Implementation: it was one of Turkey’s three ‘I’s for the Antalya Summit. Summits have been known for their lengthy communiqués and their commitments in the hundreds. Every host government hopes that the decisions made at its summit will be implemented. Turkey, however, decided to put implementation front and centre.
This year, for the first time, the Financial Stability Board (FSB) presented a formal report on the progress that has been made on financial reforms at the Antalya Summit. The report not only addresses the regulatory reforms implemented to date, but also looks at the effects of the reforms and – more importantly – any spillover effects and unintended consequences that need to be addressed.
It has been six years since the London Summit in April 2009, where many commitments were made to strengthen the financial system in order to prevent a recurrence of the crisis that rippled all over the globe. At London, the G20 tasked the FSB with a stronger mandate than its predecessor, the Financial Stability Forum. The FSB’s mandate is to work with other international organisations including the International Monetary Fund (IMF) and the Basel Committee on Banking Supervision to ensure that the commitments made in the G20 Global Plan for Recovery and Reform were realised.
The goal of this broader mandate was to produce and implement strong, internationally harmonised financial regulations and supervision in order to restore trust and avoid the use of taxpayer funds to bail out financial institutions. As the FSB includes all G20 members, it represents the views of the emerging markets as well. If harmonised global regulation is the goal, emerging markets need to be included in order for the organisation to look holistically at reform implementation and any spillover effects from the developed countries.
Collaboration and consultation
Since 2009, the FSB has created a collaborative approach to rule-making and guidance. It has partnered with relevant industry associations and international bodies to work with subject-matter experts. It has also repeatedly consulted industry before finalising recommendations. This inclusiveness allows for stakeholder buy-in because participation has been incorporated from the beginning. When industry has a voice at the table, realistic regulation is formulated and implementation becomes less difficult as a result.
With most of the regulatory work completed, the FSB is concentrating on concluding the last of the core elements of financial reform. The first is ending the concept of institutions that are too big to fail. For global systemically important financial institutions that are banks, the FSB aimed to finalise the standard for total loss absorbing capacity by the Antalya Summit. For those that are not banks, such as asset management companies, further steps towards international standards are forthcoming.
Over the last year, two consultations were undertaken on a methodology for identifying global non-bank non-insurers that are systemically important. Activities-based policy recommendations will come in spring 2016. Those recommendations must consider the creation of new standards and bodies such as central counterparties (CCPs) to ensure they too are not too big to fail. CCPs are currently being evaluated for resiliency capabilities and interconnectivity with the wider market.
For the over-the-counter (OTC) derivatives market, a work plan is under way in conjunction with the Committee on Payments and Market Infrastructure and the International Organization of Securities Commissions to standardise and aggregate trade data. The too-big-to-fail concept and OTC derivatives are complex in nature and once the work on both is complete, the result will be stable and transparent financial markets.
Different rates of progress
How would the scorecard fare for the private sector? Implementation of standards has been uneven and typically on differing schedules. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010 in the United States, and it took until 2014 for the European Union’s Directive on Markets in Financial Instruments II to be published. Although regulators in all major financial centres have adopted the regulatory framework, not all rules were promulgated in concert, resulting in differing standards across jurisdictions. Moreover, even among jurisdictions with a high commitment to regulatory reform, resource constraints at the regulatory level may result in conflicting timelines and enforcement capabilities.
The sheer magnitude of regulatory reform in the past few years along with the divergence across jurisdictions results in high costs of compliance to the private sector. These costs incorporate actual capital outlay as well as the soft cost of forgone new product innovation for clients and capital available for expansion or lending.
Actual costs include technology implementation required, remediation efforts and the additional staff hours required to implement new regulation and then support compliance on an ongoing basis. Large firms can easily realise economies of scale for the outlay of these typically large sums of capital. Small businesses do not have the same advantage and increasingly use a greater proportion of their revenue for compliance costs.
The cost of non-compliance can be even greater. There are legal, operational and reputational risks that present themselves when institutions run afoul of the regulators. Heavy fines are often levied and, at worst, firms could lose their licences. With redirected capital and reduced product innovation, the global economy may slow down further as funds are rerouted to government coffers.
All these regulations have been individually implemented with the best intentions. Yet, a truly holistic perspective is impossible with so many complexities within the same industry and just as many organisations working on solutions. These regulations may indeed enhance trust – but at a significant cost to the global economy if there is no contemplation of their combined impact. Companies need a little breathing room.
The FSB’s annual report goes far to solving this fragmented approach to regulatory adoption. It looks at the unintended consequences that will inevitably become clear as time moves on. G20 leaders must heed the summation of where support from them and their ministers is needed in order to achieve the full benefit of policies agreed to in the past.