Annual Conference 2011 Financial Regulation in a Global Market: Moving Beyond the State

1. Annual Conference 2011 Financial Regulation in a Global Market: Moving Beyond the State

2. Session One - Panel Two  Financial Services Law: Supervisory Structure – Does it Matter? Chair: Clive Briault, Risk and Regulation Consulting Ltd Speakers: Professor Kern Alexander, University of Zurich Patrick Starkman, AMF, France Nick Weinreb, NYSE Euronext Jane Welch, British Institute of International and Comparative Law

3. Supervisory Structure: Does it Matter? Jane Welch

4. Supervision of Financial Institutions and Markets Financial institutions • Credit institutions (banks, building societies and credit unions) • Insurance undertakings (Life, Non-life and Friendly Societies) • Investment firms (Securities and Derivatives broker/dealers, asset managers • Mortgage lenders and brokers • Collective investment schemes and managers • Operators of multilateral trading facilities

5. Supervision of Financial Markets • Recognised investment exchanges • Recognised clearing houses

6. What do we mean by Financial Regulation? • Macro-prudential regulation – regulation of stability and resilience of financial system • Micro-prudential regulation – firm-specific regulation of safety and soundness • Regulation of firms’ conduct of business • Regulation of markets (including Listing Rules) • Regulation to combat financial crime and market abuse

7. Present Supervisory Structure • Bank of England - statutory responsibility for financial stability • Financial Services Authority( FSA)-statutory responsibility for prudential supervision and conduct of business regulation of all authorised financial institutions • FSA also responsible for exchanges , clearing houses , official listing and financial crime

10. Regulatory Processes • Authorisation and Permission • Removal of Permission and Authorisation • Approved Persons • Approval of Controllers • Passporting • Rule-Making and waiver of rules • Supervision of Financial Groups • Insolvency

11. Session One - Panel Two  Financial Services Law: Supervisory Structure – Does it Matter? Chair: Clive Briault, Risk and Regulation Consulting Ltd Speakers: Professor Kern Alexander, University of Zurich Patrick Starkman, AMF, France Nick Weinreb, NYSE Euronext Jane Welch, British Institute of International and Comparative Law

12. The new architecture of the EU regulation Patrick Starkman Service des affaires internationales Direction de la régulation et des affaires internationales (DRAI) June 2011

13. The new EU framework for the regulation of the financial markets The European Parliament and the Council adopted legal texts setting up a reform of the EU framework for regulation/supervision of the financial system, aimed at eliminating deficiencies that were exposed during the financial crisis. It adopted regulations establishing a European Systemic Risk Board (ESRB), which will provide macro-prudential oversight of the financial system, and three new supervisory authorities at the micro-financial level: • European Banking Authority (EBA); • European Insurance and Occupational Pensions Authority (EIOPA); • European Securities and Markets Authority (ESMA).The ESRB and the EIOPA will be sited in Frankfurt, the EBA in London and the ESMA in Paris. • The new system is operational since 1 January 2011. P. Starkman

14. EU regulation network ESMA NSA NSA Joint Committee NSA NSA EBA EIOPA NSA ESRB NSA Stakeholders Board of Appeal Stakeholders NSA Stakeholders NSA NSA NSA = National Supervisory Authority P. Starkman

15. European system of financial supervisors (ESFS) European Systemic Risk Board (ESRB) • Governors of the ECBs • ECB President and Vice-President • National regulators • + 3 ASC + 1 ATC* EU Commission Chairs of the EU Authorities (EBA, EIOPA & ESMA) Non-voting: One representative of the competent national supervisor(s) per Member State + EFC President + + + recommendations + early risk warnings Micro-prudential Information/developments EIOPA EBA ESMA National securities markets supervisors National banking supervisors National insurance and pensions supervisors *the Chair and the two Vice-Chairs of the Advisory Scientific Committee +the Chair of the Advisory Technical Committee. P. Starkman

16. Relations between ESRB- ESAs and NSAs National Supervisory Authorities to act or explain ESRB to provide: Analysis, recommendation and warning ESAs (ESMA, EBA, EIOPA) to provide information on firms and markets P. Starkman

