The Convergence of International Regulations 

International

The Convergence of International Regulations

Issues and observations on the worldwide convergence of governance and reporting standards.

FROM: NOV-DEC 2006 ISSUE | BY RAMONA DZINKOWSKI

The convergence of regulatory rules by standard setters around the globe suggests that the business world is becoming an increasingly smaller place. While many would agree that one set of international standards is, for the most part, a good thing, many are concerned over the nature of regulatory convergence, political influence over the process, and whose view, if any, will dominate the standard setting agenda.

Recent merger activity between U.S. and other international capital exchanges has fuelled this debate. Despite Securities and Exchange Commission (SEC) announcements that it has no intention of extending its regulatory control into countries beyond its borders, some have suggested that a merger between a U.S.-based exchange and Euronext, Europe's first cross-border exchange, might nonetheless lead to the adoption of tough Sarbanes-Oxley corporate governance rules in Europe.

Dirk E. Witteveen is Chair of the Joint Forum, which addresses issues that arise from the continuing emergence of financial conglomerates and the blurring of distinctions between the banking, securities, and insurance sectors.

In this conversation, Witteveen comments on the nature of international convergence of governance and reporting standards.

CGA Magazine: What, in your view, are some of the regulatory challenges associated with a merger between U.S. exchanges and international securities exchanges?

Witteveen: The main issue is that bigger mergers have a large impact on society. Bringing together two big institutions which are important in different jurisdictions is always a challenge from a regulatory point of view. What supervisors should not do is to make it impossible. In my view, regulators and supervisors should take a back seat. Their role is to provide a framework ensuring a degree of security to society. If you can't find a one-size-fits-all solution, you are bound to end up with a more complicated patchwork that will require even closer cooperation between supervisors.

CGA Magazine: Do you see that, given its size and uniform business culture, the United States could likely dominate on the international regulatory front?

Witteveen: I feel a bit uncomfortable with the tension that is implied by this line of argument. It defines the situation in terms of a competition, like the Tour de France or the World Cup. But it's not about who's going to win or who's going to dominate. I think, in essence, we all realize that in the interest of a stable world economy, you can never find a solution by imposing your own rules and throwing out those of others.

CGA Magazine: Can you describe the current trend toward international regulatory convergence, perhaps drawing upon the experience and challenges in the financial services sector? Which are the most predominant influences?

Witteveen: The question is even more important than you may imagine. One of the big issues of convergence is that, all over the world, people are trying to find ways to keep the regulatory burden within limits, without compromising the quality of supervision. The second big issue is that of principles-based versus rules-based supervision. Principles-based supervision, which emphasizes the underlying aims and objectives of supervision, has been gaining ground in recent years. At the same time, there is also a growing trend toward a risk-based approach to supervision.

CGA Magazine: What have some of the competition-distorting impacts been as a result of different regulatory regimes?

Witteveen: There are huge differences between industries like banks and insurance in different countries. All such differences, to the extent that they influence your financial situation, can be said to be distorting.

CGA Magazine: Do you see an eventual convergence or unification of the regulatory bodies themselves given the nature of conglomerates in the financial services sector?

Witteveen: In Europe and in Canada we see a trend toward integrated supervisors. This leads to a degree of convergence in regulation, but one should not overestimate the speed of this development because it's a slow and cumbersome process. In the United States you have another supervisory landscape with state-wide insurance supervisors — more than 50 of them. Banking supervision is organized differently in Europe, but even within Europe we face a multitude of directives and regulations. In the meantime, we are trying to implement new solvency rules for the insurance sector, and then we're trying to integrate more detailed conglomerate issues. However, if you see where we are today compared to where we were five years ago, there has been quite an amount of regulatory convergence and I expect this will continue because the forces of the market will require it.

CGA Magazine: We see the influence of politics in the United States on the development of U.S. GAAP and SEC regulations. Do you see the same influence emerging in the E.U.?

Witteveen: It is like a pendulum moving one way, then the other. I think in history there have always been periods where the trend was to have more political pressure on supervision and toward independent institutions. Next, the pressure ebbs and the trend shifts toward greater independence for supervisors. The important thing is that whether you look at the principles of banking supervision, the Basel Accords, or whether you take IOSCO's principles of securities supervision or the IAIS core principles of insurance supervision, they all start from the same basic concept: that supervisors should be strong and independent. And if these core principles are observed, there will also be accountability. If political pressures run too high, threatening that basic concept, this would be answered by a strong warning from the International Monetary Fund (IMF) and the World Bank. Of course, it is always a bit of a struggle with independent authorities. You have to prove every year that you deserve your independence.

CGA Magazine: From time to time, we see tensions emerging between the Financial Accounting Standards Board (FASB), the SEC, and the Public Company Accounting Oversight Board (PCAOB). Do you see similar tensions emerging in the E.U. with respect to the different regulators?

Witteveen: I think that progress without tension is almost impossible. From time to time there's a bit of tension and a bit of pressure. It's all just part of the game.

CGA Magazine: Do you see closer links evolving between the standard setters such as the International Accounting Standards Board (IASB), the SEC, and Basel to try to coordinate a unified view on some of the more pressing and perhaps contentious issues such as fair market valuation?

Witteveen: In fact, yes. There has been an enormous amount of discussion, but there's a limit to resources. The main bodies cannot continue talking forever. They have to get work done as well. However, looking back, the speed of developments is quite remarkable given the complexity of the issues.

CGA Magazine: Do you have any advice for financial strategists with respect to how regulations will evolve and what they can expect in the next few years?

Witteveen: I'm afraid it's technically impossible to see that far ahead. The whole landscape is in flux. Developments move two steps forward and one step back in the general direction of convergence. I think that the international trends at the moment are to try to reduce administrative burdens and to move toward more principles-based and risk-based approaches to regulation. By their very nature these trends will lead to regulatory convergence and more common standards.

CGA Magazine: Do you see any political forces at work arising from fundamental differences between the U.S. business and political climate, and those environments in other major capital markets?

Witteveen: We should not overestimate such differences. They are quite normal. Politically, it's not going to be the case that you wake up one morning and find the regulatory world has changed overnight. In history, the biggest abrupt changes have been combined with wars and that is clearly what we don't want. Developments today can be described more accurately in terms of evolution than revolution. In a sense these developments are inevitable and inescapable. The interesting thing for me is not in the differences between countries and their business climates and outlook, but in the similarities and how we can bring them together.

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Ramona Dzinkowski is a Canadian economist and award-winning business journalist living in Toronto.