Chapter 1 The International Regulatory Environment 20 questions 9 - PDF document

Chapter 1 The International Regulatory Environment 20 questions 9 9

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1. Models of Regulation Introduction to models of regulation • Objectives and benefits of regulation • Law and regulation • Rules-based and principles-based approach • Models of self-regulation • Extra-territorial reach of legislation • Exchanges, multilateral trading facilities and systematic internalisers • Off-market transaction www.fitchlearning.com 11 11

1. Models of Regulation (1.1) Objectives and benefits of regulation • Objectives - Confidence and trust - Help prevent systemic risk - Educate and protect investors - Reduce financial crime • Benefits - Encourage investment - Encourage economic development - Encourage wealth creation www.fitchlearning.com 12 12

1. Models of Regulation (1.2) Law and regulation • Law - Framework for the financial service - Specific coverage such as • Financial crime • Tax • Consumer protection • Regulation - Rules - Standards - Market conventions - Codes of practice www.fitchlearning.com 13 13

1. Models of Regulation (1.3) Rules-based and principle-based regulation • Rules-based approach - Specific and detailed - Prescriptive - Box-ticking • Principles-based approach - High-level rules and guidance - Flexibility to support innovation - Reliance on ethical standards www.fitchlearning.com 14 14

1. Models of Regulation (1.4) Models of self-regulation • Forms of self-regulation - Industry-based organisations - Exchange-based frameworks - Private association • Key elements of an effective self-regulatory model - Industry specialised knowledge - Industry motivation - Contractual relationship - Transparency and accountability - Flexible SRO compliance programmes - Coordination and sharing information www.fitchlearning.com 15 15

1. Models of Regulation (1.5) Extra-territorial reach of legislation • Summary - Sarbanes-Oxley Act 2002 (SOX) • US – Improve the financial reporting process - Markets in Financial Instruments Directive 2007 (MiFID) • EEA – Create a base level of investor protection for the financial services - UK Bribery Act 2010 • UK – Criminalises the bribery of public officials in international transactions www.fitchlearning.com 16 16

1. Models of Regulation (1.5) Extra-territorial reach of legislation • Summary (cont.) - Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank) • US – Promotes the financial stability of the US financial services - European Market Infrastructure Regulation 2012 (EMIR) • EEA – Requires reporting and central clearing of OTC derivative contracts - The Foreign Account Tax Compliance Act 2010 (FATCA) • US – Combating tax evasion by US persons holding offshore investments www.fitchlearning.com 17 17

1. Models of Regulation (1.5) Extra-territorial reach of legislation • Sarbanes-Oxley Act 2002 (SOX) - Aim • To protect investors by improving the accuracy and reliability of corporate disclosures - Section 404 • Annual reports on effectiveness of internal controls - CEO and CFO responsible • Auditors must confirm - Public Company Accounting Oversight Board (PCAOB) • Inspect large accounting firms annually • Small accounting firms every three years • Avoid conflicts of interest with auditors • Restrictions on other services • Auditors appointed by board not management • Lead accounting firm replaced every five years • Prohibition on accounting firms with senior executives who worked for the audited firm in the previous year www.fitchlearning.com 18 18

1. Models of Regulation (1.5) Extra-territorial reach of legislation • Sarbanes-Oxley Act 2002 (SOX) (cont.) - Requirements of US listings • Measures to prevent conflicts • CEO and CFO to certify accuracy of annual and quarterly SEC reports • Disclosure of - Off-balance sheet transactions - Material relationships • Statement on whether code of ethics has been adopted • Prohibition on personal loans to officers or directors • Greater protection for whistleblowers - Retaliation punishable with up to ten years - Other crimes • Defrauding securities investors – up to 25 years • CEO knowingly signing a false financial statement – up to $5 million and 20 years • Obstruction of justice by destroying documents – fines and up to 20 years www.fitchlearning.com 19 19