17. The European Securities and Markets Authority (ESMA) • Replaces CESR • EU legal personality • Own budget : 60% provided by NSAs + 40% provided by EU • More expertise = more staff P. Starkman

18. ESMA objectives • Harmonise EU rules by setting-up a common “EU rulebook” • Decide on the action to be taken by NSAs necessary to comply with EU laws • Resolve disagreements between NSAs • Reinforce coordination between NSAs in emergency situation P. Starkman

19. Main powers of ESMA • Draft binding technical standards • Ensure consistent application of EU laws by issuing binding decisions • Binding mediation • Binding decisions in emergency situations • Possibility to stop dangerous practices by issuing bindingdecisions P. Starkman

20. Binding Technical Standards to ensure uniform application of EU law ESMA develops draft standards (in areas specified in EU law) adoption (possibility to amend) by Commission UE rulebook:Parliament-Council directives and regulations + Regulatory Technical Standards + Implementing Technical Standards + Guidelines (if no rules) P. Starkman

21. Impact of the new framework:ESMA / NSAs Implementation of EU rules “EU single rulebook” : 1) Parliament-Council laws + regulatory technical standards + implementing technical standards = less room for manoeuvre in the implementation of EU laws by NSAs 2) less EU soft law (guidelines & recommandations + “Comply or explain”) more EU hard law 3) “peer reviews” => ESMA binding decision if “Breach of Union Law” by NSA (cf. waivers MiFID) Supervision: • Individual firm supervision remaining at the national level but: • In day-to-day supervision: more coordination needed between NSAs or binding mediation • More coordination in emergency situations (avoiding isolated action or non-action) • If NSA does not comply: Individual decision by ESMA addressed to financial market participant (including the cessation of any practice) 2) “Pan-european entities by nature” directly supervised by ESMA: • Credit rating agencies • Trade repositories(EMIR currently discussed by EU Institutions) • (+ cf. EU laws currently discussed by European institutions) P. Starkman

22. Board of Supervisors (BoS) Key decision making body Independly appointed full time Chairperson + Heads of NSAs + Observers Majority voting or Lisbonne Treaty voting for « regulation » and budget Management Board (MB) Ensure that the ESMA is run effectively and perform the task assigned to it ESMA Chair + 6 elected Heads of NSAs Staff (Secretariat) de l’ESMA Executes decisions taken by BoS and MB From 45 staff in 2010 to approx. 130 staff in 2013 Functioning P. Starkman

23. THANK YOU for your attention P. Starkman

24. Session One - Panel Two  Financial Services Law: Supervisory Structure – Does it Matter? Chair: Clive Briault, Risk and Regulation Consulting Ltd Speakers: Professor Kern Alexander, University of Zurich Patrick Starkman, AMF, France Nick Weinreb, NYSE Euronext Jane Welch, British Institute of International and Comparative Law

25. Financial Regulation in a Global Market: Moving Beyond The StateSupervisory Structure: Does It Matter?BIICL’ Annual Conference, 10 June 2011 Professor Kern Alexander, Member of the European Parliament’s Expert Panel on Financial Services, and Chair for Law and Finance, University of Zurich, and Senior Research Fellow, Centre for Financial Analysis and Policy, University of Cambridge

26. Lessons from the crisis • Institutions and market structures • Power of financial contagion in integrated global financial markets • Policy analysis • Market-based financial regulatory models do not adequately monitor and control systemic risks • Policy implementation • Outdated regulation can exacerbate externalities • Failure in UK, US and other G10 supervisors to give sufficient attention to safety and soundness issues

27. The Effectiveness of UK-style ‘light-touch’ Principles-based Regulation? • ‘The United Kingdom’s experiment in a strategy of light touch regulation to attract business to London. away from New York and Frankfurt ended tragically. That should be a cautionary note for other countries deciding whether to try to take advantage of the rise in standards in the United States’ Timothy Geithner, US Secretary of the Treasury, 6 June 2011

