Abstract
The purpose of this chapter is to consider the objectives of financial supervision.1 Before addressing the issue of investment services regulation and supervision and examining its effectiveness and efficiency within the European context, a brief summary of the rationale for financial supervision is provided. Why does supervision have welfare benefits? Why supervise investment services at all? What is special about financial firms and markets and what is the relationship between supervisory objectives and institutional structures of supervision? The highlights of the purpose of an incentive-based legal and supervisory framework will assist the main aim of this book to identify the most suitable and less risk-taking supervisory structure within the EU area.
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Notes
This chapter does not distinguish between the objectives, the rationale and the reasons for regulation and supervision. It is not its point to differentiate between the economic rationale as opposed to why, in practice, regulation and supervision might be imposed. For such a distinction, see Llewellyn, D., The Economic Rationale for Financial Regulation (FSA Occasional Paper No. 1, April 1999) 8–9.
See Di Cagno, D., Regulation and Banks’ Behaviour towards Risk (Dartmouth: Aldershot, 1990).
Mayes, D. et al., Improving Banking Supervision (Basingstoke: Palgrave, 2001) 65.
Dimson, E. and Marsh, P., ‘Calculating the Cost of Capital’ (1982) 2 Long Range Planning 112, 113–14.
Cesarini, F., ‘Economics of Securities Markets Regulation: Some Current Issues’, in Ferrarini, G. (ed.), European Securities Markets: The Investment Services Directive and Beyond (London: Kluwer, 1998) 65.
See Austin, R., ‘Commentary 2 on Report No 1’, in Buxbaum, R. et al., European Economic and Business Law: Legal and Economic Analysis on Integration and Harmonisation (New York: Walter de Gruyter, 1996) 213.
See, e.g., Dale, R., ‘The Regulation of Investment Firms in the European Union (Part 1)’ (1994) 10 JIBL 394; Llewellyn, op. cit., note 1, 20.
Key objectives of financial regulation have been identified in various international reviews; for banking, see OECD, Banks under stress (Paris, 1992);
Basel Committee, Core Principles for Effective Banking Supervision (September 1997);
for securities, see IOSCO, Objectives and Principles of Securities Regulation (February 2002);
for insurance, see IAIS, Insurance Core Principles (October 2000);
for cross-sectoral issues, see Joint Forum, Core Principles: Cross-Sectoral Comparison (November 2001).
Di Giorgio, G. et al., Financial Market Regulation: The Case of Italy and a Proposal for the Euro Area in Andenas, M. and Avgerinos, Y. (eds) Financial Market Supervision in Europe: Towards a Single Regulator? (London: Kluwer, forthcoming 2003).
The outcome of Lamfalussy and his Wise Men Committee uses confidence as an objective, which can be used horizontally in pursuing the ultimate regulatory method. Recommending the adoption of a ‘conceptual framework of overarching principles’ at Level 1, on which EU securities regulation should be based, the maintenance of confidence in European securities markets constitutes one of them; see Wise Men Committee, Final Report on the Regulation of European Securities Markets (February 2001) 22.
Hawkesby, C., ‘The Institutional Structure of Financial Supervision: A Cost-Benefit Approach’ (2000) 3 JIBR 36.
‘Systemic risk’ refers to (a) the scenario that a disruption at a firm, in a market segment, or to a settlement system could cause a ‘domino’ effect throughout the financial markets toppling one financial institution from another or (b) a ‘crisis confidence’ among investors, creating illiquid conditions in the marketplace. See IOSCO, Risk management and Control Guidance for Securities Firms and their Supervisors (May 1998) 7.
See especially European Commission, Progress on Financial Services: 2nd Report (COM(2000) 336, 31 May 2000) 10.
For the regulatory and supervisory arrangements that address such conflicts of interest, see FESCO, Status of Implementation of the Standards for Regulated Markets (25 September 2000) 1.
Llewellyn, op. cit., note 1, 16. See also European Commission, Communication on Upgrading the Investment Services Directive (93/22/EEC) (COM(2000) 729, 16 November 2000), where it is noted at 5 that ‘removing regulatory obstacles to the free circulation will not be sufficient. Regulatory action is also needed to correct market failure and to facilitate the effective interaction of supply and demand for capital’.
See Mayes et al., op. cit., note 4, 82. See also Lindsey, R., ‘Efficient Regulation of the Securities Market’ in McCrudden, C., Regulation and Deregulation: Policy and Practice in the Utilities and Financial Services (Oxford: Clarendon Press, 1999) 298.
‘By promising something which cannot, in reality, be delivered, the regulatory system undermines the inevitable fundamental responsibility which consumers must take for their own decisions. As a result, when things go wrong, investors believe they are entitled to compensation, almost irrespective of the quality of the advice received’; see Ford, C. and Kay, J., ‘Why Regulate Financial Services’ in Oditah, F. (ed.), The Future for the Global Securities Markets — Legal and Regulatory Aspects (Oxford: Clarendon Press, 1996) 145.
All these make straight fraud and abuse more likely; see Goodhart, C. et al., Financial Regulation: Why, How and Where Now? (London: Routledge, 1998) 7.
See also FESCO, Market Abuse: FESCO’s Response to the Call for Views from the Securities Regulators Under the EU’s Action Plan for Financial Services (29 June 2000).
EC Treaty, Article 3(g). The EU rules on competition are contained in Articles 81–6 (former Articles 85–90) of the Treaty. Dassesse et al. regard no coincidence that these rules are to be found at the Third Part of the Treaty, which deals with the policies of the EU; see Dassesse, M. et al., EC Banking Law (London: Lloyd’s Press, 2nd ed., 1994) 245.
The Internal Market Council concluded in March 2001 that ‘competition should be reinforced in services sectors, supported by the removal of barriers to crossborder trade and market entry’. See European Commission, Economic Reform: Report on the Functioning of Community Product and Capital Markets (COM(2001) 736, 7 December 2001) 16.
European Commission, Second Report on Competition Policy (1972) Point 50.
This is more evident in banking, where it is possible to use the solvency requirements to arrive at a very rough estimate of the distortion of competition caused by state aid. For this reason, the Commission has requested very substantial asset disposals in cases like Banco di Napoli and Credit Lyonnais, in order to alleviate the most important distortive effects of the aid packages; see Van Miert, K., EU Competition Policy in the Banking Sector (Speech delivered to the foreign bankers in the Belgian Bankers’ Association, Brussels, 22 September 1998).
Dalhuisen, op. cit., note 3, 159. Indeed, imposing excessive or irrelevant regulation and supervision into an otherwise free-market context may distort the economic outcome, possibly so much that the end result is worse than the unregulated starting point; see Goodhart et al., op. cit., note 39, 2. For an outline of the numerous problems associated with a highly prescriptive regulatory regime, see Llewellyn, D., ‘Re-engineering the Regulator’ (1996) 3 The Financial Regulator 21, 23–4.
Estrella, A., ‘A Prolegomenon to Future Capital Requirements’ (1995) 2 Federal Reserve Bank of New York Economic Policy Review 1.
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© 2003 Yannis V. Avgerinos
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Avgerinos, Y.V. (2003). The Objectives of Financial Supervision. In: Regulating and Supervising Investment Services in the European Union. Palgrave Macmillan, London. https://doi.org/10.1057/9780230286870_2
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DOI: https://doi.org/10.1057/9780230286870_2
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