Structural Reform of Financial Regulation

• Author: Eric J. Pan
• Position: Associate Professor of Law and Director, The Samuel and Ronnie Heyman Center on Corporate Governance
• Pages: 796-867

Structural Reform of Financial Regulation

Eric J. Pan*

I. PREFACE ..................................................................................... 797

II. ORIGINAL INTRODUCTION ........................................................... 800

III. DESIGNING AN OPTIMAL REGULATORY SYSTEM ......................... 805

A. Regulatory Objectives ...................................................... 805

B. Characteristics of an Optimal Regulatory System ........ 808

C. Regulatory Strategies ...................................................... 812

D. Organization of the Regulatory System.......................... 816

IV. CANADA’S REGULATORY SYSTEM ................................................ 822

A. Current Structure of Canada’s Regulatory System ....... 822

B. Comments on Canada’s Regulatory System................... 827

V. COMPARATIVE ANALYSIS OF THE UNITED KINGDOM, AUSTRALIA,

UNITED STATES, FRANCE, GERMANY, THE NET HERLANDS, AN D

HONG KONG ................................................................................ 828

A. The United Kingdom ...................................................... 829

B. Australia .......................................................................... 835

C. The United States ........................................................... 837

1. Current System ..................................................... 837

2. Calls for Reform ..................................................... 841

3. U.S. Treasury Blueprint for a Modernized

Financial Regulatory Structure ........................... 843

a) Market Stability Regulation ....................... 843

b) Prudential Regulation ................................. 844

c) Business Conduct Regulation ..................... 844

D. France .............................................................................. 848

E. Germany ........................................................................... 849

F. Hong Kong ....................................................................... 851

G. Japan ............................................................................... 853

* Associate Professor of Law and Director, The Samuel and Ronnie Heyman Center on Corporate

Governance, Benjamin N. Cardozo School of Law, New York, NY. E-mail: epan@yu.edu. I am

grateful to Brian Lederman and Todd Menszak for their invaluable research assistance.

Winter 2011] STRUCTURAL REFORM OF FINANCIAL REGULATION 797

H. The Netherlands .............................................................. 854

VI. REFORMING CANADA’S REGULATORY SYSTEM ............................ 856

A. Speaking with One Voice: Promotion of National

Regulation ........................................................................ 856

B. Objectives-Based Regulation ........................................... 860

C. Choice Between Single Regulator and Twin Peaks

Models .............................................................................. 860

D. The Enforcement Dilemma: Supervisory Approaches

and Principles-Based Regulation ................................... 861

VII. CONCLUSION ............................................................................... 863

APPENDIX A........................................................................................... 864

APPENDIX B........................................................................................... 867

I. PREFACE

In the summer of 2008, I wrote the following Article to help the Expert

Panel on Securities Regulation in Canada put forward recommendations to

the Canadian Minister of Finance and the provincial and territorial ministers

concerning reform of Canada’s securities regulatory system.1 The Canadian

Minister of Finance appointed the members of the Expert Panel in February

2008.2 On January 12, 2009, the Expert Panel released the paper and its

recommendations to the public.3

While this Article discusses in detail the challenges facing the Canadian

system, its purpose is to analyze more broadly the elements of an ideal

financial regulatory system—elements that are important to any jurisdiction

1 In laying out a framework for considering optimal structural reform of financial regulatory

systems, this Article cites specific examples of existing regulatory systems and recent regulatory

reform proposals. Much has changed since the time the author drafted this Preface in 2009 and

the main body of the Article in 2008. Given the slow editorial process associated with print

publications, this Article neither references nor predicts the outcome of the most recent

developments, especially the passage of the Dodd–Frank Wall Street Reform and Consumer

Protection Act, restructuring of the U.K. financial system after the election of the new

Conservative government in May 2010, the outcome of the Council of Ministers and European

Parliament debate on the de Laro sière reform recommendations, an d consideration of new

legislation by the Canadian parliament establishing a national securities regulator (legislation

that resulted from the recommendation of the Expert Panel). The argument presented in this

Article regarding optimal structural reform of financial regulation, however, remains sound.

