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
SUMMARY

I. Preface - II. Original introduction - III. Designing an optimal regulatory system - A. Regulatory Objectives - B. Characteristics of an Optimal Regulatory System - C. Regulatory Strategies - D. Organization of the Regulatory System - IV. Canada’s regulatory system - A. Current Structure of Canada’s Regulatory System - B. Comments on Canada’s Regulatory System - V. Comparative analysis of the... (see full summary)

 
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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. CANADAS 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 CANADAS 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 systemelements 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 DoddFrank 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. 1314 (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. DEPT 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.

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