Regulation: A European Perspective Rhodri Preece, CFA CFA Institute Centre for Financial Market Integrity

Introduction 1.CFA Institute and the Centre 2.Regulatory Structure 3.Regulatory Policy Congratulations New Charterholders │ 2

1. CFA Institute CFA Institute is the global, not-for-profit association of investment professionals that awards the Chartered Financial Analyst ® (CFA ® ) designation. Membership includes more than 100,000 investment analysts, portfolio managers, investment advisors in 131 countries. Mission: To lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence. Congratulations New Charterholders │ 3

CFA Institute Centre for Financial Market Integrity The Centre is the policy and research authority on global capital markets issues. The Centre represents the views of investment professionals before standard setters, regulatory authorities, and legislative bodies worldwide. We support measures to improve efficiency, transparency, and integrity in global financial markets. Congratulations New Charterholders │ 4

2. Regulatory Structure Globalised financial markets, products, and services But... Nationalised, fragmented regulatory structure Supervisory evolution: Fragmentation  Integration Congratulations New Charterholders │ 5

i) National structures Europe operates a single market for financial services… But overseen by national regulators. Examples:  FSA – United Kingdom  Unitary authority, responsible for market conduct, consumer protection, prudential supervision  Regulates most financial services markets, exchanges and firms  AFM – Netherlands  Responsible for market conduct and consumer protection  “Twin peaks” structure: Dutch Central Bank responsible for prudential supervision and financial stability Congratulations New Charterholders │ 6

i) National structures  AMF – France  Responsible for securities markets, conduct  Separate prudential authorities for banking and insurance  CONSOB – Italy  Responsible for securities markets, conduct  Separate prudential authorities for banking and insurance Congratulations New Charterholders │ 7

Currently supported by the “Three Level 3” Committees: –Committee of European Banking Supervisors (CEBS) –Committee of European Securities Regulators (CESR) –Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) Mirrored at a global level by the Basel Committee on banking supervision, IOSCO, and IAIS, with the FSB as the hub of the global structure. Congratulations New Charterholders │ 8 i) National structures

ii) Supra-national structures New European Commission proposals: 1)Micro-prudential supervision: European System of Financial Supervision (EFSF) 2)Macro-prudential supervision: European Systemic Risk Board (ESRB) Congratulations New Charterholders │ 9

ii) Supra-national structures Micro-prudential supervision European System of Financial Supervision (ESFS) –Existing national authorities continue to be responsible for day-to- day supervision of firms. –Closer cooperation and sharing of information between regulatory authorities with colleges of supervisors for large cross-border institutions. –Implement common rulebook. Three new pan-European Authorities – Banking, Securities, Insurance –Authorities to act as over-arching bodies for national regulators, replace CEBS, CESR, CEIOPS Congratulations New Charterholders │ 10

ii) Supra-national structures Main tasks of the 3 European Authorities include: (i)legally binding mediation between national supervisors; (ii)adoption of binding supervisory standards; (iii) adoption of binding technical decisions applicable to individual institutions; (iv)oversight and coordination of colleges of supervisors; (v)licensing and supervision of specific EU-wide institutions (e.g. Credit Rating Agencies); (vi)strong coordinating role in crisis situations. Congratulations New Charterholders │ 11

ii) Supra-national structures Macro-prudential supervision European Systemic Risk Board (ESRB) –High-level systemic risk monitoring body to act as an “early-warning” system. –Chaired by European Central Bank Main tasks of the ESRB: –Analysis and advice on macro-prudential issues –Provide early risk warning to EU supervisors –Compare observations on economic developments –Provide direction and guidance –No binding powers Congratulations New Charterholders │ 12

micro-prudential information macro-prudential risk warning Congratulations New Charterholders │ 13 European Systemic Risk Board Chaired by President ECB President (ECB), vice-president, 27 national central bank governors Chairs of 3 Authorities Representatives of European Commission European System of Financial Supervision European Banking Authority (EBA) European Securities and Markets Authority (ESMA) European Insurance & Occupational Pensions Authority (EIOPA) National Supervisors

3. Regulatory Policy Rules vs. Principles Self-Regulation vs. Formal Regulation Self-regulationFormal regulation Voluntary codes & standardsMandatory rules, principles Congratulations New Charterholders │ 14

3. Regulatory Policy Examples:  Credit Rating Agencies o Codes of conduct  regulation and supervision (ESMA) o Conduct of business, independence, governance  Hedge Funds o Codes of conduct, registration  regulation (AIFM directive) o Conduct of business for Managers, capital requirements, disclosure requirements, leverage restrictions o Independent custodians and valuators Congratulations New Charterholders │ 15

Regulatory Policy  Banks o Strengthened prudential supervision (CRD) o More and better quality capital, liquidity, dynamic provisioning o Governance, executive compensation o Reform of Basel II framework  Insurers o Stronger prudential standards – Solvency II Congratulations New Charterholders │ 16

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