Securities regulators in Hong Kong and Australia have voiced optimism about a taskforce they plan to set up to facilitate cross-border coordination of rules between institutional investors.
Viewed as a more realistic approach to regional fragmentation than funds passporting, the bodies aim to establish a toolbox of common solutions to bridge different regulatory jurisdictions.
“If we can come up with a template of principles to deal with issues, that would then show how this region, amongst others, can start cooperating better,” Ashley Alder, CEO of Hong Kong’s Securities and Futures Commission, told the third Pan-Asian Regulatory Summit yesterday.
He conceded the reality they were confronted with in the region was entrenched philosophical positions on cross-border application of rules, but added: “We will give it a go.”
Greg Medcraft, chairman of the Australian Securities and Investments Commission (Asic), said the challenge was to ensure a consistent approach to global regulation while adapting to a local environment. He and Alder are working on the proposals, which Medcraft hopes to table when he becomes chair of the International Organisation of Securities Commissions (Iosco) in March.
Both see securities markets as an increasingly key driver of economic growth. “Markets are global and finding a way to make it easier for institutions to operate across markets and to avoid duplication is absolutely critical,” added Medcraft. “The future relies much more on markets providing capital, so making sure these markets are efficient and accessible is so important.”
Alder suggested the fact that they sit in Asia was an advantage as “we can move forward with this work without a lot of the baggage around some of the positions taken in the US and EU”.
Ian Johnston, chief executive of the Dubai Financial Services Authority, argued that the path to greater industry consistency was everyone adopting and applying international standards.
“We want a common regulatory framework, at least at the principles level, where institutions can work across borders so there is some consistency in implementation and governance,” he noted.
“That allows capital to flow across borders more efficiently in terms of the integrity of markets. You will get greater protection for investors and consumers if you have consistent application.”
While he acknowledged the need to take account of different regimes across Asia, he said that overall regulators should sign up to international standards.
But Krirk Vanikkul, deputy governor of the Bank of Thailand, stressed that a one-size-fits-all approach was a non-starter. “You cannot regulate a farm house in the same way you regulate skyscrapers,” he said. “What we are asking for is greater flexibility so we can have a framework to suit our system.”
Poignantly he noted that banks in Thailand were still making money and so need not be subject to some of the restrictions being imposed on developed market counterparts.
He expressed disbelief that the US Federal Reserve did not see abnormalities in subprime lending, noting that the Fed’s focus had been on risk models rather than bank activity.
If that was a thinly veiled criticism, it was nothing compared to comments made by Jin Liqun of China Investment Corporation at a conference in Mumbai this week, when he lambasted the excesses of US financial regulation, as reported.
But interestingly, when asked yesterday why it was so important for regulators to cooperate and close “the regulatory gap”, Yang Dongning, director of CSRC’s general administrative office, said that regulatory arbitrage was not necessarily a bad thing. “In a way it helps with liquidity and also with innovation, in some sense,” she said.
The notion that regulatory arbitrage could be used to stimulate competition found little sympathy with Alder. “I certainly don’t think a deliberate lowering of standards to attract business is the right way to go,” he stressed.
He added that demanding high standards was the only answer for long-term sustainability as an international financial centre. “You have to draw the line, otherwise it’s a slippery slope.”
The need for greater regulation of shadow banking emerged as another hot topic, with again differences noted between east and west. In Asia shadow banking includes financing structures that often do not involve deposit-taking.
“We think that should be considered in a different way and may not be equivalent to the sort of issues being looked at in the west in terms of securitisation,” said Alder.
Medcraft was of the view, particularly with reference to retail investors, that if you look and act like a bank, you should be regulated like a bank.
Asked what the unintended consequences of increased global regulation had been, Alder generated an audience titter when he replied “growth in the importance of the compliance industry”.
He added that no study had been done on the cumulative effect of Basel III requirements on the real economy, with reference to margin compression and collateral restrictions, although he conceded: “It is virtually impossible to do that at this stage, so it is a question of wait and see.”
Vanikkul listed Basel III as the chief challenge facing regulators today, while Johnston said an unintended consequence of Basel III was that it was punishing the trade finance industry in Africa, parts of Asia and the Middle East. “In terms of capital there will be consequences when it comes to lending out into the economy.”
Alder pointed to mis-selling and designer products to the retail segment as a chief challenge and one that was “still endemic”.
Medcraft said a priority for him when he became chair of Iosco would be to establish a separate committee to look at retail financial products and services.
Asked if regulators should become more involved in product approval, he suggested that the focus should be more on education. “At the end of the day, manufacturers and distributors have to recognise they have an obligation to make sure that product which gets to the ultimate investors is appropriate. It is good self regulation, that is absolutely critical.”