Dealing With Regulatory
Outline of Presentation
What is regulatory arbitrage and what is
wrong with it?
Two regulatory principles.
Techniques for dealing with arbitrage.
Is unified supervision the answer?
Objectives Of Unified Regulation
Supervision of financial conglomerates.
Developing a body of professional staff.
Eliminating arbitrage opportunities.
“The booking of a particular financial service or
product in an entity with the intention of
reducing regulatory costs and/or oversight.”
What’s Wrong With Regulatory
Financial conglomerates able to “game” the
system and avoid proper oversight.
Example: Capital serving “double duty”, used to
support risks in more than one entity.
Example: Large exposures “hidden” in other
Regulators encouraged to compete – may
allow regulation to be weakened in a search
Not All Regulatory Arbitrage Is Bad
Competition between regulators may be
healthy and reduce tendency to over-
Complete neutrality should not be the aim of
regulation. Regulatory objectives are diverse.
E.g. some firms require more intensive
monitoring because the costs of their failure
would be much greater than others.
Two Regulatory Principles
Prudential regulation should differ between
types of firm to the extent that they engage in
different activities and incur different risks.
Consumer regulation should ensure an
equivalent level of consumer protection
irrespective of the entity which offers the
Reducing the scope for regulatory arbitrage
requires proper consolidated supervision.
All firms in a conglomerate group should
have same reporting date and be audited by
single firm of accountants.
Need for a “lead” regulator to co-ordinate and
produce group-wide risk assessment.
Basic principle: same product = same disclosure
standards irrespective of product provider.
A collective savings scheme should have same disclosure
requirements whether offered by bank or insurance
Securities regulator regulates the sales practices of all
collective investment schemes irrespective of which firm
Structure of Regulation
Prudential regulation must be based on
Arbitrage opportunities are reduced by proper
Consumer regulation may be based either by
product or by institution.
Product regulation reduces arbitrage
Structure of Regulation
If prudential regulation is institutionally-based
and consumer regulation is product-based
some firms will have more than one regulator.
This requires close coordination and
cooperation between regulators.
Could lead to firms complaining about their
Putting all regulation inside a single
organization is a way of dealing with
Can provide firm with single point of contact.
But within the unified regulator the
distinctions between institutional v product
and prudential v consumer regulation will
Single Authorisation Regime
An important objective of FSAMA was to
create a single authorisation regime for
In theory a single firm would be able to move
seamlessly from providing one type of
financial service to another – markets made
In practice more difficult to deliver.
Financial Services Reform Act 2001
Aims to achieve some similar objectives to
FSAMA to the extent that it:
Establishes a new harmonised regime for the
regulation of the provision of financial services in
respect of a wide range of financial products
Creates the “Australian Financial Services