The times they are a’ changing. In the globalized world in which we live, it’s hard to deny that regulatory change in one region is not going to affect business in another. And in the financial services industry, the impact of US regulation is most definitely being felt around the world.
Aspectus PR recently wrote about UK Chancellor George Osborne’s plan to restructure the FSA and localized regulatory change. However, the changes we’re seeing with financial regulation in the US are having a much greater impact on the regulatory landscape globally. Indeed, the extraterritorial nature of US financial regulation is undeniable.
The US Foreign Account Tax compliance Act (FATCA) for example, is a national regulation requiring foreign financial institutions (FFIs) holding US assets to enter into an ‘FFI Agreement’ with the US Government to disclose certain information about US accounts to authorities, including the Internal Revenue Service (IRS). Although FATCA is concerned with the evasion of US taxes by US account holders, this Regulation’s very broad scope means it is relevant to all non-US businesses and investments in the US, even if they do not have US clients.
The Volcker Rule, within the Dodd Frank Act, which would remove the proprietary trading arm from US banking institutions, is raising concerns about global investment in sovereign debt based on liquidity terms in the Regulation that would make this an undesirable type of investment. Countries including Canada, Japan and the UK have adamantly argued that a sovereign debt exemption should be added to the Volcker Rule due to the projected negative impact the rule could have on investment in foreign markets.
Security in cyberspace
The significant role of the internet in supporting the financial services industry raises additional issues. Concern over the security of online and mobile banking transactions, for example, raises questions as to how US and global regulation can achieve the necessary level of control required for secure markets.
There is currently only limited cyber-security regulation in place in the US, with the Gramm-Leach-Bliley Act of 1999 and the 2002 Homeland Security Act mandating that financial institutions, among other organizations, protect their systems and information.
However, that may soon change. In February, Senators Lieberman, Collins, Rockefeller and Feinstein introduced the Cybersecurity Act of 2012, a bill that addresses critical infrastructure issues related to network systems in the energy, financial services and chemical industries. Currently, the bill would require these networks to meet federal standards and report in to the Department of Homeland Security. Given the nature of cyberspace, it is difficult to believe that national cyber security regulation won’t have an impact globally.
Oversight and enforcement
To keep pace with the new regulations coming into force, oversight and enforcement in the US is also increasing. The Dodd Frank Act created the formation of several new agencies, including the Consumer Financial Protection Bureau (CFPB) and Financial Stability Oversight Council (FSOC). Both were conceived to increase transparency in the markets, promote investor protection and identify systemically-important entities.
The US Securities and Exchange Commission (SEC) continues to modernize its technology and seek out greater expertise in its examiners, while the debate over whether the US Financial Industry Regulatory Authority (FINRA) should become the Self Regulating Organisation (SRO) for advisors continues to rage on. In 2011, enforcement issues and fines from FINRA increased significantly, with 1,488 disciplinary actions filed, up from 1,310 in 2010.
It remains to be seen how the extraterritorial nature of US regulation will play into this increased oversight and enforcement, but what is happening in the US can and will no doubt affect how financial services markets in many other parts of the world function.