the submission. In contrast to their common practice, these organisations oppose the idea of harmonization in this context because of the need for national regulators to be able to respond to local conditions:

Not only are national regulators best placed to understand and respond to developments in their local markets, they are also best placed to judge the type of regulatory intervention most likely to be effective in addressing a particular local market issue. Thus, effective regulation in this area must leave scope for national regulators to act in their local markets. Conversely, the imposition of Europe-wide regulation at a detailed level, if not precisely calibrated, could result in significant customer detriment in some national markets. Put simply, we doubt whether it would be possible to create a Europe-wide regime in this area capable of addressing the vagaries of all of the EU national retail financial markets.

Presumably the underlying concern here is that harmonized EU rules would provide more of a constraint on the products financial firms could develop than a lot of different national rules. But the invocation of the danger of consumer detriment does remind me of the lobbying about sub-prime lending which focused on the problem that consumers would be deprived of opportunities to borrow money if the states regulated sub-prime loans too aggressively and in ways which interfered with securitization of those loans. Some of those poor customers might have been better off had they been regulated out of those loans.

On the other hand, altough the lobbying against state rules about sub-prime lending can be portrayed as a preference for supralocal rules (harmonised national standards rather than divergent local rules) at the time it was also an expression of preference for regulation by a body which preferred not to regulate.

regulation and transparency January 18, 2008

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Legal rules are not as accessible as they should be. And consultations are not as accessible as they should be either. The UK Government’s recent response to feedback on its consultation on improving consultation states:

The Better Regulation Executive will look into the feasibility of one website indexing all central Government consultation exercises and providing an automated alert system.

I’m not really sure why there is much doubt about the feasibility of such a website (the Scottish Government does seem to list current consultations in one place). It would certainly be helpful. Today I somehow stumbled across the Department for Business, Enterprise and Regulatory Reform’s (BERR) request for views on what constitutes good regulatory guidance. The document wasn’t listed on the BERR consultation page (although it carries the BERR name it is really a Better Regulation Executive document and although they are supposed to be merged maybe they are not properly llinked up yet), or on the press releases page (it’s probably not considered to be a document of major significance, unlike, for example, the 6 month prison sentence for a fraudster).

uk gift to the world – english lessons January 17, 2008

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Gordon Brown’s new idea. But I hope they are better at teaching English than they are at producing videos. Brown has odd quirks when speaking straight at the camera, and why does he have half a mantlepiece sticking out of his head?

scheme liability January 16, 2008

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Yesterday’s long-awaited decision of the Supreme Court in Stoneridge Investment Partners v Scientific-Atlanta Inc (the scheme liability case) has provoked many thoughtful comments (see 10b-5 daily, truth on the market, scotusblog, and ideoblog). The plaintiffs claimed that the defendants colluded in sham transactions to enable the issuer to make its financial statements more attractive to investors than they should have been. The court says that conduct (and not just statements and omissions) can give rise to liability under s 10(b) and rule10b-5 (“[c]onduct itself can be deceptive, as respondents concede”), but finds that the plaintiffs must establish more than indirect reliance, despite a pretty broad endorsement of the fraud on the market theory:

We have found a rebuttable presumption of reliance in two different circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance…Second, under the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public. The public information is reflected in the market price of the security. Then it can be assumed that an investor who buys or sells stock at the market price relies upon the statement.”

The court goes on to state that under the plaintiffs’ theory of reliance:

the implied cause of action would reach the whole market-place in which the issuing company does business.

This cannot be:

we conclude respondents’ deceptive acts, which were not disclosed to the investing public, are too remote to satisfy the requirement of reliance. It was Charter, not respondents, that misled its auditor and filed fraudulent financial statements; nothing respondents did made it necessary or inevitable for Charter to record the transactions as it did.

On this subject, I love footnote 4 to the dissent:

Because the kind of sham transactions alleged in this complaint are unquestionably isolated departures from the ordinary course of business in the American marketplace, it is hyperbolic for the Court to conclude that petitioner’s concept of reliance would authorize actions against the entire marketplace in which the issuing company operates.

Reliance is really slippery (and especially so after Basic, given that it slithers about between a subjective and an objective concept) and seems to me to defy the sort of line-drawing the court wants to engage in here. For example the court wants to distinguish between the “marketplace for goods and services” and the “investment sphere” as though they are completely separate. I don’t really understand how the court puts together the idea that conduct alone can be enough for liability with the other idea that the deceptive acts have to be “disclosed” to the investing public for the fraud on the market presumption to apply. And does it really make sense to have a rule that reliance is presumed in respect of statements which are actually made to the market but not in respect of conduct on which those statements are based (and without which the statements would not have been made)? But, of course, requiring plaintiffs to plead and prove reliance does make it harder for them to win.