US regulators’ approach under pressure

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In Washington on Wednesday, a group representing the 100 largest financial services companies is going to throw its weight behind the call for the US to drop its decades-old rules-based approach to financial regulation.

The Financial Services Roundtable, presenting its blueprint for reform, will urge the country to adopt a principles-based regulatory system akin to the one used by the Financial Services Authority in the UK.

The initiative is the latest effort to have emerged in recent months to deal with increasing concerns that a system of multiple watchdogs and overlapping jurisdictions built upon a rules-based system may be threatening the competitiveness of the US capital markets.

This week, the New York State Insurance Department, which oversees the state’s insurance industry, has taken matters into its own hands by releasing a draft regulation that would make New York the first US state to establish principles-based regulation for the insurance industry.

Eric Dinallo, insurance superintendent, says: “New York must have the best, most effective regulation of financial services in order to remain the financial capital of the world. That means principles-based regulation.”

Hank Paulson, Treasury secretary, supports the re-examination of the structure of US financial regulation – including consideration of whether a principles-based approach makes sense for the country. While the Treasury works on producing its own reform blueprint next year, policymakers have at least one model for guidance right on their doorstep.

The US futures watchdog, the Commodity Futures Trading Commission, has operated a principles-based regulatory system since its founding in 1975.

Such a system sets out overarching concepts that provide a framework for dealing with issues, and to which the agency expects market participants to adhere – much like the FSA’s approach. Walt Lukken, acting CFTC chairman, says this method has allowed the agency to “get in front of developing regulatory problems”.

By contrast, rules-based regulation – which provides the basis for the Securities and Exchange Commission’s approach – relies on the imposition of specific obligations on those being regulated. Critics say this has led to excessive “box ticking”.

Craig Donohue, chief executive of the CME Group, the futures exchange and clearer, is expected to tell delegates at the annual meeting of the Securities Industry and Financial Markets Association tomorrow that the CFTC’s record in applying a principles-based oversight framework means it should serve as a model for the US Congress in any reform of the country’s markets regulation.

“While all these efforts to develop a new model for regulating securities markets is happening, unfortunately there is no significant representation from the futures industry in any of these efforts,” Mr Donohue says.

“That is probably counter-productive when you consider the fact that the futures market model solves most of the problems that they [policymakers] are trying to solve.”

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