Financial Services and International Regulatory Co-Operation

In June 2017 we commented that significant changes are being introduced to the existing Anti-Money Laundering (AML) framework on both sides of the Atlantic – but cross-border regulatory co-operation in financial services is not restricted to AML. Increasing international co-operation is becoming evident across all regulatory aspects.

In Q1-17, the IMF released the following[1]:

“Financial sector regulation cannot be relaxed. On the contrary it remains more necessary than ever, as does international co-operation to ensure the safety and resilience of global capital markets”

Followed by:

“The core tenets of the new global regulatory regime[2] must be preserved. Continuing co-operation remains essential”

At first glance this may appear to be at odds with the apparent momentum in the United States towards a more relaxed regulatory regime and certainly clashes with Lloyd Blankfein’s arm waving about the Volker Rule….until you look under the covers.

The Volker Rule has been implemented by agreement across five US Regulators[3] and under current legislation, can only be changed via the agreement of all five: this just isn’t going to happen.

Although Keith Noreika, a little known lawyer appointed by Trump as a caretaker at the Office of the Comptroller of Currency, is calling for the Volker Rule to be “eased”, Stanley Fischer, Vice Chairman of the Federal Reserve, formerly Governor of the Bank of Israel, and Chief Economist at the World Bank, is openly hostile to all and any suggestion that any regulatory emphasis in the Financial Services vertical should be relaxed.

Currently there is absolutely no prospect of any Volker Rule “easing”, and with Trump struggling to pass any legislation in Congress at all, it appears that Blankfein and those like him calling for US regulatory change may just have to manage with the status quo.

In practice international co-operation and the tightening of regulatory requirements and standards continues to gain momentum on both a formal and informal basis. Earlier this month[4] the Hong Kong Monetary Authority, the Monetary Authority of Singapore and the South Korea Financial Services Commission emphasised:

  • the need to re-inforce global regulatory co-operation
  • continued revision of existing legal frameworks,
  • expanding co-operation efforts
  • ensuring the implementation of consistent standards

At an informal level, it is becoming apparent that regulator’s tolerance waiting for the financial services sector to address the large number of issues surrounding IT systems that are opaque, excessively complex, inefficient, riddled with manual work-arounds and relying on time-expired hardware and software, is coming to an end.

Fining the banks is not working. This has been tried and the IT problems persist: giving the banks time to bring in consultants, produce a “report and recommendations” and respond with a “strategy” is unlikely to continue as an acceptable response …..

At some stage, regulatory concern is going to be addressed by direct action: either the banks fix their “plumbing” or the regulators will intervene. If this means an area of business activity is closed until the specific bank responds with an IT upgrade, then that may be a consequence of such action.

Do not be surprised if such a precedent is established in 2018….

[1] https://blogs.imf.org

[2] Referring here specifically to the Financial Stability Board – a body established in 2008 specifically to co-ordinate the development of regulatory policy across the international financial markets

[3] the OCC, the Federal Reserve, the FDIC, the SEC and the CFTC

[4] July 2017

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