In the alphabet soup of institutions involved in the regulation of global financial markets, the FMLC \u2013 the Financial Markets Law Committee \u2013 is not very prominent. Given that it is based only in London, having grown out of an initiative by the Bank of England 20 years ago, and that most of its members are lawyers, most banks have not even heard of it (though some of them are represented on its Council). But the services provided by the FMLC have never been more necessary.<\/p>\n
The FMLC\u2019s mission is to identify and propose solutions to issues of legal uncertainty in financial markets that might create risks in the future. As a recent FMLC paper<\/a> showed, the wave of new regulations implemented since the global financial crisis \u2013 many of which were poorly planned or inconsistent across countries \u2013 has left a jumbled landscape of legal uncertainties.<\/p>\n Consider banks\u2019 capital requirements. The Basel 3 Accord, adherence to which increased the liquidity of all banks and decreased their leverage, is viewed as a firm standard in some parts of the world. But, in others, it is regarded as a minimum to which additional rules may be added. Such \u201csuper-equivalence\u201d or, more colloquially, \u201cgold-plating\u201d creates inconsistencies across jurisdictions, thereby facilitating regulatory arbitrage.<\/p>\n Likewise, the European Union, in contrast to the United States, regards the leverage ratio as a supervisory optional extra, known as a \u201cPillar 2 measure\u201d<\/a> (which permits supervisors to add additional capital buffers to address a particular bank\u2019s idiosyncratic risks). And, though both the US and the EU prohibit proprietary trading, they each define it differently.<\/p>\n There are also inconsistencies between the US and the EU in derivatives-market reform, which the Financial Stability Board has warned could undermine the objectives, set out by the G-20, of greater standardization of contracts and enhanced transparency. And, whereas the Basel standards continue to refer extensively to credit ratings as the basis for assessing the creditworthiness of borrowers, the Dodd-Frank Act<\/a> in the US moves away from reliance on ratings.<\/p>\n Such differences \u2013 and the FMLC Council lists many more \u2013 reflect a dangerous shift in the world\u2019s approach to regulation. The early post-crisis enthusiasm for new, globally agreed regulatory standards has given way to a range of national initiatives, driven by domestic political agendas, with little regard for cross-border compatibility.<\/p>\n More problematic, the peer-review procedures that have been introduced so far will do little, if anything, to resolve the problem. Nor do the memoranda of understanding drawn up by national financial regulators offer hope of salvation. According to the FMLC paper, \u201cthey are usually the subject of interpretative disagreement, are not legally binding, do not benefit from any binding dispute-resolution mechanisms, and do not prevent national authorities from acting unilaterally.\u201d<\/p>\n So what can be done? The FMLC makes four important recommendations.<\/p>\n First, the Financial Stability Board<\/a> should help to reduce avoidable inconsistencies across countries by propagating a set of high-level principles to which all member countries would be expected to conform when introducing new regulations. Indeed, the need for such principles should have been recognized in 2009, when the wave of re-regulation began.<\/p>\n Second, to address existing regulatory conflicts, the FMLC recommends establishing a \u201cconflict of regulation\u201d framework to determine which legal regime \u2013 that of a global firm\u2019s home country or that of its local subsidiary\u2019s host country \u2013 has jurisdiction in a specific cross-border dispute. The alternative of relying on a third-party multilateral organization to act as mediator in such disputes, the report explains, has little support from G-20 countries.<\/p>\n Third, the FMLC proposes expanding the Financial Stability Board\u2019s mandate. That body, which emerged from the old Financial Stability Forum in 2009 with few powers and no formal status, has only recently become a separate legal entity. Strengthening its powers \u2013 to include, for example, the establishment of principles for addressing cross-border legal inconsistencies \u2013 could go a long way toward addressing the problems raised by regulatory disparities.<\/p>\n Finally, the FMLC calls for the establishment of a permanent G-20 secretariat to improve continuity and coordination across G-20 presidencies. As it stands, political priorities are constantly in flux, with individual dossiers losing their centrality, and even vanishing, from year to year.<\/p>\n Regulatory uncertainty may not seem like the most exciting topic, which is probably why the FMLC report has attracted so little attention. But, as the 2008 global financial crisis starkly demonstrated, it can render markets dysfunctional, with ambiguity about different regulators\u2019 responsibilities making it difficult, even impossible, to address the problems caused by failing firms. (Former US Treasury Secretary Tim Geithner\u2019s crisis memoir<\/a> makes that point painfully clear.)<\/p>\n When I chaired the United Kingdom\u2019s regulatory body, the Financial Services Authority, I believed in the idea that lawyers should be on tap, not on top. But they should always be heard. The FMLC\u2019s influential lawyers have spoken. The world should listen.<\/p>\n ___________________________________<\/p>\n Howard Davies, a professor at Sciences Po in Paris, was the first chairman of the United Kingdom\u2019s Financial Services Authority (1997-2003). He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.<\/em><\/p>\n