FSA Looks for Mutual Recognition with SEC as Two-Way Street

In the wake of the SEC’s recent roundtable on mutual recognition, the UK Financial Services Authority looks forward to engaging further with the Commission on issues of mutual reliance to facilitate business on a cross border basis. UK senior officials believe that mutual recognition represents a more promising route to widening cross border access than full convergence. The authority has worked within the context of mutual recognition for many years, noted FSA Director Verena Ross, and is trying to balance the targeted and proportionate regulation of firms with the need for investor protection and market confidence. The director’s remarks were made at a British Bankers Association securities forum.

While the FSA still needs to see a formal SEC policy proposal, noted the director, the SEC is showing increasing willingness to consider placing added reliance on overseas regulators. In the terminology that has been adopted by the SEC, this means to allow for substituted compliance.

In considering the latest ideas from the SEC, said the director, the FSA will be mindful of the EU dimension and the role of the European Commission. Also, the FSA will need greater specificity from the SEC before it is able to offer a fuller response on mutual recognition or substituted compliance. More broadly, the continuing expansion of cross-border financial services heightens the need to clarify the relations of home and host supervisors in respect of multinational firms and markets and make these work as smoothly as possible.

FSA-SEC cooperation has already begun on prudential issues. For example, with the implementation of the EU's Financial Groups Directive, the SEC developed its Consolidated Supervised Entity regime and assumed the role of the global consolidated supervisor of the largest US broker-dealers. The FSA director praised this as a welcome move, given that these firms have significant operations in the UK and other European markets.

While cross-Atlantic convergence and mutual recognition in the accounting arena has progressed, observed the official, progress has not been as fast in other areas as the UK financial services industry had hoped. A prominent example of this is secondary market trading. The UK has a regime based on unilateral recognition and equivalent protection, which is the FSA’s Recognized Overseas Investment Exchange (ROIE) regime.

Under this regime, explained the senior official, US exchanges can establish themselves in the UK based essentially on the regulatory regime in their home country. Once the FSA makes sure that the home country regime and the rules of the exchange in question deliver equivalent consumer protection, the arrangements ensure that there is no duplicative regulatory effort.

The FSA relies entirely on the SEC's regulation of the exchange in question. At that point, all the FSA requires is that it be given updates on significant developments that might impact the UK market and its players. In addition, US intermediaries can become remote members of a UK exchange without requiring FSA authorization, as long as they do not undertake regulated activities in the UK. Finally, US issuers listed on US exchanges, where the exchange operates as ROIEs, do not need to register in the UK.

But, noted the director, while the CFTC in many ways has a fairly similar approach to the FSA in secondary market trading, the SEC operates on a rather different basis. Thus, a UK exchange needs to register with the SEC to do business in the US. Also, while UK intermediaries can be remote members of a US exchange, they must register with the SEC in order to do this. Since UK exchanges would like to have the ability to place screens in the US without the need for full SEC registration, there is great UK interest in recent statements by senior SEC staff about the potential for widening the scope for mutual recognition going forward.