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Western EuropeJune 3 2007

Regulator academy

The establishment of a school for financial regulation in London should attract students from around the world eager to learn about the UK’s principles-based oversight model, says Mervyn Davies.
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In recent years we have seen the increasing globalisation of financial markets as capital has flowed across borders, while companies’ appetites for raising funds in the international capital markets, particularly in Asia, has steadily grown.

Amid this globalisation, London has emerged as the world’s leading international financial centre. In addition to the City’s position between the time zones of Asia and the Americas, and the UK government’s openness to foreign participants in the financial sector, enlightened regulation has played a major part in London’s success.

The UK’s Financial Services Authority (FSA) is internationally recognised for the highest standards and integrity. Its distinctive strength is its application of principles-based regulation, minimising the burden of complying with detailed rules while demanding rigorous adherence to the principles of regulation. This outcome-oriented approach differs greatly from the US’s desire to create rules for all eventualities.

Global reach

So it is fitting that the UK government plans to set up the world’s first International Centre for Financial Regulation (ICFR) in London. The ICFR will have global reach, providing research and training for financial regulators around the world and increasing the level of communication and understanding between regulators.

In conversations with regulators I am frequently asked about the FSA and its principles-based approach. In Asia and the Middle East I have seen a growing interest from other markets and regulators who wish to emulate this approach. Standard Chartered recently hosted regulators from Korea and China, sharing the bank’s internal regulatory processes.

Greater dialogue and understanding between regulators will strengthen the international financial system and benefit the financial services industry.

While institutions and capital flows have globalised, regulation has remained relatively local. Sharing of best practice will help ensure against the kind of local market failure that set off the 1997 Asian crisis.

The regulatory burden on financial institutions has grown hugely. In a world of increasingly complex financial products, sophisticated criminal networks using the financial system, and individuals taking more responsibility for their financial welfare, it is right that stringent measures be in place.

But for international institutions, ensuring compliance with a vast array of rules in different countries creates costs that are borne by the company’s shareholders or customers. If regulators were to coalesce around a principles-based approach to regulation, the financial services industry would become more efficient and could pass on the benefits to its customers.

The ICFR will help to influence developments in regulation across the world but its establishment is not a sign of complacency in London.

The establishment of the ICFR, with the support of the City’s leading financial institutions, is one of a range of measures from the government to consolidate London’s position as the world’s international financial centre. Its presence will help ensure that the UK continues to refine and adapt its approach to regulation.

Much has been written about competition between New York and London, and senior figures in the US such as Treasury secretary Hank Paulson have acknowledged the potential benefits of moving towards principles-based regulation to maintain the competitiveness of US capital markets.

Global pretenders

But Wall Street will not be the only competition to London in the future. In Asia and the Middle East, cities such as Tokyo, Shanghai, Singapore, Mumbai, Hong Kong, Seoul and Dubai are vying to be regional or international financial hubs (see page 44). In May, Japan’s parliamentary secretary for financial services, Koutaro Tamura, visited London to find out how he could apply London’s success to Tokyo.

There is room for more than one global leader but it is important that these emerging global financial hubs adopt an approach to regulation that stimulates investment in their economies and creates an environment where the spirit and not the letter of the law prevails. The ICFR will enable the UK to export what it does best and to learn from the world’s fastest growing markets.

Just as the City has attracted the world’s top financial institutions, the ICFR creates the opportunity for London to become a global centre for excellence in regulation and to reinforce its position as the world’s international financial centre.

Mervyn Davies is chairman of Standard Chartered and chairman of the International Centre for Financial Regulation’s interim executive committee.

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