UK: financial regulation reform - consultation paper

HM Treasury today published a consultation paper - titled A new approach to financial regulation: judgement, focus and stability - setting out in more detail its proposals for reform of the UK financial regulatory structure and explaining the proposed transitional arrangements: see here (pdf).

USA: financial regulation reform

The Wall Street Reform and Consumer Protection Act (also known as the Dodd-Frank Act after Senator Dodd and Congressman Frank and not, as posted earlier, the Restoring American Financial Stability Act) was yesterday signed by the President: see here.

The Act will bring about the most significant financial regulatory reform since the 1930s and also includes corporate governance measures. For example, Section 951 provides for a shareholder vote on compensation disclosure and Section 952 sets out requirements for compensation committee independence. For a more comprehensive summary of the Act see here and here.

USA: Restoring American Financial Stability Act of 2010

The most significant financial regulatory changes for 80 years have moved closer. The Bill that will become the Restoring American Financial Stability Act of 2010 has passed its final hurdle in Senate, gaining a majority of votes cast. The Bill now awaits signing into law by the President.

Correction (21 July 2010): the Act will, in fact, be known as the Wall Street Reform and Consumer Protection Act.

New Zealand: a new Securities Act - discussion document published

As part of its review of securities law, the Government has published a discussion document in which it proposes the introduction of a new Securities Act: see here (pdf). To quote from the document's executive summary:

The Ministry proposes that a new Act will replace the Securities Act 1978 and the Securities Markets Act 1988, and amend a range of other legislation. The new Act will set out what offers of financial products are to be regulated, how they will be regulated, and how this regulation will be enforced. While the Ministry proposes maintaining many of the existing principles in the current regime (e.g. that it remain based on mandatory standards of disclosure and governance), changes are proposed to increase the effectiveness of the regime.

The discussion paper picks up many of the recommendations of the Capital Market Development Taskforce (the Taskforce) and will support many of the other changes that have been made or are in the process of being implemented, such as the Financial Advisers Act 2008, the Financial Service Providers (Registration and Dispute Resolution) Act, the Securities Trustees and Statutory Supervisors Bill, and recent Government decisions to consolidate the market conduct regulators into a new Financial Markets Authority, and changes to improve the regulation of retail KiwiSaver schemes".

UK: the bank levy and bank remuneration

In today's budget the Government announced the introduction of a bank levy. The levy will apply to: the consolidated balance sheet of UK banking groups and building societies; the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and the balance sheets of UK banks in non-banking groups. Further information is available here (pdf). The budget report is available here.

The budget report also states, in a short paragraph titled "Bank remuneration" at para. 2.79:

The Government will explore the costs and benefits of a Financial Activities Tax. The Government has asked the FSA to consider a number of factors in its forthcoming review of its Remuneration Code. Alongside this the Government will consult on a remuneration disclosure regime".

Ireland: the Central Bank's banking supervision strategy

The Central Bank, which will be given responsibility for the supervision of individual firms and the stability of the financial system generally (see the Central Bank Reform Bill 2010), has published its strategy on banking supervision in Ireland: see here (pdf). A more assertive, risk based and challenging approach to banking supervision is promised.

USA: Guidance on Sound Incentive Compensation Policies

The Federal Reserve and several other agencies have adopted final guidance on incentive compensation policies in banking organisations: see here (pdf).

UK: financial regulation reform - Parliamentary statement

The Financial Secretary to the Treasury delivered a statement to the House of Commons yesterday on the Government's proposals for financial regulation reform: see here. The statement provides further information on the new institutional structure and the responsibilities of the Bank of England, Financial Policy Committee, Prudential Regulation Authority and Consumer Protection and Markets Authority.

UK: financial regulation reform - reactions

Lord Adair Turner, the chairman of the Financial Services Authority, was interviewed this morning on Radio 4's Today programme about the changes announced yesterday: listen here. The Chancellor was also interviewed: listen here. The Governor of the Bank of England, Mervyn King, welcomed the new responsibilities being given to the Bank of England in his speech last night at the Mansion House: see here.

UK: the abolition of the FSA and the new financial regulation framework

Last night the Chancellor of the Exchequer, the Rt Hon George Osborne, delivered his first Mansion House speech - see here - and outlined, in general terms, significant changes to the structure of financial regulation in the UK. The Financial Services Authority will be abolished in its current form and a new prudential regulator, a subsidiary of the Bank of England, will be created.

Other changes are outlined in the following extract from the Chancellor's speech (further information will be provided in Parliament later today by the Financial Secretary to the Treasury, Mark Hoban MP):

... the Government will abolish the tripartite regime, and the Financial Services Authority will cease to exist in its current form. We will create a new prudential regulator, which will operate as a subsidiary of the Bank of England. It will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

We will create an independent Financial Policy Committee at the Bank, which will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and take effective action in response. We will also establish a powerful new Consumer Protection and Markets Authority. It will regulate the conduct of every authorised financial firm providing services to consumers. It will also be responsible for ensuring the good conduct of business in the UK’s retail and wholesale financial services, in order to preserve our reputation for transparency and efficiency as well as our position as one of the world’s leading global financial centres.

