Financial Services Supervision Research Articles

DO HARD CASES MAKE BAD LAW? THE EFFECTIVENESS OF GERMAN’S APPROACH TO STRENGTHEN FINANCIAL MARKET INTEGRITY

Background: As a direct consequence of the Wirecard scandal from 2020, which brought the work and, above all, the cooperation of the executive board, supervisory board, and external auditors into the focus of the legal discussion, the German legislator adapted the Stock Corporation Act and also the German Corporate Governance Code has been adapted. Executive board members of Wirecard have been subjected to a criminal investigation after reporting fake revenues and air bookings worth billions. The German Stock Exchange, the Federal Institute for Financial Services Supervision, the Financial Reporting Enforcement Panel, the auditing firm, and the Wirecard supervisory board were all criticized for failing to detect the problem earlier. Former Wirecard stockholders lost money, and lawsuits were filed seeking compensation from the statutory auditor, Wirecard AG, and former board members. Research purpose: Following the formal amendment of the law and the GCGC, the focus is now on the effectiveness of the law and the GCGC in practice. The purpose of this study is to assess whether the German solution to strengthening financial market integrity is effective. Research hypothesis: It is hypothesized that German corporate governance requires additional improvements and further reforms. Methods: The analysis of academic literature, journal and magazine articles, reports, and other relevant literature has enabled the author to empirically build the hypothesis of this document and to identify and address major issues that require further amendments in law as well as and additional studies. Conclusions: The reform of the German law has a substantial impact on the work of companies, its main bodies and statutory auditors. It is evident that certain provisions require modification, and further reforms are both expected and necessary to address the gaps. Aspects of trust, transparency, control and monitoring need to be in the focus of the legal discussion as well as the internationalization of stock corporations with the overarching goal to ensure financial market integrity and to regain trust in German companies.

Policy implications and mobile money regulatory approaches to promote financial inclusion of the poor in Zimbabwe after the COVID-19 pandemic

The increased usage of digital financial products and financial services such as mobile money brought various challenges and opportunities in Zimbabwe during the coronavirus (COVID-19) pandemic. This has also increased the responsibilities of the regulatory authorities in the Zimbabwean financial sector. The financial regulators were inadequately prepared for the regulatory demands of financial technology (fintech) products in Zimbabwe. For instance, they struggled to cope with the increased responsibilities of overseeing mobile money operators and have adequate resources to efficiently monitor and manage such operators to ensure compliance with the relevant laws. Most Zimbabwean financial regulators did not have sufficient resources to employ persons with the relevant skills and expertise to fulfil their responsibilities. Despite this, the widespread use of mobile money has considerably improved the financial inclusion of the poor and previously unbanked persons, particularly during the COVID-19 pandemic in Zimbabwe. Consequently, various policy implications and mobile money regulatory approaches that were considered by policymakers during and after the COVID-19 pandemic in Zimbabwe in a bid to provide adequate supervision of mobile money operators and related digital financial services to curb the financial exclusion of the poor and unbanked persons are investigated. It is against this background that this article discusses the challenges, policy implications, and flaws affecting the adoption of viable mobile money regulatory approaches to promote financial inclusion of the poor in Zimbabwe after the COVID-19 pandemic.

KNOWLEDGE CHANGES FATE: CAN FINANCIAL LITERACY ADVANCE POVERTY REDUCTION IN RURAL HOUSEHOLDS?

Poverty reduction and inclusive growth in poor rural areas attracted the increasing attention of governments and scholars around the world. We investigate financial literacy by conceptualizing its impacts on rural households’ poverty reduction, considering current and long-term economic income dynamics. Using a database from 2015 to 2017 China Household Finance Survey, we find that financial literacy has current and long-term effects on promoting rural households’ status by eliminating and effectively improving poverty (dynamic effects). Second, this study reveals that financial literacy and education have a significant complementary effect on rural households’ poverty reduction. The study distinguishes financial literacy from knowledge obtained through general education. Third, financial education is shown to significantly improve rural households’ financial literacy on and enhance poverty reduction. The policy implications of our findings include that the governments and financial institutions are also required to rigorously measure, understand and improve financial literacy. Reform of financial regulatory systems must include a national strategy for education projects and improvement in the quality and supervision of financial products and services.

