Regulation and accounting rules under scrutiny

G20 leaders yesterday agreed a package of measures that will shake up the financial sector, including tougher regulation.

The measures announced were listed as:

  • to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
  • that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
  • to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;
  • to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
  • to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
  • to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
  • to take action against non-cooperative jurisdictions, including tax havens.
  • to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards
  • to extend regulatory oversight and registration to Credit Rating Agencies
  • to ensure they meet the international code of good practice, particularly to
  • prevent unacceptable conflicts of interest.

The G20 statement said: “We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November.

Stephen Haddrill, the ABI’s director general, said: “We welcome the G20 statement which made valuable commitments to ensure an open world economy, strong markets and effective financial institutions.

“The important challenge now is for national governments and regulators to follow fine words with sensible measures which ensure effective regulation and prevent protectionism. The EU has a vital role to play here in protecting the single market. The EU and the Financial Stability Forum will need to stick to the principles of modern markets and not try and reinvent older forms of regulation that belong to past eras. The UK and London, in particular, have most to lose if the fine words of today become the shackles of the future. With the ABI’s members controlling 15% of the UK’s capital, the ABI will be vigilant in monitoring how our authorities rise to this challenge.”

The ABI’s specific concerns were:

  • Remuneration - “We welcome the moves to ensure remuneration encourages long-term value creation and does not lead to excessive risk taking. We must stress the need to avoid the possibility of reward for failure. The FSA’s proposals are already aiming to do this. Any new steps to support that can only be good news.”
  • Accounting - “Fair-value did not cause the crisis and any moves to change accounting provisions must recognise the difference between financial data for investors and prudential requirements for regulators.”
  • Cross border supervision - “This renewed commitment of cross-border financial supervision should allow companies to use branches and cross border sales; driving firms into subsidiarisation would be a retrograde step.”