I can also confirm that we will fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of Government departments and agencies. We take white collar crime as seriously as other crime and we are determined to simplify the confusing and overlapping responsibilities in this area in order to improve detection and enforcement.

I have thought longer and harder and spoken to more people about all these issues than almost any other issue to have crossed my desk. We do not undertake these reforms lightly, and we do so only because we believe they are absolutely necessary. We will handle the transition carefully, consult widely and get this right. The process will be completed in 2012".

Europe: consultations on derivatives and short selling

The European Commission has published two consultation papers on draft legislation as part of its work on reforming financial regulation. The first concerns derivatives and market infrastructures: see here (pdf). The second concerns short selling and credit default swaps: see here (pdf). FAQs in respect of these consultations are available here and here.

UK: the FSA's annual report 2009/10

The Financial Services Authority has published its 2009/10 annual report: see here (pdf). Whether this will be the last report from the FSA as it is currently organised should become clear (or clearer) this month. The emergency budget on June 22 provides a good opportunity for plans to be published but the Financial Times newspaper suggests (here) that proposals may be published next week.

Meanwhile, the report provides an overview of the FSA's actions in the past year. There is a section titled "Corporate governance and Significant Influence Functions" which states:

As part of our supervisory enhancement programme,we now place much greater emphasis on the role of senior management at firms ... in 2009/10 we completed 377 cases involving a significant influence function (SIF) interview where 27 were withdrawn by the firms concerned ...

On governance more widely, in November 2009 Sir David Walker completed his Treasury-commissioned review of corporate governance in banks and other financial industry entities; our proposals in the January [Consultation Paper] cover the FSA-specific recommendations in the review. Sir David’s recommendations address many current governance concerns and, as we have said publicly, we intend to play our part in supporting their delivery alongside the Financial Reporting Council (FRC) and work in relation to the Corporate Governance Code (formerly the Combined Code)".

Europe: Commission Communication on financial services regulation

The European Commission has published a Communication titled Regulating Financial Services for Sustainable Growth: see here (pdf). The Communication describes the actions already taken by the Commission as well as forthcoming proposals. The Commission intends that the vast majority of its new proposals will be presented to the Council and European Parliament by the end of 2010.

These proposals will cover derivatives, credit default swaps, short-selling, improvements in the Markets in Financial Instruments Directive, revisions to the Deposit Guarantee Schemes Directive and the Investor Compensation Schemes Directive, revisions to expand the scope of the Market Abuse Directive to include derivatives, amendments to the Capital Requirements Directive (CRD IV), a Communication on sanctions in the financial services sector to promote convergence, and further work on international accounting standard convergence.

Europe: the governance of financial institutions - Commission publishes green paper

The European Commission has published a green paper titled Corporate governance in financial institutions and remuneration policies: see here (pdf). The paper contains a large number of questions for consultation and sets out possible ways to:

• improve the functioning and composition of boards of financial institutions in order to enhance their supervision of senior management;
• establish a risk culture at all levels of a financial institution in order to ensure that long-term interests of the business are taken into account;
• enhance the involvement of shareholders, financial supervisors and external auditors in corporate governance matters;
• change remuneration policies in companies in order to discourage excessive risk taking.

Amongst the questions on which views are sought are:

• Should the number of boards on which a director may sit be limited?
• Should combining the functions of chairman of the board of directors and chief executive officer be prohibited in financial institutions?
• Should a specific duty be established for the board of directors to take into account the interests of depositors and other stakeholders during the decision-making procedure?
• Should cooperation between external auditors and supervisory authorities be deepened?
• Should supervisory authorities be given the power and duty to check the correct functioning of the board of directors and the risk management function?
• What could be the content and form, binding or non binding, of possible additional measures at EU level on remuneration for directors of listed companies?
• Should disclosure of institutional investors' voting practices and policies be compulsory? How often?

The paper makes clear (at p. 11) the Commission's view that there is a role for financial regulators to play:

The main challenge in seeking to improve existing corporate governance practices will be to ensure real change in the behaviour of the relevant actors. This cannot be achieved through new regulatory and non-regulatory requirements alone. It must also be backed up by effective financial supervision".

Interestingly, whilst the paper is concerned with financial institutions, it is noted (at p. 3):

... the Commission will soon launch a broader review on corporate governance within listed companies in general and, in particular, on the place and role of shareholders, the distribution of duties between shareholders and boards of directors with regard to supervising senior management teams, the composition of boards of directors, and corporate social responsibility".

For further information see: press release | press conference video | faqs | Commission consultation page | Commission staff working document: lessons from the financial crisis | other proposals announced: credit rating agencies : remuneration : financial services regulation |

UK: The Queen's speech - the Financial Services Regulation Bill

Today saw the State Opening of Parliament by The Queen. The Queen's speech - available here - set out the Government's legislative programme. A Financial Services Regulation Bill is proposed, the purpose of which is to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation: see here.