Square Pegs and Round Holes (Continued): Financial Market Surveillance Authorities and Internal Market Association

AbstractAfter the financial crisis of 2008, the European Union (‘EU’) not only increased its substantial legislation regarding financial services, but also built up a strong and unified system of financial market supervision. In particular, central surveillance authorities were created. These were given far-reaching competences with regard to substituting dysfunctional national authorities or players in the financial services sector. The three European Economic Area (‘EEA’) and European Free Trade Association (‘EFTA’) States—Iceland, Liechtenstein, and Norway—participate in the EU's internal market through their membership of the EEA. In order to continue participating on an equal footing in the internal market for financial services and to honour their duty to maintain homogeneity, the EEA EFTA States also had to incorporate the new institutional setup regarding financial services supervision. This obligation, however, in particular relating to certain intrusive powers of the new surveillance authorities, collided with some constitutional reservations, above all of the two Nordic EEA EFTA States. This article will show how these conflicting aims could be merged into a system that on the one hand guarantees the unified overall approach needed for strengthened surveillance of the internal market for financial services, and on the other hand safeguards certain constitutional reservations of the EEA EFTA States. It also looks at how third countries that do not (fully) participate in the internal market, such as the United Kingdom and Switzerland, are likely to be treated in this context by the EU.

РЕФОРМУВАННЯ ДЕРЖАВНОГО РЕГУЛЮВАННЯ ТА НАГЛЯДУ ЗА ФІНАНСОВИМИ УСТАНОВАМИ В УКРАЇНІ

Urgency of the research. Introduction of efficient system of state regulation and supervision of financial institutions is key direction of state policy of Ukraine for creating stable financial system. Target setting. Difficult situation in financial sector of Ukraine, low financial stability of financial institutions and high sensitivity to risks tell about necessity of reforms in state regulation and supervision of financial institutions. Actual scientific researches and issues analysis. Native and foreign scientists pay much attention to mechanisms of state regulation and supervision of financial services markets, including: O. Baranovsky, S. Barnes, V. Korneev, I. Krupka, V. Mischenko, S. Naumenkova, T. Smovzhenko, K. Styroch, M. Tailor, V. Fedosov, and others. Uninvestigated parts of general matters defining. At the same time existing scientific researches don’t provide proper review of justification of efficient institutional model for Ukraine. The research objective. Investigation of existing models of state regulation and supervision of financial institutions in the world and justification of efficient institutional model for Ukraine. The statement of basic materials. The results of investigation show that in terms of open financial market existing in Ukraine model doesn’t provide efficient supervision of financial institutions. Conducted critical analysis of existing models of state regulation and supervision of financial institu-tions helped to determine advantages and disadvantages of each model and justify the necessity of reforms in state regulation and supervision. Conclusions. Is suggested the way of transformation of existing in Ukraine sectoral model into efficient system of state regulation and supervision of financial institutions by combining model of concentration of all monitoring functions in one monitoring institution with assignment of supervising responsibilities under systemically important financial institutions on individual and consolidated basis on National bank of Ukraine.

From Integrated Financial Services Supervision to the Twin Peaks Model: The Future of Financial Regulation and the Role of the Basel Capital Framework

As regards macro prudential policies, the focus by Basel III on macro prudential policies can also be considered a consequence of the recent Financial Crisis. Hence, in response to efforts aimed at addressing issues relating to coordination, this paper not only seeks to highlight and comprehensively analyze initiatives which have been taken to address macro prudential regulation through Basel III, but also demonstrate how Basel III functions as a vital tool whereby coordination between regulatory and supervisory authorities, both at national and supra national, as well as globally, can be achieved. Through efforts aimed at facilitating harmonization, consistency and comparability, Basel III has not only attained immense progress and recognition in pivotal leading economies, but also proven its potential to pave the way for global harmonization efforts which is so vital and crucial if coordination is to be achieved given complex structures and functions which currently persist with regulatory and supervisory authorities.

