The SIA’s Richard Thornburgh explains why clarity and clear regulatory regimes are good for business.

Money is more mobile than ever before: dollars become euros become yen become pounds, as capital is redeployed in a never-ending quest for its best use.

We are all familiar with the profound effect this can have on economies, industries and trade balances; less familiar is the role that regulatory differences can play. But in the long term, inappropriate or inconsistent regulation can harm an entire country by prompting capital to seek a safer harbour.

For example, a World Trade Organisation paper, The Impact of Transparency on Foreign Direct Investment, concluded that countries can expect a significant rise in foreign direct investment if they increase transparency by combating bribery, corruption, poorly enforced property rights and inefficient government institutions.

Transparent and fair regulatory systems are integral to developing deep, liquid capital markets, which in turn attract market participants, increase efficiency and fuel economic growth and job creation. Where the rules are not known or predictable, investment is discouraged and incentives for corruption are created. Investors do not like to do business in markets where the ground rules change without warning or where only local firms know the rules (or which ones will be enforced).

Calls for global standards

The US Securities Industry Association (SIA) has urged regulators and trade negotiators worldwide to set standards, adopt best practices and make legal commitments that would enhance regulatory transparency globally. Others, such as the Bank for International Settlements and the World Bank, have endorsed regulatory transparency. And in January, the UK government published its revised Code of Practice on Consultation.

The SIA’s approach to regulatory transparency seeks a system through which good rules have the best chance of being adopted, known to all, and applied consistently and fairly. Our vision can be divided into six basic principles:

1. Rules, regulations and licensing requirements should be considered and imposed, and regulatory actions should be taken, to achieve legitimate public policy objectives that are expressly identified.

2. Regulation should be enforced in a fair, non-discriminatory manner.

3. Regulations should be clear and understandable.

4. All regulations should be publicly available at all times.

5. Regulators should issue and publicise final regulatory actions and the basis for those actions.

6. Regulators should use open, public processes for consultation on new regulatory proposals and changes to existing regulations. A reasonable period for public comment should be provided.

Clear advantages

And the benefits? Clear regulations provide market participants with predictability and the knowledge to comply with regulations. They help businesses to develop an accurate portrayal of their costs and returns, and requires regulators to articulate their objectives. Opaque regulations create uncertainty: the enemy of capital markets. Transparency also makes for better regulation. The greater the range of interested parties that is solicited for input the more prepared regulators will be and the better the regulation.

Requesting public comment does not oblige regulators to follow it. The SIA regularly files comment letters with the US Securities and Exchange Commission and other bodies, disagreeing with a proposed rule. Sometimes the regulators make adjustments based on our advice, sometimes they do not. It is the communication between the regulator and the regulated that benefits markets and, hence, investors.

Our experience shows that transparent regulatory regimes result in rules that reflect the best experience and wisdom of each market and, increasingly, of all markets. They enable regulators to assess all the available alternatives and to avoid initiatives that waste time and money and can harm their markets. As an industry, we believe in regulatory transparency, and stand ready to help, to advise and to participate.

Richard E. Thornburgh is chief risk officer at Credit Suisse Group and 2004 chairman of the Securities Industry Association

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