Regulators and businesses must communicate more effectively and engage in a common sense dialogue to lead global financial regulation into the right direction in 2010, the Association of Chartered Certified Accountants states in a new policy paper.
The paper The Future of Financial Regulation – An Update follows an initial analysis that was published by the ACCA in June 2009 to contribute to the debate on the consequences of the financial crisis.
Both papers set out a number of principles which should guide the design and implementation of any effective regulatory framework, according to the organisation.
The updated paper takes into account the various legislative initiatives that have been launched in the US and Europe since June 2009.
Like the initial paper it stresses that while there appear to have been failures in terms of financial regulation and supervision, the ACCA believes that the credit crunch was more a failing of governance and ethics than of regulation per se.
The ACCA therefore calls for better ethics training for directors, the implementation of a US style consumer protection agency in Europe and the need for company boards to upgrade their risk management functions.
Ian Welch, ACCA’s head of policy and co-author of the report, said: ‘We need to see specific proposals to turn the G20’s stated pledge to see integrity in financial institutions turn into reality. The way to do this is for both businesses and regulators to agree on ways to instil and implement ethical business codes in our financial and corporate sectors. Buy-in from both sides is the key to achieving successful regulation.
‘The risk is that if this is not achieved, governments could lose patience and impose a framework of strict and detailed regulations rather aiming for than a balanced and common sense business environment,’ he added.
The paper states that the role of non-executive directors needs to be strengthened to be able to exercise oversight functions in large banks.
The ACCA paper aims to support the discussion of what lessons can be learned from the financial crisis by laying down guiding principles for future regulation in terms of the purpose and structure of regulation, competition, governance, risk management and capital funding.
John Davies, the other co-author of the report and ACCA’s head of business law, said: ‘It is still too early to give a definitive view of the regulatory landscape as proposals are still being consulted on at national and global levels. The debate will go on way into 2010. But some of the key points made by ACCA have been followed, notably on the welcome maintenance of national supervision as the bedrock of regulation.’
He emphasised the importance of an effective dialogue between the regulators and businesses.
‘Speculation earlier this year about the introduction of some sort of ‘super-regulator’ has remained, mercifully, just that. The connection between regulator and regulated must be maintained, which is why we also have concerns about the proposed pan-EU regulatory architecture – co-ordination and best practice sharing is good, but remoteness is not,’ Mr. Davies said.
With regard to bank regulation, the ACCA is attracted to the idea of reintroducing a form of the Glass-Steagall Act, which in the US separated deposit-taking commercial banks from the perceived riskier investment banks.
Its principles are sound because it ensures clarity of purpose on what regulation is intended to achieve and puts consumer protection first, the paper said.
In addition the ACCA criticised the policy of supporting institutions that are deemed too big to fail in order to protect the financial system against systemic risks.