Efficacy of Policy Response to the Financial and Economic Crisis: A Case Study of the United Kingdom

<p><em>This piece of work seeks to perform detailed review and analysis of those factors that precipitated global financial and economic crises in 2008 with a focus on the United Kingdom economy. Impacts of the crises from both micro and macro economy perspectives are also analysed in conjunction with the sudden change in government policies from less rigid fiscal prudence, price stability, unsupportive employment policies as well as weak financial services supervision to unconventional stiff fiscal and monetary policies as well as hard core financial regulations with a primary aim to cleaning up the economic and the financial mess that characterised the meltdown. To finalise this work, it is concluded that efficiency of policy actions to address the economic menace to a large extent, helped British Economy to get out of the crisis despite that all the measures adopted were not considered to be perfect in its entirety. Other potential areas of study are also identified. </em></p>

KEBIJAKAN PENGAWASAN PERBANKAN YANG INDEPENDEN DAN EFEKTIF MENURUT ARSITEKTUR PERBANKAN INDONESIA

This study discusses the independent and effectiveness by the Indonesian Banking Architecture (API) to the national banking system and before the establishment of the Financial Services Authority (FSA) oversight. The important role of national banks to the economy of Indonesia will impact on if something happens to the national banking system when its also had a significant effect on the national economy such as the crisis case in 1998 up to 2002 and 2008 before. It encourages the Government to create special institutions for which the duty to financial services supervision including banking sector. Through Law No. 21 of 2011 the government established the Financial Services Authority (FSA) is expected to be able to work independently and effectively perform their functions. This study officially made a compares The Act No. 21 of 2011 about Indonesian Banking Architecture (API) in supervision of national banks terms. Furthermore, this study reveal several factors inhibiting and supporting surveillance on Indonesian Banking Architecture (API) also. Hence, this research led the conclusion that the FSA can not be fully independent and effective as it should because there are still other agencies involved in the supervision of national banks and due to number of sectors that have to be monitored by FSA, in fact this kind of situation made the institution become very superior. Untill, the agency less focus oversee the national banking sector occur.

The United Kingdom's Response to Crisis: A Critical Examination of the New Regulatory Structure of Financial Services Supervision.

The 2008 economic turmoil, which greatly affected the UK, led to the realisation that there had been a missing link in the overall structure of financial regulation. Thus, within days of coming into power, the Coalition Government announced its plans for an extensive overhaul of the regulatory structure of financial services supervision and put forward an ambitious programme for reform, hoping to restore public confidence. The UK’s official response is enunciated in the Financial Services Act 2012, which came into force on the 1st of April 2013. The new legislation has resulted in the split of the Financial Services Authority (FSA) into two separate authorities, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), while a new committee, the Financial Policy Committee (FPC), has been established within the Bank of England (BoE) in order to perform macro-prudential oversight functions. This paper focuses on this very change of the regulatory architecture in the UK. It aims to critically examine its implications in order to reach a conclusion on whether the new regulatory framework is indeed what the UK needs to restore its financial stability. It will attempt to analyse whether this alteration of the regulatory framework is capable of handling future challenges posed by the ever-evolving commercial realities of the global financial markets.

MANAGING FINANCIAL REGULATION: THE REGULATOR'S TOOLKIT, THE ROLE OF PRIVATE ACTORS, AND INTERNATIONALIZATION

The failure to regulate international financial markets in an adequate way is widely understood to be one of the foremost causes of the global financial crisis (e.g. De Larosiere Committee 2009; Financial Services Authority 2009). As the President of the European Commission, Jose Manuel Barroso, stated, ‘The banking crisis exposed the gaps in financial services supervision in Europe. Our market was interdependent, but oversight was purely national’ (European Commission 2010). Regulatory institutions had even created incentives for irresponsible behaviour. For instance, banks were not required to retain on their books part of the securities they issued, over-the-counter (OTC) trading of derivatives was not centrally registered, and hedge funds and private equity firms were not obligated to comply with the capital standards of the Basel II framework. Yet there is also agreement that economic growth requires a regulatory framework that stimulates – rather than suffocates – competition, entrepreneurship, and innovation. Hence, banks worry about the possible negative effects of the regulatory response to the crisis. They fear that economic recovery will be hampered by increased regulation and stricter rules, such as the higher bars for funding and capital levels (Financial Times 2013). Banks also complain about the overlapping of rules and regulators at multiple levels of government, as this adds to complexity and generates uncertainty. For example, to limit

