FSB releases international standard adherence framework

On 9 January 2010 the Financial Stability Board announced a new framework for adherence to international standards.

The FSB, re-established at the initiative of the G20 in April 2009, comprises senior representatives of national financial authorities, including central banks, supervisory authorities and ministries of finance, and has been mandated with the development of regulatory, supervisory and other policies to ensure financial stability.

The FSB says it aims to foster a race to the top with its new framework and is in the process of finalising procedures to encourage all countries and jurisdictions to raise their level of adherence to international cooperation and information exchange standards.

This process will include the identification of non-cooperative jurisdictions.

The FSB stated that the initial focus of its efforts will be on countries that could pose a risk to financial stability because of their importance in the financial system and their weak adherence to the relevant standards.

Financial importance will be determined on the basis of several economic and financial indicators that are very likely to apply to the Cayman Islands.

They consist of domestic financial assets and gross capital flows, both in absolute terms and relative to national GDP, and external financial assets and liabilities.

In addition the global market share of a jurisdiction in cross-border interbank assets, pension fund assets, hedge fund assets based on the location of the manager and the legal domicile of the fund, over-the-counter derivatives markets and insurance premiums will be taken into account.

Countries that are important to the financial system will then be evaluated against three regulatory and supervisory standards: the Basel Core Principles for Effective Banking Supervision, the IAIS Insurance Core Principles and the International Organisation of Securities Commission’s Objectives and Principles of Securities Regulation.

The FSB will obtain the compliance information mainly from International Monetary Fund and Worldbank reports on the observance of standards and codes and financial centre assessment programmes. These assessments will be complemented by a peer review process for FSB member countries.

Compliance with the large majority of these principles and standards should not pose a major issue for the Cayman Islands.

The Cayman Islands was formally admitted as a full member of IOSCO in March 2009.

A December 2009 IMF assessment of financial sector supervision and regulation in the Cayman Islands stated the regulatory framework for the investment funds and securities market of the Cayman Islands exhibits high levels of implementation of the IOSCO Principles.

Of the 30 IOSCO principles for securities regulation, the IMF assessed 17 principles as ‘implemented’ or ‘broadly implemented, 8 as ‘partly implemented’ and only 1 as ‘not implemented’, with 4 principles being ‘not applicable’.

The IMF assessed Cayman’s banking supervision as ‘compliant’ or ‘largely compliant’ with all 30 recommendations included in the 25 Basel Core Principles for Effective Banking Supervision.

Of the 17 IAIS Core Principles, the IMF assessed 11 as ‘observed’ or ‘largely observed’ and 6 as ‘materially non-observed’. This non-observance was due to either a lack of staff to carry out the implementation or a lack of documentation of rules or practices.

However, the IMF assessment also warned that ‘in the current environment, when heightened concerns have been expressed about ‘secrecy’ jurisdictions, it becomes crucial, particularly for an OFC, that continued effort be made to both being cooperative and being seen to be cooperative’.