Regulation: A European Perspective

Rhodri Preece, CFACFA Institute Centre for Financial Market Integrity

Introduction

1. CFA Institute and the Centre

2. Regulatory Structure

3. Regulatory Policy

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1. CFA Institute

• CFA Institute is the global, not-for-profit association of investment professionals that awards the Chartered Financial Analyst®

(CFA®) designation.

• Membership includes more than 100,000 investment analysts, portfolio managers, investment advisors in 131 countries.

• Mission: To lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence.

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CFA Institute Centre for Financial Market Integrity

• The Centre is the policy and research authority on global capital markets issues.

• The Centre represents the views of investment professionals before standard setters, regulatory authorities, and legislative bodies worldwide.

• We support measures to improve efficiency, transparency, and integrity in global financial markets.

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2. Regulatory Structure

• Globalised financial markets, products, and services

But...

• Nationalised, fragmented regulatory structure

• Supervisory evolution: Fragmentation Integration

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i) National structures

• Europe operates a single market for financial services…

• But overseen by national regulators. Examples:

FSA – United Kingdom

Unitary authority, responsible for market conduct, consumer protection, prudential supervision

Regulates most financial services markets, exchanges and firms

AFM – Netherlands

Responsible for market conduct and consumer protection

“Twin peaks” structure: Dutch Central Bank responsible for prudential supervision and financial stability

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i) National structures

AMF – France

Responsible for securities markets, conduct

Separate prudential authorities for banking and insurance

CONSOB – Italy

Responsible for securities markets, conduct

Separate prudential authorities for banking and insurance

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• Currently supported by the “Three Level 3” Committees:

– Committee of European Banking Supervisors (CEBS)

– Committee of European Securities Regulators (CESR)

– Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS)

• Mirrored at a global level by the Basel Committee on banking supervision, IOSCO, and IAIS, with the FSB as the hub of the global structure.

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i) National structures

ii) Supra-national structures

• New European Commission proposals:

1) Micro-prudential supervision: European System of Financial Supervision (EFSF)

2) Macro-prudential supervision: European Systemic Risk Board (ESRB)

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ii) Supra-national structures Micro-prudential supervision

• European System of Financial Supervision (ESFS)

– Existing national authorities continue to be responsible for day-to-day supervision of firms.

– Closer cooperation and sharing of information between regulatory authorities with colleges of supervisors for large cross-border institutions.

– Implement common rulebook.

• Three new pan-European Authorities – Banking, Securities, Insurance

– Authorities to act as over-arching bodies for national regulators, replace CEBS, CESR, CEIOPS

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ii) Supra-national structures

Main tasks of the 3 European Authorities include:

(i) legally binding mediation between national supervisors;

(ii) adoption of binding supervisory standards;

(iii) adoption of binding technical decisions applicable to individual institutions;

(iv) oversight and coordination of colleges of supervisors;

(v) licensing and supervision of specific EU-wide institutions (e.g. Credit Rating Agencies);

(vi) strong coordinating role in crisis situations.

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ii) Supra-national structures Macro-prudential supervision

• European Systemic Risk Board (ESRB)

– High-level systemic risk monitoring body to act as an “early-warning” system.

– Chaired by European Central Bank

• Main tasks of the ESRB:

– Analysis and advice on macro-prudential issues

– Provide early risk warning to EU supervisors

– Compare observations on economic developments

– Provide direction and guidance

– No binding powers

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micro-prudential information macro-prudential risk warning

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European Systemic Risk BoardChaired by President ECB

President (ECB), vice-president, 27

national central bank governors

Chairs of 3 Authorities

Representatives of European

Commission

European System of Financial Supervision

European Banking Authority (EBA)

European Securities and Markets

Authority (ESMA)

European Insurance & Occupational

Pensions Authority (EIOPA)

National Supervisors

3. Regulatory Policy

• Rules vs. Principles

• Self-Regulation vs. Formal Regulation

Self-regulation Formal regulation

Voluntary codes & standards Mandatory rules, principles

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3. Regulatory Policy

• Examples:

Credit Rating Agencies

o Codes of conduct regulation and supervision (ESMA)

o Conduct of business, independence, governance

Hedge Funds

o Codes of conduct, registration regulation (AIFM directive)

o Conduct of business for Managers, capital requirements, disclosure requirements, leverage restrictions

o Independent custodians and valuators

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Regulatory Policy

Banks

o Strengthened prudential supervision (CRD)

o More and better quality capital, liquidity, dynamic provisioning

o Governance, executive compensation

o Reform of Basel II framework

Insurers

o Stronger prudential standards – Solvency II

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