A Road Map to Better Financial Services Regulation

A Road Map to Better Financial Services Regulation

  By David F. Snyder, Vice President and Associate General Counsel, Public Policy, American Insurance Association  

In the Paris headquarters of the Organization for Economic Co-operation and Development (OECD), there is a photograph of President Eisenhower, President DeGaulle, Prime Minister MacMillan and Chancellor Adenauer seated around a table in December 1959.  The photo's caption tells us that President Eisenhower used the occasion to declare the rebuilding of Europe complete (an astounding mark of success considering that bombs were still dropping on European cities less than 15 years before) and called on the assembled nations to work for the economic betterment of the rest of the world.

A year later, in December 1960, the OECD was created. Among its aims are to promote policies that: "...achieve the highest sustainable economic growth and employment and rising standards of living in Member countries..." and "...contribute to the economic development of both Member and non-member countries..."  See articles 1 and 2 of the Convention on the Organization for Economic Co-operation and Development (December 14, 1960).

Rooted in this history, it would not be surprising if the OECD stepped in to play a constructive role in solving today's global crisis-the economic turmoil and the resulting restructuring of the world's financial services regulatory system(s).  And almost exactly 50 years from that meeting of some of history's greats, the OECD has done just that.

Recommendations and Principles for Financial Services Regulation

On December 4th, the OECD released three documents which argue that effective and efficient financial regulation frameworks can constructively assist in the current national and international debates regarding financial services regulation. The first is the OECD Recommendation and Principles. This document lays out high-level principles for the identification and achievement of a healthy financial system, including public policy objectives, policy instruments, system design and implementation, and review of the "effectiveness and efficiency of the policy instruments and system of institutions used to achieve them."  The paper and its recommendations emphasize the importance of stating clear policy objectives, the use of least costly policy alternatives, and the performance of periodic reviews to determine whether success has been achieved.

Policy Guidance

The Recommendations and Principles paper incorporates two other OECD documents. The first of these is the Policy Framework for Effective and Efficient Financial Regulation: General Guidance.  The Policy Framework offers a more detailed discussion of the financial landscape, the policy objectives, the policy instruments, system design and implementation, and review. It states in paragraph 7 on page 4 that:

...the framework for government intervention and financial regulation is based on the elaboration of policy objectives, which define the outcomes to be expected from addressing the identified problems or specified needs in the financial system and possibly more broadly.  Government intervention and regulation should strive to achieve these objectives, and their effectiveness is measured by the extent to which these efforts are successful.  At the same time, intervention and regulation in the financial system carries costs, so that should be done as efficiently as possible without sacrificing the achievement of policy objectives-unless indeed the overall costs of intervention exceed the benefits.

The need for clearly stated policy objectives, careful selection of policy tools, and efficiency as well as effectiveness are reinforced throughout the document. It is, therefore, a refreshing call for clarity in establishing regulatory objectives, thoughtfulness in selecting policies, and care in setting up systems to carry out those objectives with accountability built in for the selected policies and systems.

Policy Checklist

The second document referenced in the Recommendations and Principles paper is the Policy Framework for Effective and Efficient Financial Regulation: High-level OECD Checklist.  This paper summarizes the content of the other two documents in an easy-to-follow checklist of questions to be asked and answered in connection with any financial services regulatory action.  The same basic principles-clarity of objectives, thoughtful selection of policy instruments, and careful creation of systems to achieve the regulatory objectives in the least costly way with accountability for government action-are carried forward in the checklist.  Reflected throughout are concerns for cost effectiveness, international coordination, transparency, and responsibility.

First, under the financial landscape, the checklist asks such questions as:  Have the expected outcomes of a well-functioning financial system been identified? Has this vision of a well-functioning financial system been communicated to the public?  Have considerations of cost, confidentiality, financial stability, and security been properly assessed in determining the appropriate level of transparency?

Second, the checklist recommends the statement of policy objectives and asks whether problems have been clearly identified?  Has the case for intervention been established, and have the direct and indirect costs of intervention been assessed?  Do the objectives correspond to the anticipated beneficial outcome of intervention?  Have the alternatives to government intervention been assessed (including non-intervention)? And, have accountability mechanisms been established?

Third, the checklist provides guidance on matching policy instruments to the identified objectives.  It asks, among other questions: Have the impacts of each policy instrument been identified, particularly in respect of costs, incentives of affected parties, and international spillovers?  The checklist further inquires:  Are the selected combinations of policy instruments appropriate for the identified needs in the financial system and are they the least-cost approach?  Have specific factors, such as industry sector, type of institution, and type of consumers been explicitly considered in the choice and design of instruments for each policy objective? And has the choice of the selected instrument been publicly justified?  The checklist then cites 10 principles for regulation and emphasizes the need for a sound, open, and transparent process, including assessing the costs versus the benefits.

Fourth, system design and implementation are addressed.  Key issues cited include whether there are appropriate accountability mechanisms for each governmental entity.  Fifth and finally, the checklist emphasizes the importance of periodic review of effectiveness and efficiency.

Taken together, this body of OECD work on financial services regulation deserves serious attention from all interested parties, whether public or private.  These three documents provide a constructive policy framework for action that would likely produce effective financial services regulation, even while the thinking behind them encourages a healthy, competitive financial services market.

Just as the precursor to the OECD oversaw the rebuilding of a devastated Europe, so, too, can the principles and related guidance recently enunciated by the OECD successfully guide the rebuilding of the world's financial system.  History could repeat itself, this time in a good way.

Note:  The OECD is comprised of 30 nations, including the world's greatest insurance markets, and is termed "the world's largest think tank." The key documents may be found at http://www.oecd.org.

Note:  The author serves as a member of the US delegation, chaired by the US Department of Commerce, to the OECD's Insurance and Private Pensions Committee, which significantly contributed to the contents of the final OECD documents.


David F. Snyder is Vice President and Associate General Counsel, Public Policy, for the American Insurance Association (AIA), specializing in international trade, insurance regulatory issues, transportation insurance and legal reform.