By John D K Lawrence AIB, Superintendent, TCI Financial Services Commission

This Latin quotation is to be found in one of Juvenals Satires. The original context highlighted the problem of hiring guards to prevent infidelity amongst women, when husbands were out of town. The modern challenge more likely to avoid the assignment of a fox to guard the henhouse.

So who will "guard the guards themselves" and why do we need guards in the first place? The financial industry has experienced substantial cross-border growth in recent times, involving businesses, for the most part, that are solid and well managed. However, as we know, even solid businesses can trip up from time to time and not all international growth in financial services comes from the blue chip company. A growth environment also enables individuals of less scrupulous character to take advantage of opportunities to defraud, either deliberately or through mismanagement, unsuspecting members of the public through sophisticated techniques for carrying out financial fraud or they may exploit laws and practices of one country in order to hide their identity from the authorities in another.

If there were no guards (let us refer to them as regulators since the context is financial regulation) expansion of international financial fraud could go unbounded. What about "Caveat emptor", you may ask? Well let the "buyer beware" indeed. However to rely entirely on this solution would be a simplistic answer to what is a complex problem. Current thinking is to allow professionals within the industry to be "aware" but not the public at large. The world has seen too many examples of innocent, well meaning and even sophisticated investors being defrauded of some or all of their life savings, either through wilful intent, wilful blindness or through sheer incompetance.

What do regulators need to do to ensure the financial services world is a safer place for all concerned? The Economist had this to say at the time of the Barings collapse: "International regulators also need to work together more closely. British regulators have received only the scantiest of information form the Monetary Authority of Singapore, the country's bank regulator, even after the collapse. Yet domestic lead regulators, whose task it is to oversee the entire position of their charges cannot do their job unless they keep in touch with banks' activities in other jurisdictions. In this respect regulators seem to have gone global less rapidly than all their charges..."

This clearly focuses on the perceived need for better regulatory control and improved regulatory cooperation. What is therefore Regulatory Cooperation, also known as Gateway Legislation, and what does it set out to receive?

Regulatory Cooperation is exactly what is says and what the Economist refers to above so aptly. It is regulator in Jurisdiction A cooperating with regulator in Jurisdiction B in respect of i) a financial institution applying to operate a cross-border financial services business or ii) one which is already operating in both jurisdictions. From this arises the need to obtain appropriate exchange of information which allows the regulators involved to improve their information base and thereby to do their regulatory job more efficiently. If the Bank of England had been better informed about the activities of Barings in Singaport, there would have probably been a different outcome.

The crucial point in all this is that the regulator of the jurisdiction where the mind and management of the financial institution resides needs to be aware of all the parts that make up the whole in order to understand the whole itself. This was precisely the problem with BCCI and which gave rise to the Basle Committee concept of home and host regulators in the banking industry.

What information needs to be disclosed in regulatory cooperation? There is no one answer to this question. Each case will be different depending on the type of cross-border activity, the type of company involved and what normal regulatory information is already to hand. The basic answer, however, is information which allows the international regulator to do his job effectively and to be able to preempt problems before they arise rather than having to pick up the pieces afterwards. Sadly, there are too many cases of the latter situation happening. What about confidentiality? Confidentiality is both important and sensitive. It is well known and recognised that many offshore jurisdictions are able to develop successful offshore industries by competing on various levels, one of which is confidentiality. This must be respected. However, confidentiality must never be an excuse to hide fraudulent activities, where the public is put at risk. The fraudster has an ability to latch onto activities which are unregulated and to use jurisdictions where regulation is lax or licences can be readily obtained. Thus gateway legislation is precisely what it says. It creates a gateway for genuine regulatory disclosure through existing confidentiality laws.

Typical gateway legislation in banking, insurance, mutual funds, i.e. financial services which are being offered to the public, will be as follows:

1) Restrictions on disclosures of any information i.e. confidentiality, will be clearly stated and penalties for unauthorised disclosure detailed.

2) An exception, i.e. gateway, to these restrictions will allow the regulator to disclose information to another regulatory body, for example a banking regulator who has a bone fide regulatory need to obtain such information.

3) The information will only be used for a regulatory purpose such as securing compliance with or enforcing a legal or regulatory requirement.

4) Any regulatory information given must remain confidential and can not be disclosed to a third person.

5) The above points 3 and 4 may be expanded to include written assurances on further disclosures, written reasons for requesting information, the nexus in the jurisdiction of the enquirer to the jurisdiction of the enquiree etc...

The banking industry has largely taken on cross-border regulatory cooperation through the Basle system of home and host regulator, already mentioned. The Barings episode, however, would seem to indicate that there are still some improvements to be made.

The insurance regulatory industry, particularly through IAIS, also recognises that the major concern of monitoring the financial soundness and strength not only of major insurance companies in their cross-border activities, but also of re-insurers, who will be operating in many cases in another jurisdiction to the insurer. These issues are currently being addressed by IAIS.

What problems of regulatory control face the industry? In the first instance, one has to recognise that the world is made up of jurisdictions at different stages of development with different underlying philosophies, goals and laws, particularly on the type of information which can be disclosed. Some markets are integrated internationally, such as Europe while other markets remain single.

Problems will arise where exchange of information needs to take place between jurisdictions of differing confidentiality regimes, where certain types of information in one jurisdiction may be in the public domain but are treated as confidential in the other. This will also give rise to the need for reciprocity between jurisdictions. So-called "fishing expeditions" to obtain general or specific information, dressed up as a standard regulatory enquiry, may go well beyond what regulatory cooperation is really about. The regulator will therefore need to be vigilant in his understanding of the industry and in the charges under his care to ensure that requests for regulatory information are exactly what they say they are. Finally, there is the delicate problem of outward disclosure. Once the information becomes extra-territorial, there is little that the giver of information can do to prevent unauthorised disclosure to third parties e.g. tax authorities. At best he must rely on knowing this counterpart regulator, the underlying reason for the need to exchange information, and the legal restrictions which will bind the recipient of information not to disclose to an unauthorised third party.

It will be a question of "Caveat Regulator".

Let us return to Juvenal who, perhaps unwittingly in another Satire, gave the reason behind the need for regulatory cooperation. He said "Onde habeat quaerit nemo, sed oporter habere" Where you get if from, nobody asks, but have it you must. The answer to this conundrum is of course money.

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