Please see the full text of Mr. Yarde’s presentation below:
Good day ladies and gentlemen, let me start by first thanking the Jamaica Stock Exchange for inviting me to this, the 8th Regional Investments and Capital Markets Conference and, of course, to present on the topic, “The Influence of Soft Law on Securities Regulation in Emerging Markets and Developing Economies or EMDEs of the Region”.
It gives me great pleasure to present on this topic as the recent global financial crisis (GFC) has brought into sharp focus the role of Regulators in managing securities/capital markets, as we get the impression that regulators in some of the major markets around the world, seemed to have “fallen asleep at the wheel”. In other words, though the regulatory infrastructure was seemingly moving along the road of regulating the obvious, there were gaping holes in the regulatory framework that allowed new products and services to go unchecked. As a consequence, the question of “Soft Law”, “New Governance” and “Principled-Based Regulation” have come to the fore.
The term Soft Law is said to refer to quasi-legal instruments which do not have any legally binding force, or whose binding force is somewhat weaker than the binding force of traditional ‘Hard’ law. Soft Law is associated primarily with International Financial Law, however, in light of the global financial meltdown, many facets of Soft Law have been, and continue to be, incorporated into domestic law.
There are two analyses used when assessing the influence Soft Law has on International Financial Law. These are the “Contractarian” and “Soft Powers” analyses. Brummer describes the latter, in terms of Soft Law, as having the distinct advantage of being a driver for a collective approach to international engagement essentially facilitating ongoing productive coordination and cooperation. Soft law acts as a means of building trust for “sustained effective collective action”. He posits, however, that the former Contractarian analysis views Soft Law as a risk mitigation device. It allows for action to be taken quickly and efficiently without “extensive participation from heads-of-state nor lengthy ratification processes”. Soft Law agreements are also very flexible, allowing participants to “amend accords relatively easily, so long as agreement among parties exists”.
Soft law is usually developed in a principle-based approach. In a paper entitled “New Governance in The Teeth of Human Frailty: Lessons From Financial Regulation”, author Cristie Ford stated that, “Principles-based regulation is based on the conviction that while legislators and statutory drafters have the public legitimacy to establish broad regulatory goals, they are not in the best position to develop detailed guidelines for industry conduct, especially in fast-moving arenas like securities regulation”. She goes on to explain that, “In order to stay relevant and informed about fast-moving industry practice, to keep regulation sufficiently flexible, and to avoid inhibiting productive innovation, regulators need to establish open and perpetual communication lines with industry. They need to use industry‘s own good and best practices to add the ―meat of detail to the ―bones of their principles-based regulatory expectations”.
There are three broad categories of Soft Law instruments: Best Practices, Regulatory Reports and Observations, and Information Sharing And Enforcement Cooperation Agreements. Best Practices are ‘rules of thumb’ or codes of conduct that promote sound regulatory supervision. These are most effective when promulgated by a regional coalition of bodies or even private actors, and supported by national authorities to ensure compliance. Regulatory Reports and Observations help to establish a basis for policy making that generates norms that help define different regulatory fixes or responses to a regulatory problem. Information Sharing And Enforcement Cooperation Agreements take the form of Memorandums of Understanding (MOUs). These MOUs address the fact that domestic markets are globally active and integrated. The use of Information Sharing Agreements are cited by Brummer as extremely important as they allow “National regulators of the securities industry to routinely enter into information-sharing agreements whereby the regulators commit to better coordination with one another in order to enhance their prudential oversight and monitoring at home”. Enforcement Agreements are developed through MOUs as well. These agreements set out the rules by which different countries agree to assist each other when enforcing their domestic rules and obligations abroad.
The terms “New Governance“ and “New World Order“ are often associated with Soft Law and its principle based approach to regulation. In light of the ongoing financial crisis many proponents share the view that, “Our financial markets can no longer depend on national regulators to regulate international capital flows; we need to focus less on ‘government’ and more on ‘governance’ wherever that governance may come from”. Governance usually comes from Agenda or Sectoral Standard Setters such as central bankers, securities commissioners, and insurance supervisors networking through their own international organizations such as the Basel Committee, the International Organization of Securities Commission’s (IOSCO) and the International Association of Insurance Supervisors (IAIS) to establish standards geared towards ensuring international financial stability. Ann-Marie Slaughter, author of “New World Order”, and one of the more well known proponents describes “New World Order” as, “A system of global governance that institutionalizes cooperation and sufficiently contains conflict such that all nations and their peoples may achieve greater peace and prosperity, improve their stewardship of the earth and reach minimum standards of human dignity”. She further posits, ”New governance scholarship seeks to develop governance mechanisms that in terms of flexibility, effectiveness, and inclusiveness are superior to command-and-control mechanisms.” “… New governance regulation, unlike command-and-control regulation, is regulation based on an iterative process between private-party experience and a regulator that serves variously as clearing-house, catalyst, monitor, prod, and coordinator.”
