International Standard-Setting Bodies Face Political Headwinds, say Senior Regulators

International standard-setting bodies for financial regulation could find it harder to achieve their intended results in future as political movements threaten to remove the consensus such bodies need to operate efficiently, officials said. 

Ashley Alder, chief executive of the Securities and Futures Commission ("SFC") in Hong Kong and chairman of the International Organization of Securities Commission ("IOSCO"), said he was concerned the direction of travel was away from a consensus regarding global standards.

"I think it is a challenge, not least because standard-setting bodies don't have a clear legal foundation," he told the Asian Financial Forum in Hong Kong on 16 January. "They're not treaty-based organizations, so they do require a huge amount of political consensus and support to operate properly."

Nearly 10 years since the financial crisis there was no longer a sense of urgency underpinning the consensus, he said. 

Political events such as Brexit and the protectionist and deregulatory policies attributed to President-elect Donald Trump have threatened to disrupt the work done by international standard setters such as IOSCO and the Basel Committee on Banking Supervision. In addition, the implementation of some regulations on a global scale has been held back by disagreements, such as that between U.S. and EU regulators on oversight of derivatives regulation. 

Lack of Consensus

Andrea Enria, chair at the European Banking Authority ("EBA"), said a lack of consensus was evident in the European Parliament, where MEPs have increasingly challenged decisions regarding the Basel III capital regime for banks. This had to some extent been driven by the impact on taxpayers from the rescue of several European banks during the crisis, he said, which made banking regulation "politically sensitive". 

Enria, a panellist with Alder at the forum, said increased transparency and accountability were vital to maintaining the importance of the standard-setting process. 

"With the experience we have had in Europe with the establishment of the EBA, I think we need to rethink the governance and decision-making processes," he said. "We need to have international standard-setting bodies which are able to decide also in the presence of disagreement."

As such, a decision-making process based on reaching consensus was "probably not the best way forward", he said. 

"In Europe we moved from consensus decision making, committee style, to authorities which have majority decision making and the 'comply-or-explain' mechanism," he said. "We need to show the ability of these bodies to decide and then to challenge authorities and make sure the standards are actually enforced." 

Enria said to see whether this process was feasible, achieving agreement on recovery and resolution for banks would be the main challenge. Without this a banking crisis could cause capital and liquidity to be trapped in individual jurisdictions, leading to a major disruption of cross-border activities.

"We need to put effort into achieving good agreements … that allow a positive interaction on a cross-border basis in cases of crisis," he said.

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North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.