jump to navigation

what happens to better regulation now? September 5, 2007

Posted by Bradley in : Uncategorized , trackback

Charlie McCreevy, a champion of better regulation, comments on the state of the financial markets and implications for regulation:

The interconnectivity of markets shows how important it is to have a globally convergent approach to regulation, with sound prudential rules and proper investor protection standards. It makes the Commission’s regulatory dialogues with the US and other jurisdictions even more critical. High standards of regulation are necessary throughout global financial markets – given the spill-over effects.

But:

What we need are clear, robust methodological rules and principles, rigorously applied, and a much deeper understanding by investors of the uses and limitations of ratings and their reliability or otherwise. The scope for conflicts of nterest to influence ratings must be firmly addressed. Of course adequate due diligence from other market players is also essential. Where was it? Were firms, and the professionals they employ, constantly and objectively assessing the quality of the instruments they were buying and selling and the risk implications of the structures of those instruments? Or were they just assuming? Did they stop and consider the validity of the underlying assets, the fraud risks, the track records of the originators and the trends in the markets? Did they question the ratings themselves and did they have access to the necessary data — both qualitative and quantitative to do so? I hope that the Boards of all financial firms will examine their actions and draw appropriate conclusions. We believe that “light touch”, principle-based regulation is the best approach for the financial sector. It has proven its value. But we need to remain vigilant and draw lessons. All parties need to take their responsibility — and take it seriously.

Just last year the Commission concluded that not introducing EU rules for regulating rating agencies was consistent with better regulation:

Following the request by the European Parliament, the Commission has considered very carefully whether or not fresh legislative proposals are required to regulate the activities of credit rating agencies.
Its conclusion is that at present no new legislative initiatives are needed. One of the central principles of ‘Better Regulation’ is that legislative solutions should be applied only where they are strictly necessary for the achievement of public policy objectives. The Commission believes that the case for new legislation in this area remains unproven.

In 2006 the Commission concluded that self-regulation was working:

Recent market developments show that several credit rating agencies have set up their own Codes of Conduct
along the lines of the IOSCO Code which proves that the latter provides a useful set of standards for self-regulation of the credit rating industry.

It’s not clear why adoption of standards by firms proves that the standards are useful standards for self-regulation. Meanwhile, CESR is in the process of consulting on structured products and Credit Rating Agencies (deadline for comments is 10 September).

Comments

Sorry comments are closed for this entry