A European perspective on the need for transparency in regulatory reform

Author:

Rudi DeCeuster, Senior Director, Business Wire

In the aftermath of the financial and banking crisis, the European Commission has recently charged a group of experts under the Chairmanship of Jacques Delarosière, former Managing Director of the IMF, to make recommendations for improving the supervision of the financial services sector in the European Union.

Their recommendations have been examined in the course of the latest EU summit held in Brussels in March. They include a fundamental review of the Basel 2 rules, registering and supervision of Credit Rating Agencies that are operating in the EU, as well as a fundamental review of the business model of said CRA’s.

The report further advises “wider reflection” on accounting rules, particularly as regards the mark-to-market principle, so that accounting standards will no longer bias business models or promote pro-cyclical behavior.

Lastly, the Delarosière group recommends that in all EU Member tates competent regulatory authorities should be granted sufficient supervisory powers, including sanctions, that insure that financial institutions comply with the applicable rules.

On April 15, the European Commission struck a draft deal for introducing mandatory registration and supervision of CRA’s and put the Committee of European Securities Regulators (CESR) in charge of handling the registration process. A proposal from the European Parliament to put CESR in charge of supervising registered CRA’s was declined by a number of MS’s, so for the time being this function will be handled by national regulators in Member States where the CRA effectively operates.

The EU furthermore intends to impose registration and information on hedge fund managers concerning their strategies, methods and leverage, including their worldwide activities.

The latter measure is significant; all the additional supervisory and regulatory bodies, and the sanctions that they may impose will have little impact unless regulators and the market in general receive due and timely information on the activities and strategies of such organizations.

One cannot but notice that, while these are undoubtedly commendable intentions and measures, in all this, scarce attention is paid to the interests of the investor and the shareholder, those who, through their savings and the money that they invest, provide the lifeblood for banks, brokers and investment funds alike.

If there is one lesson to be drawn from the current financial crisis, it is that essential information was lacking on crucial moments at the level of the shareholders, the regulators, the authorities.

Notwithstanding the supposedly efficient disclosure rules that have been in place since many decades, it would appear that the latter were not applicable to, or not duly observed by certain market participants who were taking considerable financial risks in an effort to maximize return on investment.

While some corporate executives complain about the burden and cost of disclosing regulatory information , in the midst of the current financial crisis it has become clear that more, not less accurate and timely information should be made available, and to all market participants – not just to the inner crowd.

This is not the time to call for cutting the cost and the scope of disclosure, or the dissemination of corporate information. If anything, there has to be more of it. The tools for disseminating are there, be they the news media and agencies, web posting, or primary information providers that offer a global reach and required technology to disseminate key information swiftly and simultaneously. Recent experience has shown that the market needs more and better insights in the intricacies of certain products and services, and the modus operandi thereof. It is up to the authorities to create the legal framework for making such information mandatory.

While the EU’s recent decisions in creating a reinforced regulatory system should be welcomed, the EU authorities should at the same time pay attention to the need for increased information flowing to shareholders and investors . Without due and complete information, all efforts towards enhanced regulation and supervision will indeed remain pointless.

Author bio

Rudi DeCeuster is the former managing director of the Belgian news agency, Belga, and the former secretary-general of the European Alliance of News Agencies. Rudi has worked closely with the Financial Services Authority in the United Kingdom and the Committee of Securities Regulators (CESR) in the debate over disclosure models leading up to the Transparency Obligations Directive.

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Posted : Thursday 23 April 2009 19:46 | Rudi De Ceuster

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A European perspective on the need for transparency in regulatory reform

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