The future of financial regulation

ACCA sets out nine principles they consider should be addressed in the design and implementation of regulatory frameworks. These cover both what regulatory authorities and individual entities should address.

The principles are summarized below:-

Purpose of Regulation :-

There needs to be clear understanding of the purpose of regulation. It should facilitate legitimate business activity , provide essential safeguards for the interests of the shareholders and ensure fair competition in the market.

In order for regulation to be credible and effective, authorizes need to have a thorough understanding of the business and markets that they are supervising. This in turn requires the involvement of individuals with the appropriate skills and experience.

Competition :-

Government and national and regional authorities should regard healthy competition in the marketplace as crucial to the enhancement of their regularity systems.

Government and regularity systems may have contributed to the scale of the crisis by allowing entities to become even more larger and powerful.

The concentration of market power in the hands of a few large entities has presented significant challenges to regulators and will continue to threaten the effectiveness of regulation unless steps are taken.

Standards of Business Contact :-

Companies should be expected to carry out their activities in accordance with high standards of business conduct. The adoption of a firm commitment to an ethical corporate culture should not only help to protect the interests of the shareholders , but would help to achieve internal and external transparency and help the company combat threats such as fraud and bribery.

Standards of Competence:-

Companies should be expected to possess appropriate skills and human resources at all levels of business. In addition each of the company’s board of directors should be able to understand the technicalities of the business that is being conducted on their behalf. They will therefore be in a position to exercise their functions of stewardship.

Corporate Governance :-

Serious questions have been posed both about the ability of non executive directors to exert efficient supervisory control over the executive and the way companies engage with their institutional shareholders.

Boards, shareholders and where appropriate other stakeholders should have a common understanding of the purpose and scope of corporate governance. In other words they should all appreciate the ultimate aim of securing long-term prosperity for the company concerned.

Accountability :

Companies should be expected to account for their activities transparently, thoroughly and with due regard to the demands , rights and information needs for their shareholders.

But these are legitimate concerns about some aspects of financial reporting. The accounts of banks have become so detailed , complex and lengthy that their capacity to meet the information needs of most investors are being questioned.

Incentives:

Remuneration for directors and employees should be integrated into the company’s strategic plans and should not encourage behaviour that could be detrimental to the long-term interests of the company.

Risk Management and Internal Control:-

All companies should set up risk management and internal controls and these should be able to be objectively challenged by the board, independently of line management. Ideally the officer responsible if not a member of the board, needs to be accountable directly to the board rather than to executive management.

Funding :-

Companies in the financial sector should be required to have capital structures and levels of liquidity corresponding to the scale and level of risk inherent in their activities and which make reasonable provision for changes in economic circumstances.

The international regulatory authorities should take a coordinated approach in the definition of optimal capital levels of the major banks.

(The future of financial regulation is available in full at www.accaglobal.com/future_regulation)