Institutional structures of financial sector supervision, their drivers and historical benchmarks

This paper studies institutional structures of prudential and business conduct supervision of financial services in 98 high and middle income countries over the past decade. It identifies possible drivers of changes in these supervisory structures using the panel ordered probit analysis. The results show that (i) more developed, small open economies with better public governance tend to integrate their supervision, especially the prudential one; (ii) more financially developed countries integrate more their supervision; however, greater development of the non-bank financial system leads to less integrated prudential supervision but not business conduct supervision; (iii) the lobbying power of concentrated and highly profitable banking sectors significant hinders business conduct integration; (vi) countries that experienced financial crises integrate their supervisory structure relatively more and (v) greater central bank independence could cause less integration of prudential supervision, but not necessarily of business conduct supervision.

Financial regulation and supervision in the European Union after the crisis

The global financial crisis challenged the existing architecture for financial services regulation and supervision in the European Union (EU). This article first examines the new pieces of legislation that were issued by the EU in the wake of the crisis, as well as substantial revisions of existing EU legislation. Second, it conducts an overall assessment of the reforms implemented and highlights some open issues that were underscored by the crisis and that were only partially addressed afterward. It is argued that the framework for financial regulation and supervision in the EU after the crisis is still poorly equipped to deal with (or to prevent) future financial crises mainly because of the political constraints encountered during the reform process. One of the most important lessons to be drawn is that political factors are as important as (if not more important than) economic factors in shaping financial services regulation and supervision in the EU (and, arguably, elsewhere).

Why the Transfer of Bank Supervisory Powers Back to the Bank of England is a Step in the Right Direction: Revisiting the Role of External Auditors in Bank and Financial Services Supervision

The need for effective supervision of capital markets is becoming all the more evident in the aftermath of the recent LIBOR and rate rigging scandals. Financial regulators or indeed bank regulators cannot perform such a function effectively without the involvement of auditors in the supervisory process. A challenging task awaits the incoming Bank of England Governor, Mark Carney – particularly given the reduced involvement of auditors in the bank supervisory process since the time of assumption of the Financial Services Authority's bank supervisory functions. However, he (as well as other recent financial reforms) may prove to be the much needed boost required in the bank and indeed, financial supervisory process. This paper is aimed at highlighting why the transfer of bank supervision back to the Bank of England is required if further progress is to be made in the effective regulation and supervision of the financial services sector. It also highlights shortcomings which exist and need to be addressed if the Bank of England is to perform its tasks efficiently as well as regain the momentum and advantages it had acquired before its supervisory powers were transferred to the Financial Services Authority.

The New Mandate for the Supervision of Financial Services Conduct

The UK is redesigning the institutional architecture of financial services supervision. The Financial Conduct Authority is meant to play a central role in the reformed system by delivering a new policy approach to the supervision of financial services conduct, which places considerable emphasis on competition as a force for the promotion of good consumer outcomes. The article examines the Financial Conduct Authority’s statutory mandate, and focuses in particular on the interaction of the competition and consumer protection objectives. It accepts that putting a heavy responsibility on a financial regulator to create the right environment for competition in financial services to flourish has the potential to help consumers, but it is skeptical about the likelihood of success. The article examines the risk of lighter forms of regulation once again coming into favour as, over time, the current drive for more consumer protection increasingly gives way to a competition promoting, business-friendly agenda. It explains why a statutory mandate is a weak mechanism for preventing this result.

The Reorganisation of Financial Services Supervision in the UK: An Interim Progress Report

The UK has embarked upon a programme of reform that will result in the Financial Services Authority (FSA) being split into two separate authorities, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). A new BoE committee, the Financial Policy Committee (FPC), will perform macroprudential systemic oversight functions. The BoE will assume responsibility for the oversight of clearing and settlement systems in addition to its existing responsibility for payment systems. Crisis management and bank resolution functions will also sit with the BoE.The new arrangements are expected to be fully up and running by the end of 2012. A considerable amount of practical preparatory work is already underway, including the establishment of an interim FPC and an internal re-organisation within the FSA to split it into separate prudential and conduct units.Primary legislation is required to establish the legal framework for the new institutional structure. At the time of writing (October 2011), a Joint Committee of the House of Lords and House of Commons is conducting pre-legislative scrutiny of the draft Bill, and HM Treasury has also recently completed its own public consultation on the draft Bill.This paper, drawn from work done for the purposes of giving evidence before the Joint Committee, focuses on certain key features of the draft Bill that are emerging from the scrutiny process. It provides an overview of salient features of the current debate.

