28 September 2009

September 2009

Graham Bishop's Personal Overview:

The G20 summit in Pittsburgh ushered in – or re-enforced - a period of sweeping reforms for the financial system in terms capital, liquidity, remuneration policies and, ultimately, resolution of failed banks. The Leaders imposed tight deadlines for action – the longest being 2012. They also specified a future cycle of annual meetings and G20 as the “premier forum” for these issues, with the FSB as the monitoring body. Looking ahead to the eventual impact on the structure of banking, the phrase “Standards for large global financial firms should be commensurate with the cost of their failure” suggests that the extra capital that will be required of systemically important banks will provoke a market pressure towards smaller banks. In the EU, the Commission’s competition policy may well work in exactly the same direction.

EU Heads of Government caucused in Brussels beforehand to agree their common position and appear to have met all their key goals, including a commitment for all G20 members to implement Basel II – by 2011. G20 Finance Ministers also met earlier and agreed to tackle remuneration practice, and the Leaders fully endorsed the FSB’s specific implementation guidelines on the governance, structure and disclosure of compensation.

Detailed accounting issues loomed surprisingly large for such a high-level political process as they featured in the Communiqué with a call to complete the convergence project by June 2011. The FSB welcomed the steps taken by accounting standard setters to address weaknesses in existing standards and the enhanced dialogue between the IASB, prudential authorities and market regulators on financial institution reporting issues. The IASB Trustees wrote to G20 supporting these calls but entered the caveat of “recognising the IASB’s commitment to investors as the primary users of financial information...” There may well be growing debate about exactly what these standards are to achieve as accurate financial information is the foundation of any financial market and other uses should only be co-incidental, rather than the main purpose.

Meanwhile, the competent authorities in the US and EU were also producing their own proposals for detailed action. The US Treasury set out its core principles to reform the international regulatory capital and liquidity framework so global banking firms must be made subject to stronger regulatory capital and liquidity standards that are as uniform as possible across countries. The European Commission adopted legislative proposals to strengthen financial supervision in Europe. These provide the detailed legislative package that implements the De Larosière group’s proposals – following the amplification by successive European Council meetings.  There were no surprises in the press release to create a European Systemic Risk Board (ESRB) to monitor and assess risks to the stability of the financial system as

a whole("macro-prudential supervision"). The second pillar is the European System of Financial Supervisors (ESFS) for the supervision of individual financial institutions ("micro-prudential supervision"), consisting of a network of national financial supervisors working in tandem with new European Supervisory Authorities. However, there are 259 pages of detailed legislative changes to implement these and the devil could easily be in the detail!

The proposed AIFM Directive continues to cause great furore and Commissioner McCreevy argued that proposal is proportionate in the requirements it imposed. The Swedish Presidency helpfully published some notes on the first meetings of the Council Working Party. These identified a number of key issues in the AIFM proposal that need to be addressed, noting that there are indeed provisions in the proposal which, from a technical point of view, do not seem relevant for all funds, especially those without redemption rights. Here changes can be made within the specific articles by further specifying their scope of application. MEP Rasmussen – a leading protagonist – also argued during a visit to the lion’s den in London that “the answer to the one-size-fits-all criticism…is OK, let's look into the directive; let's try to take care of it inside the directive. But any argument saying 'We have to stay outside'; I don't think there's a majority for that." But a sizeable amount of common ground appears to be emerging and the tightest possible timetable for discussion in the European Parliament means a Report by December, ECON Committee vote in March and Plenary vote in July – assuming that it can be done at First Reading. 

Recently attention has focussed on financial regulation but the interests of consumers are likely to come to the fore from 2010 onwards.  In particular, the full introduction of SEPA from this November opens the way to a genuine single currency for consumers and SMEs so that cross-border payments will be simple. The Commission presented a roadmap to make SEPA a success, identifying actions, actors and deadlines. The Communication, in line with the view of the ECB, presents a series of actions to be undertaken by EU and national authorities, industry and users over the next three years. However, European business and consumer organisations are warning that plans to create a Single Euro Payments Area (SEPA) are doomed to failure unless payment systems end users are more widely consulted but Finextra and Accenture surveyed nearly thirty major EU and found they are confident of complying.

However consumers may be reluctant to take full advantage of these facilities if they fear they cannot make an informed decision on the products. So Commissioner McCreevy called for action to be taken at EU level on responsible lending and borrowing as irresponsible lending does not just have an impact on individual borrowers and households; it also poses a much wider challenge to the financial system and to society as a whole. But EUROFINAS argued that the Commission should wait for the Consumer Credit Directive to be transposed, implemented and tested before rushing to new legislation.

Graham Bishop

© Graham Bishop