In times of economic turmoil, there is an increased risk that governments will be tempted to engage in "regulatory competition" and use regulation to promote national interests in contravention with their international commitments, and to give a temporary boost to competiveness. The risk seems greates in the area of financial services, as a number of countries like the US adopt tough financial reforms to reassure their citizens that they are proactive in dealing with financial instability and speculation. In some cases, there can be consequences for foreign firms operating on their markets, and even abroad. An article on Reuters.com of two days ago summarizes the current tension under the catchy title "ET, the new alien scaring global markets" where ET stands here for "extraterritoriality", or legal effect beyond borders of a national law. The article shows the risks of regulatory competition, and the need for international regulatory cooperation (IRC), or coordination, to avoid negative economic effects.
The European Union provides a good forum to broach these sensitive issues with major economic competing blocs such as the US and Japan. See the DG Enterprise page on IRC which reports on EC cooperation with a number of governments around the world to remove regulatory barriers viewed as a significant impediment to trade and investment. With the US for instance, "regulatory cooperation is an important tool to helping dismantle existing regulatory barriers and prevent new ones from emerging. Since the development of the EU-US Guidelines for Regulatory Cooperation and Transparency, Regulatory authorities on both sides aim at achieving greater convergence of technical rules through a number of sectoral and methodological regulatory dialogues. Since its inception in 2005, the High Level Regulatory Cooperation Forum has met regularly to focus on key regulatory issues of common interest and to facilitate the exchange of best regulatory practice across sectors." See previous post on EU-US regulatory dialogue
Following a similar initiative from the Commission, the UK Finance Minister George Osborne wrote to B. Bernanke (Federal Reserve) on 23 January to ask for regulatory dialogue "aimed at minimising any unintended consequences of regulatory reforms on either side of the Atlantic."
A good presentation of the US point of view can be found in a 2010 speech by the U.S.Securities and Exchange Commissionner who explored the history, the forms, the advantages and the limits of IRC in promoting efficient capital markets.
Another particularly necessary area for IRC is the cooperation about collective investment schemes (CIS), but it seems to be fraught with difficulties, as explained in an article of the International Financial Risk Institute (IFRI)"To date, a uniform and consistent approach to the global regulation of CIS has not been pursued by regulatory authorities. It is therefore important in this climate for regulators to develop strategies to deal with this increased global activity in order to improve their collective oversight of the markets. If regulatory authorities chose to ignore the current trend that cross-border activity is increasing, they run the risk of failing to effectively regulate their markets and decreasing investor protection. Alternatively, if regulators accept that globalisation is a permanent feature of the managed funds industry, they should consider ways of improving their oversight of the markets. The incentive for pursuing this approach is that a co-ordinated harmonised approach to international regulatory co-operation should promote and strengthen the securities markets globally, increase investor confidence, attract investment, as well as assist the mutual flow of business."
The issue of IRC was raised at the OECD conference in October 2010on the future of regulatory policy, and a break-out session was devoted to the rationale for IRC (see summary of discussion). The theme was recently incorporated in the Recommendationsfor Regulatory Policy and Governance of OECD as part of quality regulation: "In an increasingly globalised economy, international regulatory co-operation must become integral to systemic risk management and long-term policy planning. Governments should take into account relevant international regulatory settings when formulating regulatory proposals to foster global coherence" (draft under discussion). OECD will be further exploring how to share national best practice in this new workstream of regulatory governance.
The European Union provides a good forum to broach these sensitive issues with major economic competing blocs such as the US and Japan. See the DG Enterprise page on IRC which reports on EC cooperation with a number of governments around the world to remove regulatory barriers viewed as a significant impediment to trade and investment. With the US for instance, "regulatory cooperation is an important tool to helping dismantle existing regulatory barriers and prevent new ones from emerging. Since the development of the EU-US Guidelines for Regulatory Cooperation and Transparency, Regulatory authorities on both sides aim at achieving greater convergence of technical rules through a number of sectoral and methodological regulatory dialogues. Since its inception in 2005, the High Level Regulatory Cooperation Forum has met regularly to focus on key regulatory issues of common interest and to facilitate the exchange of best regulatory practice across sectors." See previous post on EU-US regulatory dialogue
Following a similar initiative from the Commission, the UK Finance Minister George Osborne wrote to B. Bernanke (Federal Reserve) on 23 January to ask for regulatory dialogue "aimed at minimising any unintended consequences of regulatory reforms on either side of the Atlantic."
A good presentation of the US point of view can be found in a 2010 speech by the U.S.Securities and Exchange Commissionner who explored the history, the forms, the advantages and the limits of IRC in promoting efficient capital markets.
Another particularly necessary area for IRC is the cooperation about collective investment schemes (CIS), but it seems to be fraught with difficulties, as explained in an article of the International Financial Risk Institute (IFRI)"To date, a uniform and consistent approach to the global regulation of CIS has not been pursued by regulatory authorities. It is therefore important in this climate for regulators to develop strategies to deal with this increased global activity in order to improve their collective oversight of the markets. If regulatory authorities chose to ignore the current trend that cross-border activity is increasing, they run the risk of failing to effectively regulate their markets and decreasing investor protection. Alternatively, if regulators accept that globalisation is a permanent feature of the managed funds industry, they should consider ways of improving their oversight of the markets. The incentive for pursuing this approach is that a co-ordinated harmonised approach to international regulatory co-operation should promote and strengthen the securities markets globally, increase investor confidence, attract investment, as well as assist the mutual flow of business."
The issue of IRC was raised at the OECD conference in October 2010on the future of regulatory policy, and a break-out session was devoted to the rationale for IRC (see summary of discussion). The theme was recently incorporated in the Recommendationsfor Regulatory Policy and Governance of OECD as part of quality regulation: "In an increasingly globalised economy, international regulatory co-operation must become integral to systemic risk management and long-term policy planning. Governments should take into account relevant international regulatory settings when formulating regulatory proposals to foster global coherence" (draft under discussion). OECD will be further exploring how to share national best practice in this new workstream of regulatory governance.
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