Financial services and consumer protection after the crisis

PurposeThe purpose of this paper is to examine the approaches to consumer protection in UK financial services before and after the global financial crisis.Design/methodology/approachThis paper reviews the literature on behavioural economics and psychology, and uses it as the basis for a critique of the UK's approach to the supervision of financial services firms and the protection of their consumers.FindingsNon‐interventionist approaches to consumer protection, which are based on the traditional theories of the law and economics movement, have failed. As a result, there is now a shift in thinking towards more interventionist approaches.Research limitations/implicationsBy understanding the likely impact of the regulatory reforms the academic research community can assist the regulator to understand the best way to ensure desirable outcomes for users (consumers) of financial services.Originality/valueThe moves to reform UK financial regulation after the crisis have only recently got under way and a lot of the reforms have not been widely debated or written on.

A new systems engineering approach for a Socio‐Critical System: A case study of claims‐payment failures of Japan's insurance industry

AbstractSince the 1950s there have been numerous contributions proposing solutions to failures of social systems. However, we have hardly found a holistic and interdisciplinary approach to a failed social system beyond “stove‐piped” academic disciplines. This paper identifies a new holistic and interdisciplinary systems engineering methodology of systems engineering for a social system through a case study of Japan's insurance industry. The new methodology is a “soft” systems‐approach to accommodate goals of stakeholders in a failed social system. First, the three elements of a social system are identified. Second, the multiple viewpoint model transforms these three elements of the human activity view to a new set of elements of the Holon view. Third, a social system of the Holon view is redefined as a Socio‐Critical System (SCS). Finally, the Vee Model is applied for fixing a problem in the SCS. From 2005 to 2008, massive claims‐payment failures cases were found in Japan's private insurance companies. They became big social scandals. The insurance claims‐payment system is a typical SCS. The Financial Services Agency (FSA), Japan's financial services supervision authority, identified, with the “unintended” systems approach, dysfunctions of the insurance claims‐payment system. This FSA action, even though the authority was not aware of the effectiveness of the methodology, proved to be positive in applying the Vee Model for solving failures in those claims‐payment systems. © 2011 Wiley Periodicals, Inc.

Internal Market: Gesture Politics? Explaining the EU's Response to the Financial Crisis

The most significant development in internal market legislation in 2009concerned the regulation and supervision of financial services. This focus isunderstandable. The worst European financial crisis and economic declinesincetheGreatDepressionandunprecedentedEUMemberStategovernmentbail-outs and credit guarantees for a large number of banks created a strongpolitical and populist backlash in many EU Member States against financialinstitutions, and banks in particular (Quaglia

Financial Services Supervision in the United States: The House of Representatives Has Spoken

This is a follow-up on Lybecker’s article in ECL Volume 6, Issue 5, about financial reform in the US. On 11 December 2009 the US House of Representatives approved the so-called Wall Street Reform and Consumer Protection Act of 2009. Although work in the US Senate, in particular by its Committee on Banking, Housing & Urban Affairs, has not yet proceeded as far as the work in the House, this contribution discusses the main features of the Act as approved by the House.

British Virgin Islands: Financial Sector Assessment Program Update Documentation: Technical Note on Corporate and Trust Services Providers

This study reviews the structure of the Trust and Corporate Service Providers (TCSP) sector in the British Virgin Islands (BVI), focusing on their role in the offshore financial sector, and seeks to assess the legislative framework in place as well as effectiveness of implementation and enforcement of this framework. Structure of the TCSP industry and the key features of legislative framework are also discussed. The global financial crisis has also resulted in a significant decline in asset values. The Financial Services Commission Act (FSCA) provides a strong framework for the supervision of other financial services in the jurisdiction.