It's fair to say that the exact boundaries of responsibility between the Financial Services Authority and the Bank of England under the proposed regime will remain uncertain until further information is provided by the Government, not least because the terms 'macro-prudential' and 'micro-prudential' lack a precise definition and have changed over time. Further discussion of the meaning of 'macro-prudential' appeared in the March 2010 edition of the Bank for International Settlements Quarterly Review: see here (pdf).

Europe: Governance Forum publications

Last week the European Corporate Governance Forum published two documents: its 2009 annual report (here, pdf) and the minutes of its meeting on 19 February 2010 (here, pdf). Sir David Walker attended the February meeting and spoke about his review of bank and financial institution governance; the minutes record his answers to questions from Forum members.

The minutes also provide an insight into the European Commission's forthcoming green paper on corporate governance, due to be published this month. To quote from the minutes:

As with the Walker report, some of the planned recommendations are specific for the financial services industry, others are also relevant for listed companies in general, for instance the recommendations with regard to shareholders. At this stage some recommendations are further developed than others, such as the recommendations on risk. No choices have been made yet as to whether and to what extent the recommendations should take the form of legislative measures. This will depend on the Commissioner's decision".

UK: the Con-Lib coalition agreement and financial regulation

The Conservative-Liberal Democrat Government has published its coalition agreement: see here (pdf). With regard to financial regulation (with overlaps into the governance field) the agreement states:

The parties agree that reform to the banking system is essential to avoid a repeat of Labour’s financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs. We agree that a banking levy will be introduced. We will seek a detailed agreement on implementation.

We agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk. We agree to bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry.

The parties wish to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this would take time to get right, the commission will be given an initial time frame of one year to report. The parties agree that the regulatory system needs reform to avoid a repeat of Labour’s financial crisis. We agree to bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation".

Canada: governance at financial institutions

Ted Price, an assistant superintendent at the Office of the Superintendent of Financial Institutions (OSFI), delivered a speech earlier this week titled "Defining the New Agenda for Governance at Financial Institutions": see here (pdf).

The speech provides some useful insights into governance in Canada as well as the actions being taken by the OSFI with regard to governance, including the assessment of board directors and the functions of the board with regard to risk, about which Mr Price observed:

At OSFI, we believe that defining financial risk appetite is as important in an institution’s strategic planning as other production inputs, like budgets. It has been long accepted that major expenditures and budgets should be reviewed by the board, but when it comes to setting risk appetite, some boards have, incorrectly, abdicated that responsibility to management. We believe that boards have an essential oversight role in setting and limiting risk appetite in financial institutions".

Europe: financial supervision update

MEPs on the Economic and Monetary Affairs Committee yesterday made significant changes to the European Commission's proposed financial supervision framework. The Committee's proposals will require the approval of the European Parliament and further debate and lobbying is inevitable. In a press release published yesterday - see here - the Committee's decisions were explained:

The EU's financial supervisory plans were beefed up by Economic and Monetary Affairs Committee MEPs on Monday, with new measures including a much bigger say for the nascent European Systemic Risk Board before and during crises affecting financial stability, direct EU supervision of systemically important financial institutions, the right to impose temporary bans on very risky financial products and the designation of two EU stability-assisting funds.

EU supervision must be much stronger than what the Commission and Council are proposing, in order to prevent the kind of slow and fragmented supervisory responses seen in the 2007-2008 crisis, said the committee, broadly backing the position of its rapporteurs.

If backed by Parliament as a whole, the committee vote will base all the proposed supervisory bodies in Frankfurt and make them part of a tightly-integrated system, replacing the looser network of supervisors in various European cities originally proposed.

Intensive talks now start between MEPs and the Council find a deal that satisfies both sides. It is hoped that this deal could then be put to a vote at Parliament's June plenary session. If the deal is done in June, then the bodies provided for in this package can be set up in 2011".

For further information about the Committee's adopted text see here and the short video news report below from European Parliament TV:

The Committee was due to vote on the proposed Alternative Investment Fund Managers Directive but this will now take place on May 17 so that time is available to consider the opinion of the Legal Affairs Committee (available here, pdf).

New Zealand: new 'super regulator' for financial markets

The Government has announced that a new 'super regulator' will be created - the Financial Markets Authority (FMA) - and that it will consolidate various functions currently carried out by the Securities Commission, the Ministry of Economic Development and the New Zealand Stock Exchange.

In a press release published yesterday, Commerce Minister Simon Power stated that the FMA will "enforce securities, financial reporting, and company law as they apply to financial services and securities markets. It will also regulate and oversee, trustees, auditors, financial advisers and financial service providers including people who offer investments". The Reserve Bank will retain responsibility for prudential regulation.

The Government's intention is that legislation establishing the FMA will be passed this year and that the FMA will begin operating early in 2011. For further information see here (and, in respect of auditor oversight, here).