As international financial markets began to operate on a global level, the need for global standards has become more evident; a need that became extremely important as a result of the global financial crisis. As a response, Brummer stated that regulatory authorities have sought to, “Promulgate global standards, best practices, and prudential guidelines through a range of international forums and organizations.” These institutions tend to operate in a less formal arrangement, however, the power extended to them is significant. The International Regulatory System, therefore, is characterized by having informal institutions “founded under informal bylaws” that are ‘soft’ in nature as far as their administrative structures are concerned. It can also be characterized as being agency dominated, that is, comprised of many national agencies/regulators who “meet with their counterparts from other jurisdictions to determine international standards in their area of expertise.” The final feature of the International Regulatory System is that it is fragmented in that there is no one institution responsible for establishing standards and best practices, settling disputes or enforcing compliance.
One such institution is the International Organization of Securities Commission’s (IOSCO). IOSCO is recognized as the international standard setter for securities markets. Its membership regulates more than 95% of the world’s securities markets and it is the primary international cooperative forum for securities market regulatory agencies. IOSCO members are drawn from, and regulate, over 100 jurisdictions and its membership continues to grow; there are three types of members of IOSCO, they are Ordinary, Associate and Affiliate.
The IOSCO By-laws states:
Securities authorities resolve to cooperate together to ensure a better regulation of the markets, on the domestic as well as on the international level, in order to maintain just, efficient and sound markets:
· to exchange information on their respective experiences in order to promote the development of domestic markets;
· to unite their efforts to establish standards and an effective surveillance of international securities transactions;
· to provide mutual assistance to ensure the integrity of the markets by a vigorous application of the standards and by effective enforcement against offences.
A prime example of the creation, application and implementation of Soft Law, is IOSCO’s Objectives and Principles of Securities Regulation and its Multilateral Memorandum of Understanding (MMoU). The latter sets an international benchmark for cross-border co-operation critical to combating violations of securities and derivatives laws. The former, however, is based on three main objectives:
· Protecting investors;
· Ensuring markets are fair, efficient and transparent; and
· Reducing systemic risk
It then outlines thirty-eight principles divided into nine broad categories which are based on the aforementioned objectives. The nine categories are:
· Principles Relating to the Regulator
· Principles for Self-Regulation
· Principles for the Enforcement of Self-Regulation
· Principles for Cooperation in Regulation
· Principles for Issuers
· Principles for Auditors, Credit Rating Agencies, and other Information Service Providers
· Principles for Collective Investment Schemes
· Principles for Market Intermediaries; and
· Principles for Secondary Markets
In reviewing a “Report to the G-20 Finance Ministers and Central Bank Governors” entitled “Financial Stability Issues in Emerging Markets and Developing Economies (EMDEs)” prepared by a Task Force of the Financial Stability Board (FSB) and Staff of the IMF and the World Bank in 2011, one gets a sense that the larger developed economies or Advanced Economies (AEs) are taking greater note of the size and importance of EMDEs to the global financial system. They also note that the contagion effect of financial crisis throughout the world and see the need for all AEs and emerging markets to maintain the same standards and be measured in the same way. As a consequence, the AEs are using international financial law or soft law to keep EMDEs in check. A good example of this is the OECD’s Global Forum On Transparency And Exchange of Information For Tax Purposes which has on occasion labeled Barbados as a tax haven because all the relevant legislation is not in place for the exchange of tax information, yet there are AEs that are tax havens and not labeled as such; however, I digress. The Report on EMDEs previously cited, focused on five (5) key financial stability issues:
1. Application of International Financial Standards
2. Promoting Cross-Border Supervisory Cooperation
3. Expanding the Regulatory and Supervisory Perimeter
4. Management of Foreign Exchange Risk
5. Developing Domestic Capital Markets
