The head of the UK financial services regulator has called for more transparent global regulatory standards to be introduced to stop ‘regulatory arbitrage’ and help solve financial uncertainty over Brexit, during a keynote speech given to economists in Berlin yesterday.
Speaking at the Economic Council Financial Markets Policy Conference, Andrew Bailey, chief executive of the Financial Services Authority, called for unity across international financial services regulations in a move that he hopes could bring EU access for UK banks abiding by global rules and help stop financial scams in certain jurisdictions.
Bailey, speaking as he said, from his own views, not those of the UK regulator, believes that this type of ‘equivalence’ could even be a solution for banks and financial institutions concerned about their future involvement in the UK due to Brexit uncertainties.
He called for “common recognition of higher-level global standards, which are transparent and subject to regular review” pointing that global standards would oversee maters that affect companies internationally, while leaving national or regional regulators overseeing matters specific to local markets, including the monitoring and policing of financial advisers.
He said: “While we have done a great deal to develop regulatory standards in the aftermath of the [financial] crisis, we have taken very few steps towards using those stronger standards as a basis to govern market access for financial firms.
“A much broader commitment to open up market access using global standards would be a decisive step in the right direction at a time when the openness of the world economy is more under threat.”
Bailey also believes the global regulatory system that exists does not fully support free trade and capital mobility.
“While we have done a great deal to develop global regulatory standards in the aftermath of the crisis, we have taken very few steps towards using those stronger standards as the basis to govern market access for financial firms. Our approaches remain national, or in Europe regional,” he said.
Bailey believes that the Financial Stability Board, alongside the umbrella of the G20 could sit as one of a number of global standard setting bodies setting standards in the areas of financial services.
“The FSB could be thought of as the melting pot in the middle, the place where it comes together under the objective of global financial stability,” he said.
In the EU the legislation that provides the specific legal underpinning for integrated EU financial services markets has, in Bailey’s opinion, become “much more granular, technical and detailed” in its provisions, pointing to the financial services passport within the EU Single Market or to third country access provisions as provided in certain EU directives such as MIFID II as examples.
“This is something that could be avoided if an alternative system that based market access on common recognition of higher level global standards, which are transparent and subject to regular review was introduced to support the global economy,” he said.
New global standards of regulation could also ensure that certain financial jurisdictions are not able to provide international financial services with the type of lighter touch approach that has left many investors open to unscrupulous financial advisers and financial services scams.
“A primary aim of global standards is to promote regulatory outcomes that are consistent across jurisdictions, thereby avoiding so-called ‘regulatory arbitrage’ – the risk that firms might seek to locate their business in a jurisdiction where the regulatory regime is perceived to be less onerous,” said Bailey.
“In doing so, they seek to ensure minimum standards to enhance financial stability and provide for a framework for cooperation among supervisors. By helping to promote international consistency and hence reducing the risks of regulatory arbitrage, global standards can support trade in financial services between jurisdictions.
Bailey points that “bilateral mutual recognition between securities regulators” has some precedents but is “far from commonplace”. For example, the United States Securities and Exchange Commission (SEC) and the Australian Securities and Investments Commission (ASIC) signed a mutual recognition agreement in 2008 which provides a framework for US and eligible Australian stock exchanges and broker-dealers to operate in both jurisdictions, without – under certain circumstances – the need for separate regulation in each country.
Bailey concluded by stating that post [financial] crisis global regulatory standards are not altogether weak but they are “not well rooted”, he said calling for more to be done on their development.
“The last time in history that an open world economy came under major threat, a century or more ago, the response turned out to be a disaster,” he warned. ” That’s a lesson from economic history. My view is that open financial markets are the best way to support trade in goods and services.
“We could take a big step in that direction by using global regulatory standards as the basis for market access around the world,” he concluded.