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Global overhaul of regulation beginsThe push to reform and overhaul financial regulation globally in the wake of the financial crisis – which has seen the world economy plunged into the worst recession in 70 years – took a major step forward last week. The Organisation for Economic Co-ordination and Development (OECD) announced an agreement on a policy framework for effective and efficient financial regulation.
The OECD announced that it has established a set of key principles to guide financial policy-makers as it looks for fundamental reform that will achieve strong, resilient financial systems which play their part in driving economic growth. Among the issues it addressed are the need for increased transparency, more effective surveillance and greater accountability to the public.
Welcoming the agreement of member countries on the principles, OECD secretary-general Angel Gurría underlined the importance of well thought-out reform for sustainable economic growth: “The systemic importance of the financial system was clearly demonstrated by the huge human and social impact of the crisis.
"To prevent its recurrence, we need to correct a number of failures, including of regulation, supervision, corporate governance and risk management. This is a major task and to accomplish it, we cannot rely only on incremental, piecemeal reform.”
“We must get the whole system right so that the financial sector can effectively resume its vital role in the functioning of the global economy,” he added.
Increasing transparency is key. The complexity and opaqueness of products made risk assessment difficult for firms and investors and hindered market transparency – a major cause of the crisis.
The principles call for domestic and international efforts to ensure that comprehensive, relevant, up-to-date and internationally comparable statistics and indicators are available. Governmental authorities should have the legal powers to compel the collection and dissemination of data.
Surveillance and analysis of the financial system should be strengthened, involving close co-operation among governments. Market failure analysis should be carried out to assess the efficiency of the system and understand evolving problems.
The principles also underline the need for greater accountability of governments. Governmental authorities, including regulators, should publish annual reports that give an overview of developments in the financial system, identify key risks and explain how they are addressing them.
Ongoing review and reform are critical to ensure that governmental authorities stay on top of innovation, develop a comprehensive view, co-ordinate their actions, and are held to account.
The framework recommends that member states also “take account of the General Guidance on a Policy Framework for Effective and Efficient Financial Regulation and the related High-level Checklist, as they may be modified from time to time.”
The framework further “invites non-members (of the OECD) to adhere to this recommendation”, and instructs the Committee on Financial Markets and the Insurance and Private Penssions Committee to exchange information on progress and experiences with respect to the implementation of this recommendation, review that information and report to the Council within three years from its adoption.
The full agreement and related documents can be viewed at www.oecd.org/finance.