With reference to the application of international financial standards, throughout the region, many jurisdictions have sought, wherever possible and practicable, to incorporate international standards and best practices so as to improve their financial stability. For instance, in Barbados, we have sought to comply with as many of these IOSCO Principles as possible. The Principles are set at a high-level so as to allow jurisdictions to develop the legislative framework to achieve the Objectives of IOSCO. This is consistent with soft law and IOSCO is one of the major proponents of this brand of law. ‘The Principles play an important role in the promoting a sound global financial regulatory system through their use by the IMF and World Bank assessors in the performance of the securities sector element of country Financial Services Assessment Programs (FSAP).’ Barbados is committed to implementing the IOSCO Objectives and Principles and has been making amendments to its legislation and issuing Consultation Papers on Guidelines as per section 53 of the Financial Services Commission Act (FSCA) for the market to ensure compliance. An example of this is the “Consultation Paper & Proposed Securities Guidelines” of the Financial Services Commission – Barbados (FSCB). The purpose of the paper was to: “(i) highlight the Commission’s proposal for guidelines to improve the conduct of securities business and enhance investor protection measures; and (ii) seek industry feedback about the regulation of Repurchase Agreements.” The FSCB has, to date, undergone two FSAP reviews, in 2003 and 2009, and while both reviews cited the underdeveloped nature of the market, both praised the FSCB, then the Securities Commission, for having implemented or partially implementing most of the IOSCO principles.
While the Financial Stability Issues in Emerging Markets and Developing Economies report gave mention to the improvements made in the financial stability issues, there was one consistent message and that was the EMDEs need to increase their supervisory capacity to effectively monitor and manage the financial stability in their respective jurisdictions. The Report stated that, “The main challenge relates to the actual capacity of the regulator to conduct surveillance and adequately implement supervisory programs, as well as to appropriately use its disciplinary powers. While some EMDEs have invested in sophisticated surveillance systems, it has been more difficult to build the appropriate technical capacity to understand and monitor the linkages and potential risk transmissions across market segments.” The 2009 FSAP review made mention of the fact, that the then Securities Commissions was not yet fully staffed as at the completion date of the report. The newly formed FCSB, while currently in a better state, is yet to achieve its full complement of staff, however, they have informed me that the BSE will be receiving an assessment/inspection sometime during the first quarter of this year. This is in line with the objectives and principles set out by IOSCO. It must be noted as well, that the FSCB conducted its own self assessment exercise – Self-Assessment Report of Securities Regulation, with the aid of a consultant, in August 2012 to test its application of the IOSCO principles.
There were a number of issues identified and the consultant deemed the following as needing immediate attention:
· Fix the Legal problems, for example, “The gaps in the information sharing, access to information, inspection and investigation authority may prevent the Commission from being a full signatory to the IOSCO MMOU.”;
· Finalize and Put Supervision Program into Operation;
· Address the Gaps in the Requirements for Regulated entities; and
· Resource Issues – Further human and financial resources are required in order for the FSCB to carry out its mandate.
There are a number of initiatives being worked on the Barbados jurisdiction that will be influenced by Soft Law – the Caribbean Exchange Network (CXN); the International Securities Market (ISM); implementation of Corporate Governance Recommendations For Companies listed on the Barbados Stock Exchange; the signing of the IOSCO’s MMOU; and the planned legislative changes to ensure the jurisdictions continued competitiveness. These projects are all heavily influenced by the principled-based approach which is a main feature of Soft Law.
Although my focus has been on Barbados, it is a well known fact that, as a region, we are all working towards increasing our financial stability to ensure our financial viability and overall sustainability. The application of Soft Law is but one method of doing so and I’m sure my counterparts at the JSE, TTSE and the ECSE and their respective Regulators are working as assiduously as we are in Barbados to ensure that their jurisdictions are in compliance with the standards and best practices set out by agencies such as IOSCO.
In closing then, it is my belief that, in light of the severe impacts the global financial crisis has had, and the responses many developed jurisdictions across the globe have made and are continuously fine-tuning, our region stands to gain significantly from the application of “Soft Law” principles, policies and procedures to both bolster and strengthen regional jurisdictions, ensuring that we operate in line with generally accepted international best practices.
