« Financial Regulation & Supervision: What to Expect in 2017 and Beyond »
Bank of France, Representative for the Americas
President of the Financial Integrity Network, former US Treasury Officer.
Opening Remarks by
Credit Agricole Americas
Highlights of the March 6 conference organized by Labex ReF in New York on Financial Regulation & Supervision
Labex ReFi in New York hosted on March 6 2017 at the Credit Agricole Americas Auditorium a discussion on » Financial Regulation and Supervision: What to Expect in 2017 and Beyond. » Francois Haas, Banque de France senior representative for the Americas and Chip Poncy, co-founder and president of the Financial Integrity Network and a former executive at the US Department of the Treasury debated around the future of a risk-based approach, models for international cooperation and the outlook for financial regulation.
The audience brought together about seventy participants including financial experts, professors, representatives of central banks and monetary authorities from several European and Asian countries, lawyers, bankers, American and European students who were eager to interact with the speakers. Raphael Douady, International Director of Labex ReFi, Allan Chapin, Chair of the French American Foundation, professor Georges Ugeux of Columbia University, Olivier Jonglez, Financial Counsellor, French Treasury Office in the US, Anne de Louvigny, President of the Grandes Ecoles Association, Patrick Simmonet, President of the US Sciences Po Alumni, Yann Coatanlem, President of Praxis were also present. Olivier Audemard, Managing Director of Credit Agricole welcomed the participants and framed the discussion highlighting the importance of the topic in our changing world. Michel Perez, Representative of Labex ReFi in the United States introduced the speakers and moderated the discussion.
The debate between Chip Poncy, Francois Haas and the audience centered around five key themes: (1) the increasing importance of financial integrity in a post 9/11 world, (2) the necessity for international cooperation in our increasingly globalized world, (3) the successful globalization of the financial integrity regime with FATF as a model for collective action, (4) the importance of balancing the risk-based approach with enforcement and clarity and (5) the ongoing challenges to the global architecture of financial integrity.
Increasing importance of financial integrity
Chip Poncy defined financial integrity as protecting the global financial system from malicious activities. The theme has become increasingly prevalent in the public arena, starting with the criminalization of money laundering in 1980s and the development of a cross border response in the 1990s. But it is really in the post 9/11 that the topic became headline worthy as it was a key tool for the counterterrorism strategy. The “spirit to fight” will remain because AML, CFT, fraud, corruption are most resilient topics – the public understands their necessity due to constant headlines.
Necessity of global cooperation – financial regulation post crisis, a pillar for expanding global financial integrity
The renewed political uncertainty in the United States and in Europe, paired with the complexity of contemporary financial regulation, raise the question of the sustainability of the reforms of the past 8 years. The “Make America Great Again” campaign, Brexit and more globally the push back against globalization contribute to a growing concern that countries are walking away from cooperation. The threats are as globalized as the economy so there is no going back on the collective regulatory and financial integrity framework, it is a necessity. There is an audacity in global cooperation that needs to be preserved.
Audacity of global cooperation – Successful globalization of the financial integrity regime
Since the crisis, a sophisticated architecture of the financial industry has been established, in line with the agenda set up by the G20. We must recognize the remarkable achievements to date in finding a consensus on sophisticated regulation covering prudential, legal, tax and other issues and challenges. This globalized regime would be hard to unwind. Over this period, monetary policy has helped in implementing the regulatory framework. There is still work to do to effectively end “too big to fail,” make markets safer and more resilient and reform shadow banking to ensure it can play an active and positive role in financing the economy.
FATF (Financial Action Task Force) is a model for collective action. It now has 37 members, most of the countries with the largest economies and 2 supranational organizations (EC and GCC). Members drive the agenda of financial integrity across the financial system. It (1) sets standards, (2) conducts peer review assessments of member countries, (3) publishes results and (4) issues follow up steps, blacklisting. By these four essential steps, FATF has the proven ability to change behaviors, even without recourse to the law. The punitive blacklisting system has real consequences for all entities involved in financial markets and could be considered as a cost of doing business.
