A radical sea-change in the way regulators and financial authorities operate is taking place worldwide amid a post-crisis shift in focus to systemic risk, a forum heard.
Ashley Alder, newly installed chief of the Hong Kong Securities and Futures Commission (SFC), offered a compelling narrative on key issues facing those who police the industry at the fifth annual summit staged by the Hong Kong Investment Funds Association.
Alder, who only took up his post four weeks ago, offered a personal perspective on just how much has changed since he last worked at the SFC between 2001 and 2004.
“The agenda then [2001-04] was totally governed by corporate governance,” he reflected. “What is striking about coming back this time around is that the agenda is very different and much more complex, ultimately. It is now all about systemic risk and stability and intermediaries, so as a result we are having to focus on that.”
He reflected that the global financial crisis of 2008 was not only imposing a change in behaviour among financial institutions, but also among regulators and central banks.
“The way in which regulators interact is starting to change quite radically,” he said. “The environment at the moment is about how regulators work together, which is relatively new.”
To illustrate his central point – that the traditionally separate roles of prudential regulation and conduct regulation were becoming increasingly interdependent – he quoted remarks made by Paul Tucker, deputy governor of the Bank of England.
Banking supervisors, Tucker had said, used to oversee illiquid loans held by banks, while in a largely separate universe securities regulators policed individual transactions on public exchanges.
But this had changed (and been cruelly exposed by the financial crisis) with the growth of private and over-the-counter (OTC) markets, derivatives, securitisation and banks acting as intermediaries in capital markets.
“Banks are having to recover their historic mission for systemic stability, but this time around that calls for greater attention to markets and, in particular, not simply assuming that what’s in a bank’s trading portfolio and warehouse must be liquid,” said Tucker.
“Securities regulators are having to look well beyond their roots, accepting that their roles and policies influence the resilience of the system.
“And financial stability authorities such as central banks have to become as comfortable debating the hard and soft infrastructure of core capital markets as they are with the intricacies of the capital structures of banks.”
Alder suggested there are two key strands of regulation being proposed at present: the first regarding the internal structure of organisations and institutional risk, and the second to do with general conduct and in particular the issue of mis-selling.
“It is clear that in some places the bank interest income business model is being squeezed, that some products generate fees which do not attract higher capital requirements,” said Alder.
“And in some places you have front-line staff who may be unskilled but yet are set some pretty testing sales targets around what they are offering to customers.”
Speaking specifically about Hong Kong, Alder noted that the impact of the financial crisis had been very different for the city than it had been elsewhere and observed that G20 reforms largely address problems with the US and Europe at their epicentre.
Nevertheless, he suggested any notion of decoupling had been completely debunked, and stressed it was in Hong Kong’s interests to commit to the key G20 reforms “because the benefits of ensuring that reforms are directed at containing future systemic risk and to protect investors are overriding”.
He acknowledged this was not a one-size-fits-all solution and that implementation would be difficult, especially for OTC derivatives. But he said it was doable.
“Fundamentally that is about putting OTC derivatives into mandatory clearing and also reporting to the trade repository, which in Hong Kong is going to sit with the Hong Kong Monetary Authority.”
He stressed that project alone would require a huge amount of international coordination as separate jurisdictions move to formulate laws enacting mandatory clearing and trade reporting.
“They have to work in lockstep, because you can’t clear one product in two places, for example,” he said. “So that is going to have to be worked out very carefully, but there is huge will to do that.”
He suggested there had been a real change in the way regulators operate and work together in recognition of the fact that the world is interconnected and is now all about systemic risk.
“The way in which we operate going forward depends on communication and cooperation both between regulators and between regulators and the industry,” he concluded.