28. US regulatory and supervisory practices were suspect as well • In 2003, then-Vice Chairman of the Federal Reserve Roger W. Ferguson praised the truly impressive improvement in methods of risk measurement and management and the growing adoption of these technologies by mostly large banks and other financial intermediaries.’ (The Future of Financial Services - Revisited, 8 Oct 2003) • Alan Greenspan believed in ‘self-regulation.’ It is critically important to recognize that no market is ever truly unregulated, . . The self-interest of market participants generates private market regulation. Thus, the real question is not whether a market should be regulated. Rather, the real question is whether government intervention strengthens or weakens private regulation.’ ‘Government Regulation and Derivative Contracts’ (Feb 1997)

29. US & EU Institutional regulatory settings 29

30. Supervisory Structure – the US experience • Multiple regulators justified as creating ‚checks and balances‘ to keep agencies ‚from becoming arbitrary or inflexible‘. • The current structure provides banks with a method . . . of shifting their regulator, an effective test that provides a limit on the arbitrary position or excessively rigid posture of any one regulator. The pressure of a potential loss of institutions has inhibited excessive regulation and acted as a countervailing force to the bias of a regulatory agency to overregulate. - Alan Greenspan (1994) • Some US regulators (OTS and OCC) were funded by industry assessments from institutions they regulated. As a result, the larger the number of institutions that chose these regulators, the greater their budget

31. US ‘Fed Lite’ Programme (1999) Light-touch regulation and supervision of Financial Holding Companies Intent was to eliminate excessive or duplicative regulation across a FHC’s subsidiaries and across financial sectors However, Fed Lite ‘made it difficult for any single regulator to reliably see whole picture of activities and risks of large, complex banking institutions.’ Ben Bernanke, evidence before the FCIC Complex regulatory and institutional structure made it difficult for anyone regulator, including the Fed, to identify excessive risks and unsound practices building up in non-bank subsidiaries of financial holding companies, such as Citigroup and Wachovia.

32. US has a fragmented structure for financial regulation and supervision There was an absence of a governing body to oversee the various agencies Vulnerability to gaps and oversight failures Dodd-Frank creates ‘Financial Stability Oversight Council’ (the Council) to oversee financial institutions The Council: chaired by Treasury Secretary. Voting members consist of heads of Treasury, Federal Reserve, OCC (Comptroller), SEC, CFTC (futures), FDIC (Deposit Insurance), Federal Housing Finance Admin, National Credit Union Association, & Bureau of Consumer Financial Protection, and an independent member with insurance expertise appointed by president. Non-voting members: Office of Financial Research, Director of Federal Insurance Office, a state insurance commissioner and state securities commissioner Purpose: identify and respond to risks to US financial stability arising from large interconnected financial institutions and outside financial sector Collect information, direct financial research, monitor regulatory proposals, facilitate info sharing among federal and state agencies 32

33. Dodd-Frank Act - Major changes in agency oversight (Title III) • Fed will regulate thrift holding companies & subsidiaries. Continue to regulate state member banks • OCC will regulate national banks and federal thrifts of all sizes • FDIC will regulate state thrifts of all sizes • OTS eliminated and functions shifted to Fed, OCC or FDIC • SEC require registration of investment advisers who manage over $100 million of hedge funds • Create Office of National Insurance (in Treasury) • Create Office of Credit Rating agencies • Bureau of Consumer Financial Protection (in Fed)

34. Financial StabilityOversight Council 15 members – Membership – FRB, FDIC, Treasury, SEC, OCC, CFTC, & FHFA Identify gaps in regulation and provide a forum for discussion of cross cutting issues Coordinate macro-prudential systemic views of other regulators Identify institutions’ practices and markets that create potential systemic risks Synthesize perspectives of various functional regulators Federal Reserve Board – main systemic risk regulator of financial institutions (Financial Holding Companies) with excess of $50 billion assets. Authority to recommend firms that will be subject to Tier 1 FHC supervision Systemic regulator (FRB) required to consult with the council in setting prudential standards for Tier 1 FHCs. Issues: Agencies serve as check and balance to systemic regulator? How agencies discharge responsibilities in globalised financial markets and adequately coordinate with other national/EU authorities?

