Dovetailing Regulation - Securities and Banking Update May 2005

The FSA’s Gay Huey Evans is one of the best known of the UK regulators in her role of Director of Markets. What is less widely appreciated is her international role as chair of the body known as the Joint Forum. Indeed many have no idea that there is a joint forum, nor who are its members, nor what it does. Here in an interview with Anthony Hilton, Gay Huey Evans answers these questions and talks about the work programme and the issues being tackled by her committee.

The Joint Forum is the only international regulatory body looking across all financial sectors. Members include representatives from Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Switzerland, the UK and the US.

As well as representing their national jurisdictions, members represent the international regulatory committees that are sectorally focused. These are:

• The Basel Committee, which was established in 1975 and brings together banking supervisors from the G-10 countries (plus Spain and Luxembourg.)

• The International Organization of Securities Commissions (IOSCO), which was created out of the inter-American regional association in 1984, when securities regulators from France, Indonesia, Korea and the United Kingdom joined.

• The International Association of Insurance Supervisors (IAIS) which was established in 1994 to represent insurance supervisory authorities of some 100 jurisdictions.

Financial regulators have been co-operating internationally for many years. This co-operation initially focused on specific financial sectors, in line with the three sectoral committees – banking; securities and insurance – just mentioned.

But just as national regulatory structures have changed over the years, so the international committee structures have had to evolve. The growing importance of issues related to financial conglomerates, which straddle more than one sector, led first to the formation of a Tripartite Group in 1993. It brought together 25 supervisors from different sectors and countries. It came up with a workable definition of a conglomerate and assessed the main supervisory consideration relevant to conglomerates supervision.

The success of this project led to the formation of the Joint Forum at the end of 1995, with thirteen countries represented and an equal number of representatives from each sector.

Although the Joint Forum’s original mandate focused specifically on financial conglomerates, it soon realised conglomerates were not the only issue that required cross sectoral attention. There were many others that cut across all the sectors. As a result in 1999 the mandate was broadened to look at issues of common interest to all three sectors.

Thus in the broadest sense, the Joint Forum’s objectives are to bring together national regulators from across all sectors to look at:

i) Issues of common interest to all the sectors (banking, securities and insurance).

ii) Issues relating specifically to financial conglomerates.

Within these categories, the Joint Forum has wide ranging responsibilities to look at issues around risk management, corporate governance, operational risk or disclosure. For those who are really keen, you can view the specifics as outlined in the mandate online at ( http://www.bis.org/bcbs/jfmandate.htm) At another level, the individual objectives of the three sectoral committees are necessarily embedded within the Joint Forum's remit. To paraphrase, this encapsulates consumer protection, identification and mitigation of systemic risks, drawing up of international standards of regulation and co-operation between countries.

Finally, the Joint Forum is tasked with co-operating with other international bodies on issues where it shares a common interest.

The current work programme is particularly exciting and is moving rapidly. Co-operation with other international bodies was mentioned just now. The Joint Forum's recent report into the credit derivatives market is a useful case in point. The report was requested by the Financial Stability Forum, the high level group of officials from central banks, regulators and finance ministries, established after the Asian crisis in 1999 to think about risks to the global financial system. The FSF noted during their regular assessments of vulnerabilities in the financial system the potential risks arising from the growth of the Credit Risk Transfer (CRT) market. The Joint Forum investigated and reported back, outlining some reasons to take comfort, but also some areas of ongoing concern including the high number of unconfirmed OTC credit derivative transactions. To address these risks the report contains a host of recommendations for firms' risk management and disclosure practices, as well as regulatory approaches, which are being taken forward by regulators and industry. (If you want to read the report please see http://www.bis.org/publ/joint13.pdf) The Joint Forum also recently completed a paper on outsourcing in response to the growing trend for outsourcing functions and for outsourcing off-shore. The objective was to produce a high level set of principles relating to outsourcing that would apply across borders as well as across sectors. The risk with such an approach is that you end up being so high level the output is meaningless. We think we overcame this risk by providing a meaningful base-line of issues that all firms should consider. Our case studies illustrated that even big firms sometimes let seemingly straight-forward risk management issues slip! At the same time we worked closely with other committees, notably IOSCO, who have developed a more detailed set of principles specifically aimed at securities regulators. What this demonstrates is that the Joint Forum's value added is in creating the consistency across sectors and countries. It cannot and does not, at the same time try and answer all questions for all individual circumstances.

In a similar vein the Joint Forum is currently creating a set of high level international principles related to business continuity. Many jurisdictions and firms have been giving careful thought to business continuity plans in recent years. In this context international regulators felt the provision of some high level principles would help guide consistent best practice across countries and sectors. As in outsourcing, this would not preclude others adding more detail, but does help establish the minimum requirement, creating certainty for firms and regulators in their early stage thinking about business continuity.

We have other work streams in train at present but it would be indiscreet of me to go into too much detail when we are not clear where they will end up.

The Joint Forum is part of the global financial architecture. As outlined above not only does it bring together the three standard setters (Basel, IAIS, IOSCO) that establish global regulatory standards in banking, insurance and securities regulation but it also co-ordinates where appropriate with bodies such as the IMF and FSF.

Still, it is equally important that as a global body it communicates with key regional bodies such as the regulatory bodies established in the EU. CESR has existed for some time and CEBS and CEIOPS have recently been established. There are obvious informal links, because many of the participants in the Joint Forum are European and so interact with the EU bodies. But we have also ensured that more formal links are established where there are issues of common interest. So for example, several meetings were held with representatives of the EU bodies on outsourcing to ensure everyone knew what was going on.

Of course, it is important to remember that the EU bodies are dealing with legislation that will work its way into national law. The global bodies are establishing voluntary best practice.

There are a range of papers on the websites which serve as testimony to the Joint Forum's achievements. The CRT report referred to earlier is a particularly good read on a relatively complex subject. But I also like some of the older ones, such as the 2001 comparison of the core principles between different sectors. That publication is essential reading if you want to understand the basic approaches of the different sectoral regulators. Or the original papers that broke ground in setting out issues for conglomerates.

Some even claim that that early work was the inspiration for the EU's Financial Conglomerates Directive. I don’t know if that is true but they have certainly been influential in many people's thinking about conglomerates. More generally I think the Joint Forum's real achievement lies in its ability to bring different regulators together and find common ground where in the past there have been mainly differences.

A key challenge for the Joint Forum lies in persuading others of the benefits of a crosssectoral approach. There is value in having specific issues dealt with on a sectoral (or national) basis. But this does not preclude the usefulness of a degree of consistency across sectors and across countries. The Joint Forum also operates with minimum resources and relies on national authorities for most of the work. As you can see we have produced excellent papers, but each time we do struggle against competing priorities within national authorities.

Finally we are acutely aware of overburdening industry. Treading the line between engaging industry and overburdening them is hard. So far I think we have it right. So we only undertake surveys etc. when absolutely necessary. We consult on our proposals as widely as possible, but try to give adequate time and channels for feedback. For example we held an industry round table to discuss our proposals on credit derivatives.

Definitely look out for the Business Continuity Principles, which we are expecting at the end of this year. But look also for work on current pressing issues. The Joint Forum tries to pick up issues that are relevant and timely. So for example, if I were to guess, I would say liquidity is one of the issues that cuts across sectors and is increasingly coming to the fore. But I wouldn't like to speculate on what the Joint Forum will produce.

 More generally, you can expect the Joint Forum to continue to pull together supervisors from across countries and across sectors, to co-operate and consider where a more consistent approach is desirable and necessary and can benefit regulators and the regulated community.

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