Dealing with Regulatory Arbitrage

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					Dealing With Regulatory
Arbitrage
Michael Taylor
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.
   Regulatory efficiency.
   Regulatory flexibility.
   Developing a body of professional staff.
   Eliminating arbitrage opportunities.
Regulatory Arbitrage
   Definition:

“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
Arbitrage?
   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
        group entities.
   Regulators encouraged to compete – may
    allow regulation to be weakened in a search
    for “clients.”
Not All Regulatory Arbitrage Is Bad
   Competition between regulators may be
    healthy and reduce tendency to over-
    regulation.
   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
    product.
Prudential Regulation
   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.
Consumer Regulation
   Basic principle: same product = same disclosure
    standards irrespective of product provider.
   “Product Regulation”
       A collective savings scheme should have same disclosure
        requirements whether offered by bank or insurance
        company.
       Securities regulator regulates the sales practices of all
        collective investment schemes irrespective of which firm
        offers them.
Structure of Regulation
   Prudential regulation must be based on
    institutions.
        Arbitrage opportunities are reduced by proper
        consolidated supervision.
   Consumer regulation may be based either by
    product or by institution.
       Product regulation reduces arbitrage
        opportunities.
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
    regulatory burden.
Unified Supervision
   Putting all regulation inside a single
    organization is a way of dealing with
    coordination problems.
   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
    remain.
Single Authorisation Regime
   An important objective of FSAMA was to
    create a single authorisation regime for
    financial services.
   In theory a single firm would be able to move
    seamlessly from providing one type of
    financial service to another – markets made
    more contestable.
   In practice more difficult to deliver.
Australian Comparison
   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
        Licence”

				
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