35. Global reform agenda – macro-prudential supervision • Global consensus on need for more effective, better coordinated macro- and micro-prudential regulation and supervision • Oversight of systemic risk has to be globally co-ordinated • Systemic risk oversight bodies: international, regional, national • Global: Financial Stability Board (FSB) • EU: European Systemic Risk Board (ESRB) • UK: Financial Policy Committee of Bank of England • USA: Federal Stability Oversight Council • Switzerland: systemic risk oversight committee (FINMA and Swiss National Bank) • France: Council on Financial Regulation and Systemic Risk

36. G20 and Financial Stability Board Initiatives The G20 Washington Action Plan and the London & Pittsburgh Summit Statements on strengthening the financial system FSF’s April 2008 and 2009 Reports FSB principles for cross-border cooperation on crisis management G-20/FSB protocol to establish colleges for all major cross-border financial institution Basel Committee membership increased to 20 (Australia,Brazil, China, India, Korea, Mexico and Russia) Macro prudential to complement micro prudentialregulation 36

37. The Financial Stability Board: in brief • FSB (global systemic risk) • FSB – G20 mandate to promote global financial stability • Members: developed countries and large developing countries • national financial authorities (central banks, regulatory and supervisory authorities and ministries of finance) international financial institutions • standard-setting bodies • committees of central bank experts • FSB mandate includes • Assessing vulnerabilities, and identifying and overseeing action needed to address them; • Collaborating with the IMF to conduct early warning exercises • FSB soft institutional structure and no binding powers • Flexibility/speed evident in response to crisis in 2009 • Impact? • Obligations on members • FSB members produce almost 90% of world GDP: leading by example • Peer reviews • Implementation & follow up • Transparency • “Naming and shaming” • Accountability and legitimacy concerns?

38. European System of Financial Supervision European Systemic Risk Board (ESRB) [Chair elected by ESRB Board] Members of ECB/ESCB General Council (with alternatives where necessary Chairs of EBA, EIOPA & ESMA European Commission Macro-prudential supervision + + Information on micro-prudential development Early risk warning European Supervisory Authorities (ESAs) European Banking Authority (EBA) European Insurance Occupational Pension Authority (EIOPA) European Securities & Markets Authority (ESMA) Micro-prudential supervision National Banking Supervisors National Insurance Supervisors National Securities Supervisors

39. What role for international law? • Financial globalisation requires international standards/rules - how voluntary? • What international legal relevance? • The governance gap in international norm setting and the challenge for efficient international financial regulation – the dominance of the G10/G20? • What supervisory structure for global governance • International norms must be effective, accountable and legitimate K. Alexander et al., Global Governance of Financial Systems (OUP, 2006)

40. European Commission ‘Augur’ projectWhat global financial regulation will look like in 2025? • G20/FSB/IMF regime – build on existing international regime – ‘muddling through’ • Regional groupings of states – EU, NAFTA, Mercosur, Asian groupings • A return to the primacy of nation states • Further consolidation of the existing international regime through the creation of a World Financial Organisation What institutional structure of international financial regulation/supervision?

41. Session One - Panel Two  Financial Services Law: Supervisory Structure – Does it Matter? Chair: Clive Briault, Risk and Regulation Consulting Ltd Speakers: Professor Kern Alexander, University of Zurich Patrick Starkman, AMF, France Nick Weinreb, NYSE Euronext Jane Welch, British Institute of International and Comparative Law

42. Session Two - Panel One EU Law: Combating Cross-Border Financial Crime in the EU Chair: Ros Wright CB, QC, Fraud Advisory Panel Speakers: David Clark, City of London Police Stephen Gentle, Kingsley Napley LLP Glyn Powell, Serious Fraud Office Carlo van Heuckelom, Europol

43. Europol AML Disposition Carlo van Heuckelom Head of Unit O3 - Criminal Finances and Technology

44. Number of disclosed SAR’s in the EU

45. Number of disclosed SAR’s in the EU

46. Conversion rate

47. Conversion rate

48. “Financial intelligence led policing” Potential entries in AWF SUSTRANS after transferral to prosecutorial bodies

49. Session Two - Panel One EU Law: Combating Cross-Border Financial Crime in the EU Chair: Ros Wright CB, QC, Fraud Advisory Panel Speakers: David Clark, City of London Police Stephen Gentle, Kingsley Napley LLP Glyn Powell, Serious Fraud Office Carlo van Heuckelom, Europol

50. DCI David Clark Economic Crime Directorate City of London Police