Regulators are confronted by a changed landscape
Being asked to review the global regulatory landscape was a tough task, conceded Ashley Alder at the Hong Kong Investment Fund Association’s fifth annual conference last week.
After all, he pointed out, he had only started as chief executive of Hong Kong’s Securities & Futures Commission (SFC) four weeks beforehand.
Nevertheless he offered his reflections on what he described as a massive sea-change in regulatory attitude since the 2008 global financial crisis.
It was a crisis, he acknowledged, that had exposed some very deep questions, none more so than the role of finance itself, which traditionally had been looked on as the bridge between savings and investments.
“Questions have arisen about complex and opaque products, layers of intermediaries and fees, and new and unknown counterparty risks, to name just a few,” Alder noted.
He said one of the underlying subtexts to his initial conversations with regulators on a recent trip to London was: does the financial system extract more value than it creates for investors and entrepreneurs?
“These issues now underpin a lot of the regulatory discussion, and that is hugely significant,” he stated. “A question which is circling around us is: to what extent should we go back to basics and perform the primary function of financing economic growth?”
Alder cited Tobin Tax – a tax on financial transactions – as an example, saying it was gaining traction potentially as a tool to stifle some aspects of financial conduct seen to be harmful.
Other questions swirling in regulators’ heads included the extent to which easy money over a long period distorted the cost of capital and encouraged risk-taking; whether leverage disproportionately amplified risks and losses; issues around skewed incentives, in particular related to the securitisation process; the prevalence of herding; and suspension of disbelief over mispriced securities in the run-up to the credit crunch.
Alder also referred to the breakdown in risk management, citing as an example reliance on credit rating agencies focused on default and not on liquidity risk.
In particular, one question he said he had been asked most frequently during his first four weeks as SFC chief revolved around whether more regulation was a good thing.
The regulatory pendulum, he said, had swung in some places from light-touch to something much more prescriptive, although he described Hong Kong as fortunate in that the amplitude of its pendulum was not as extreme as elsewhere (which he expected to continue).
“The move to reregulate as a response to the crisis boils down to a real point, and that is the need to fix a broken system,” he explained. “I think there is an absolute consensus on that front. But it is not about how much regulation, but [about] what is quality regulation.”
At an international level, he stressed that in the past there had been no clear mandate among regulators as far as systemic risk was concerned.
“Financial institutions operate globally, but by and large regulation over many years has been segmented and national,” he said “Of course, now we have the issue of how to deal with systemically important financial institutions and too big to fail.”
The result of all the above, he said, was an unprecedented regulatory and political challenge, even setting aside the issues facing the eurozone at present.
He said the SFC’s focus since the 2008 crisis had been on strengthening investor protection, and added that it was about to publish results of its recent surveillance of SFC funds in relation to key fact statements.
“It is important once we have published results of that surveillance that we interact with the industry to make sure we are getting it right, both for investors and for the industry,” he added. “You can only develop good rules that work in tandem with the industries you are dealing with.”
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