By James Hamilton, J.D., LL.M.
Returning to a familiar theme, the chair of the UK Financial Services Authority has rejected the idea that the exclusive regulator of multi-national financial institutions should be their home country regulator. In remarks to the Estonian Financial Supervision Authority, Callum McCarthy called this approach a ``simple nostrum’’ that does not recognize the realities of the situation. While recognizing the legitimate desire of firms to avoid duplicative regulation, he noted that host countries in which financial institutions have branch operations or subsidiaries have duties that cannot be ignored.
For example, host regulators are accountable for the activities of a large financial institution within their jurisdiction. In his view, they cannot simply refer questions about those activities to a distant home country regulator. In addition, there are substantial differences between the legal powers granted to different regulatory organizations in different countries.
This issue is simply not going away as global financial institutions continue to develop and sophisticated regulatory regimes are involved. There are also questions of political will since the degree of independence of financial regulators is not uniform across the world, nor even within the EU. Finally, according to the FSA chair, there are questions of competence. It is evident that not all countries are able to devote the resources, or have the experience, to discharge all the responsibilities that might be expected of a lead regulator even with the benefit of some collaboration with host authorities.
The growing prevalence of large banks and securities firms operating in a number of countries has led to an effort to find the most efficient and effective means of regulating them. Under the lead regulator approach, the bank or securities firm is supervised by the regulator of the country where it is headquartered or has its principal place of business. The allure of simplicity attaches to this approach.
Even if a bank did extensive business in another country, the host country, it would still be exclusively regulated by its home country regulator. For example, while Deutsche Bank is one of the largest players in the U.K. market, its lead regulator would be the German BaFin. Similarly, U.S. global banks and securities firms would be regulated solely by the Federal Reserve Board and the SEC despite their substantial activities in the U.K. or Germany.
But the FSA chair has now consistently expressed strong reservations with allowing one regulator to have authority over a bank or firm that has a large systemic financial presence in a host country. In these and in earlier remarks, he has amplified the concern that different regulators have differing levels of power and resources to deal with global firms that may pose systemic risk in the countries in which they operate.