2 See Press Release, Dep’t of Fin. Canada, Government of Canada Appoints Expert Panel to

Review Securities Regulation (Feb. 21, 2008), available at http://www.fin.gc.ca/n08/08-018-

eng.asp.

3 See EXPERT PANEL ON SECURITIES REGULATION, FINAL REPORT AND RECOMMENDATIONS (Jan.

12, 2009), available at http://www.expert panel.ca/eng/documents/Exper t_Panel_Final_Report_

And_Recommendations.pdf.

798 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 19:796

considering how to improve the structure of its regulatory system. This

Article identifies a regulatory system’s key objectives, essential

characteristics, most important strategies, and optimal organizational

approaches. In order to show how different jurisdictions have implemented

these elements, this Article compares the regulatory systems of Canada, the

United Kingdom, Australia, the United States, France, Germany, Hong

Kong, Japan, and the Netherlands. The comparative analysis produces

several lessons for any financial regulatory reform effort.

When I initially examined the optimal characteristics of a financial

regulatory system, the global financial crisis was still in its adolescence and

the seriousness of the crisis and its effect on the general economy were not

entirely obvious. In intervening months, however, the crisis has cast a harsh

spotlight on the quality of financial regulation in the United States and

elsewhere in the world. The leading economic powers acknowledge the failure

of their regulatory systems to prevent the causes of the financial crisis and

are now struggling to make improvements to avoid future financial crises.4

In June 2009, President Obama unveiled his administration’s White

Paper on Financial Regulatory Reform

5 to replace a regulatory system

“crafted in the wake of a 20th century economic crisis . . . [and] overwhelmed

by the speed, scope, and sophistication of a 21st Century global economy.”6 In

the United Kingdom, policymakers are considering several recommendations

to improve the U.K. financial regulatory system, ranging from the Turner

Review submitted by the U.K. Financial Services Authority in March 2009,7

to a report presented by the U.K. Treasury in July 2009,8 to a White Paper

prepared by the Conservative Party also in July 2009.9

4 See Gr oup of Twenty [G-20], The Global Plan for Recovery and R eform, paras. 13−14 (Apr. 2,

2009), available at http://www.londonsummit.gov.uk/resources/en/PDF/final-communique.

The European Union

is in the process of implementing a series of structural reform

5 See generally U.S. DEP’T OF THE TREASURY, FINANCIAL REGULATORY REFO RM: A NEW

FOUNDATION: REBUILDING FINANCIAL SUPERVISION AND REGULATION (2009) [hereinafter U.S.

TREASURY WHITE PAPER], available at

http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.

6 Press Release, Office of the Press Secretary, Remarks by the President on 21st Century

Financial Regulatory Reform (June 17, 2009), available at

http://www.whitehouse.gov/the_press_office/Remarks-of-the-President-on-Regulatory-Reform/.

7 UNITED KINGDOM FINANCIAL SERVICES AUTHORITY, THE TURNER REVIEW: A REGULAT ORY

RESPONSE TO THE GLOBAL FINANCIAL CRISIS (Mar. 2009), available at

http://www.fsa.gov.uk/pubs/other/turner_review.pdf (the relationship between the FSA, Bank of

England, and HM Treasury is often referred to as the “tripartite arrangement”).

8 See generally HM TREASURY, REFORMING FINANCIAL MARKETS, 2009, Cm. 7667, available at

http://www.official-documents.gov.uk/document/cm76/7667/7667 .pdf.

9 THE CONSERVATIVE PARTY, FROM CRISIS TO CONFIDENCE: PLAN FOR SOUND BANKING (July

2009), available at

http://www.conservatives.com/News/News_stories/2009/07/~/media/Files/Downloadable%20Files/

PlanforSoundBanking.ashx.