Inter-jurisdictional Regulatory Recognition – Facilitating Recovery and Streamlining Regulation
A report from the EU-US Coalition on Financial Regulation
In 2005, a group of transatlantic trade associations in the financial services sector established the EU-US Coalition on Financial Regulation to encourage governments and regulatory authorities on both sides of the Atlantic to progress inter-jurisdictional regulatory recognition and exemptive relief on the basis of regulatory compatibility and, where possible and appropriate, rules’ convergence. The overall objective was to facilitate customer choice and market access and establish a more coherent framework for the effective regulation of cross-border financial services business.
This reports updates and expands on the Coalition’s earlier pre-crisis reports by emphasising the importance of exemptive relief and regulatory recognition (whether unilateral, bilateral or multilateral) based on common regulatory values and shared outcomes (and the need for targeted rules’ standardisation where either (i) there is insufficient approximation in rules’ outputs to facilitate recognition; or (ii) standardization or convergence would deliver regulatory coherence, efficiency , cost-effectiveness and tangible benefits to business.
The Coalition recognizes entirely that regulatory authorities must be able to engage in confidential regulator-to-regulator dialogues, but believes also in the importance of a separate dialogue being maintained with industry participants (both the sellers and consumers of financial products and services), market infrastructures and their representative bodies in order to ensure that the commercial and business benefits alongside the regulatory benefits are given due consideration.
The conclusions reached in this paper are the result of a process of consultation with all the industry associations who are members of the Coalition and major firms that are particularly engaged in transatlantic financial services business.
See the Coalition’s press release, “Transatlantic Trade Associations Call for Urgent Re-Engagement on the Pre-Crisis Dialogue on Regulatory Recognition and Accreditation (June 19, 2012).”
Excerpt
Introduction
Transatlantic relationships are largely founded on common commercial and political goals and values, and upon the free-flow exchange of ideas, persons, products, services and technology. In financial services, these linkages are evidenced by the increasingly transatlantic nature of capital and derivative markets as evidenced by market statistics. The U.S.-EU economic relationship dominates the world economy by the sheer size of the combined economies. The combined population of the United States and the EU members approaches 800 million people who generate a combined gross domestic product (GDP) that is roughly equivalent to 40% of world GDP in 2010. Combined EU and U.S. trade accounts for over 47% of all world trade. Together, the two regions account for 80% of global financial services business. Indeed, a large part of the prevailing framework of regulation in financial services in Europe, Canada, Australia, Switzerland and many other jurisdictions is built on the original regulatory approach of the US authorities.
Unfortunately, despite the good work of a number of international groups (e.g. the informal transatlantic Financial Markets Regulatory Dialogue (FMRD) and the more formal harmonization of standards and principles, particularly by IOSCO), the rules, processes and priorities of regulatory authorities continue to be largely geographically based and governed by differentiated national laws. This has resulted in a complex and costly meld of duplicative and sometimes conflicting regulations and processes, which sit uneasily with the increasingly global nature of financial markets and services.
Prior to 2008, perhaps not surprisingly, there was broad consensus between regulators and firms that international co-ordination was a necessary part of improving the efficiency and effectiveness of the regulation of cross-border financial business and services. This is as true today as it was then. The difference is that prior to the crisis the general belief was that regulation was broadly effective, and the challenge was to make it more efficient. After the crisis, the general belief is that regulation needs to be made more effective as well as more efficient. The “three gateways” of exemptive relief to avoid duplication of effort, mutual recognition to enable regulators to rely on each other in terms of extraterritorial actions and supervision, and cross-border harmonization of key rules all have a continuing part to play in delivering this outcome. This will enable customers to benefit from being able to exercise more choice and to better negotiate a reduction in their “pass-on” costs; compatible regulatory authorities to work together more efficiently and for firms to carry on their cross-border business with more coherent compliance and less legal risk.