1. Models of Regulation (1.5) Extra-territorial reach of legislation Markets in Financial Instruments Directive 2007 (MiFID) • Aims - To extend the scope of passporting - Remove major barriers to cross-border services - Harmonised rules on investor protection • General obligation - Client’s best interests • Other obligations - Best possible result - Information disclosure - Suitability and appropriateness - Inducements - Fiduciary duties www.fitchlearning.com 20 20

1. Models of Regulation (1.5) Extra-territorial reach of legislation Markets in Financial Instruments Directive 2007 (MiFID) (cont.) • FCA’s implementation of directives - Considerations • Protecting market innovation • Protecting and enhancing international character • Considering impact on competition - Process • Discussion paper - Preliminary and informal • Consultation paper - Proposed rules and guidance • Policy statement - Decided policy - Feedback www.fitchlearning.com 21 21

1. Models of Regulation (1.5) Extra-territorial reach of legislation UK Bribery Act 2010 • Background - Organisation for Economic Co-operation and Development (OECD) • Anti-Bribery Convention - Combating bribery of foreign officials • UK Bribery Act - Key offences • Offering or receiving a bribe • Bribery of foreign public officials • Failure to prevent bribery - Scope • Offences committed in the UK or • Committed by a person with a close connection to UK www.fitchlearning.com 22 22

1. Models of Regulation (1.5) Extra-territorial reach of legislation Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) • Key elements - Consolidation of regulatory agencies - Review of regulation of markets • Including increased transparency of derivatives markets - Consumer protection agency - Uniform standards for ‘vanilla products’ - Tools for financial crises • Including a resolution regime - Increasing international standards and co-operation - Improved accounting - Tightening of regulation around credit rating agencies www.fitchlearning.com 23 23

1. Models of Regulation (1.5) Extra-territorial reach of legislation European Market Infrastructure Regulation 2012 (EMIR) • EMIR is regulation of OTC derivatives • Provisions - All OTC derivative trades to be reported to a trade repository (TR) - All financial and non-financial counterparties to adequately mitigate the risk of the contract - Requirement to use a central counterparty where mandatory clearing is in effect www.fitchlearning.com 24 24

1. Models of Regulation (1.5) Extra-territorial reach of legislation The Foreign Account Tax and Compliance Act (FATCA) • Purpose - To combat tax evasion • Provision - US taxpayers holding financial assets in offshore accounts must report those assets to the IRS - Foreign financial institutions (FFI) • Undertake due diligence on accountholders • Report annually to the IRS if they hold accounts for US taxpayers • Foreign entities owned substantially by US taxpayers • Withhold certain payments www.fitchlearning.com 25 25

1. Models of Regulation (1.6) Exchanges, multilateral trading facilities and systematic internalisers Exchanges • Typical responsibilities - Regulating stock market - Approving applications for listing - Supervising and investigating members and listed companies - Market surveillance and risk management - Overseeing capital requirements of members • UK recognised investment exchange (RIE) - Fit and proper - Financial resources - Willing and able to share information - Promote and maintain integrity and fair dealing - Record, monitor and enforce compliance www.fitchlearning.com 26 26

1. Models of Regulation (1.6) Exchanges, multilateral trading facilities and systematic internalisers Exchanges (cont.) • Possible disciplinary action - Reprimand - Financial penalties - Suspension - Expulsion www.fitchlearning.com 27 27

1. Models of Regulation (1.6) Exchanges, MTFs and systematic internalisers (cont.) • Multilateral trading facility - Alternative trading venue - Operated by investment firms and market operators - Directly regulated by national regulators • Systematic internaliser - Investment firms acting as market maker outside an exchange - Matching customer orders in-house www.fitchlearning.com 28 28

1. Models of Regulation (1.6) Exchanges, MTFs and systematic internalisers (cont.) Transparency • Pre-trade transparency - Order-driven markets • Best five price level on both buy and sell side - Quote-driven markets • Best bids and offers of market makers • Post-trade transparency - Publish price, volume and time of all shares www.fitchlearning.com 29 29