Financial Reform Watch

Regulation seems to be dominating the agenda in Europe. The EC Commission on 1 December made a sudden shift in policy when it announced that it is fast-tracking a review concerning new regulation for important sectors of the financial industry, including hedge funds, private equity firms, and derivatives.

Heeding the mounting criticism of a laissez faire attitude and for being asleep on his watch, the EC Commissioner in charge of banking, financial services and securities legislation, Charlie McCreevy, in a speech before the European Parliament presented a number of initiatives that could lead to new and far-reaching regulation of several sectors of the financial markets.

McCreevy defended his track-record by pointing to the significant number of legislative measures introduced during his tenure. The exchange in the European Parliament confirms the drastic change in philosophy among regulators where success now is measured by the number of initiatives for regulation introduced, a trend that most probably will continue into the foreseeable future.

The Commission’s new initiative comes at a time when the Commission, as reported earlier on these pages, is entering a lame duck phase ahead of being replaced entirely in 2009. Therefore, these new initiatives will eventually be handed over to the incoming Commission, which will make the final decisions.

McCreevy recalled that the leaders of the G20 agreed on 15 November that "all financial markets, products and participants should be regulated or subject to oversight, as appropriate to their circumstances." The G20 has also decided that by 31 March, 2009, "private sector bodies that have developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices."

MCreevy said it was necessary to complete a wide ranging examination of the issues relating to hedge funds so that this could be fed into the EU response to the G20 work. Among the issues to be addressed in the public consultation are:

• Adequacy of transparency measures
• Oversight responsibility
• Risk management practices
• Assessment of systemic risks
• Need for capital requirements; and
• Supervisory responsibility.

This public consultation will be launched in the next 10 days. The aim is to receive stakeholder contributions by end of January. The results will be discussed at a high level conference to be held in Brussels in February 2009.

Echoing events in Brussels, British Chancellor of the Exchequer Alistair Darling, in his Pre-Budget Report statement to the House of Commons, also announced new measures. He said the Financial Services Authority (FSA) is now considering changes across the regulatory system—including banks’ capital requirements; liquidity conditions; accounting rules and pay structures; and scrutinizing whether the right processes are in place to ensure the FSA can supervise the system. The FSA was long considered to be the gold standard in regard to oversight, but events are now forcing the UK Authority to consider a total overhaul.

Meanwhile, financial officials in the United States continue working toward a smooth transition between the outgoing Bush Administration and the incoming Obama Administration. Political leaders appear more immediately focused on economic stimulus than regulatory reform. In a meeting with U.S. governors Tuesday, President-elect Obama indicated that investing in America’s infrastructure—such as roads, bridges, transit, rail, ports, airports, clean water systems, energy, and schools—would create jobs, revive industries, and promote long-term economic growth. U.S. Congressional leaders have said they will have a stimulus package ready for consideration as soon as the new president takes office.