Balancing the evolution of a risk-based approach with the need for clarity
There seems to be growing calls in favor of a more risk-based approach. Would such an evolution be a step back, and ultimately a license to be more lenient? Some fear that a risk-based approach could turn out to be return to self-regulation. If anything, the crisis has shown the limits of the self-regulatory model. Yet, Chip argued that the alternative one-size-fits-all model does not provide the flexibility to allocate resources where they are most needed and leverage the expertise on the ground. Francois Haas explained that the risk-based approach is the foundation of the French approach and has shown it can provide a solid grounding for navigating crises as it leverages the expertise on the ground (judgement versus rules). Chip Poncy underlined that behavior can change not only thanks to regulation but also supervision, examination and enforcement. The objective it not just to tick boxes but actually manage risk and resources. Raphael Douady highlighted that we don’t need to allocate capital to all risks but there is a fiduciary responsibility to disclose them. A successful risk-based approach needs to be balanced. Enforcement is essential and Chip Poncy questioned whether, in the area of AMF-CFT, we ever had a risk based approach, given that the risks were never assessed until 2013 by FATF. There is an inherent difficulty with coming up with a process to quantify these risks.
Are sanctions unjustifiably punitive or are they the cost of doing business? Chip argued that banks are responsible for deceptive actions on a systemic level. There is a strong difference between Europe and the US in the magnitude of the fine (is it taxation without representation?). We are witnessing a change in corporate culture as very large fines now shift to an individual criminal responsibility. The dominance of the USD in global trade implies that US regulation is relevant to all. The US model is risk based but has a strong enforcement capability (FED, DOJ, OFAC, US Treasury) and although its enforcement mechanism is messy, it is nevertheless necessary. There is a need to rationalize and cut the overlapping jurisdictions but leveling the playing field and coordinating supervision on a global basis will require stronger enforcement actions by non US authorities.
Ongoing challenges to the global architecture of financial integrity – what’s next on the agenda of financial regulators
The disparity between policy and market practices calls for a more level playing field. The key challenge to regulation remains the constantly evolving financial system. As shadow banks are increasingly replacing banks in some of their traditional activities, there needs to be an even approach on both instances.
One participant raised the issue of US enforcement, in particular if European banks operating in New York are unfairly targeted by the supervising authorities. Other participants contested this impression pointing out that the largest fines were in fact levied on American banks. Chip Poncy reiterated that there is no disparity of treatment between US and foreign banks; for instance JP Morgan was fined over $2 billion for failing to file a timely SAR on Madoff related transactions; several US banks were fined billions for compliance violations and associated settlements, including relating to the sub-prime financial crisis
The FCPA (Foreign Corrupt Practices Act) framework is challenged as it creates a double standard where American business suffers. The disparity in enforcement in the United States versus the rest of the world needs to stop with the rest of the world closing the gap. The diversity of risk profiles is essential to the financial stability and it is necessary to navigate these risks while recognizing their specifity. The United States and France have a long history in cooperation in the field of financial integrity.
After eight years of intense change in the financial regulatory framework, progress in the completion of the G20 regulatory agenda remain uneven. Yet, it is clear that the international financial system today is more resilient. The time is prone to reflect and conduct a comprehensive impact assessment of the regulatory changes that have been implemented, and their interactions. In terms of process, the peer review / pressure method has shown constructive results. Overall, there is a need for better visibility and stability in the financial regulatory framework.
Threats and risks are not going away. Chip Poncy sees the more lenient approach to financial regulation as an opportunity for leadership coming from the industry (especially if we migrate towards a risk-based approach, the drive needs to come from the industry versus the government). The industry must think long-term what is best for the stability of the industry, how to make it better, rethink implementation and use technology to increase effectiveness.
A challenging task ahead!