Need of the hour is consistency of regulations across the world
As the world recovers from the worst financial crisis it has experienced since the Great Depression in 1930s, regulators around the world are now aware that the financial crisis has international dimensions.
Realising the financial markets are inexorably globally integrated, they are now devising ways on how to preserve cross-border financial stability in order to ameliorate systemic risk and prevent regulatory arbitrage.
"There is no doubt that in many cases regulations globally didn't prove adequate. Businesses and markets were interconnected but regulations have not evolved as much as it could have," said Ian Johnston, Deputy Chief Executive and Managing Director, Dubai Financial Services Authority (DFSA). He said much to be expected this year will spring from G20's endorsement of the Financial Stability Board as the vehicle to monitor the cross-border consistency of financial regulations. "It will never be one standard for everything but there will be greater consistency for banking, insurance and securities."
What were the major themes in 2009? Was fraud one of them?
Last year was marked by the global financial crisis. There were some examples of fraud in the middle of the year. You did see some big examples in the US. Fraud happens every year and it is difficult to regulate. Fraud is generally an enforcement matter. Some of them were high profile ones like the Madoff case but not more than really in the previous years.
What's the case in the region?
Within DIFC we didn't see major examples of fraud. We haven't been receiving complaints nor have received a lot of enquiries with respect to fraud.
Is there a relationship between financial crisis and fraud?
Yes, some people who make less money than they used to tend to cut corners.
Have we seen the peak of fraudulent cases last year?
It's one of those things that are incredibly hard to predict. There are a number of things where you can identify trends in relation to capital requirements and what happens to managed funds but it's very difficult to predict fraud because the very nature of fraud is that people are always finding ways to beat the system.
Entities in the financial services regulation were put under the hot seat last year. What lessons were learnt?
There is no doubt that in many cases regulations globally didn't prove adequate. Many people were surprised by just how interconnected the financial system is. Regulations have not kept up at a global level with that interconnection. If businesses and markets were interconnected, regulations have not evolved as much as it should have. Two key things learned in particular were the need for greater consistency of regulations across the globe and a greater need for regulators to communicate more to each other and share information.
Is there a universal regulatory standard or a move to have one?
There is no one global standard. However, the G20 is playing an important role in driving international standards to be more consistent. At the moment there are standard setters for banking, insurance and securities regulations around the world. Each of those standard setters are being pushed to make standards more consistent globally. There is a far more greater push for some of those standards to be consistent across the three sectors. International consistency is being aimed at but they can't be completely consistent because the amount of capital needed to run a bank is greater than the capital required to run an insurance broking firm.
How will this impact the economy?
There are a number of benefits. There will be opportunity to understand risks posed to the global system if you are able to capture the information collectively. It will also benefit businesses. About 70 per cent of financial transactions are carried out by global firms. It is better if they are playing on a consistent set of rules than having to deal with different rules in every country they operate.
When can we see this consistency?
There are works going on just now. There is a big push for sharing more information by regulators and that is being done in two ways. The FSB is working on improving regulators' sharing of information during the crisis. When there is a crisis in a global firm, they create the right mechanism for regulators to be able to quickly share information with each other. There is also a recent trend of the college of supervisors. Wherein, various global regulators regulating a big international firm operating in various jurisdictions may meet two or three times a year and discus issues across borders.
PROFILE: Ian Johnston Deputy Chief Executive & Managing Director of DFSA
Johnston is an experienced international regulator who joined the DFSA in November 2006 to head the Policy and Legal Services Division.
He has held a number of senior positions within the AXA Group and was CEO of one of Australia's major Trustee Companies.
In 1999, he joined the Australian Securities and Investments Commission where he was Executive Director, Financial Services regulation, and spent several terms as an Acting Commissioner. In 2005, he took up a position with the Hong Kong Securities and Futures Commission as a Special Advisor.
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