Financial regulators who are scrambling to adapt investment laws to life after the global financial crisis believe principles-based regulation, which focuses on outcomes rather than regulatory details, is the way forward.
“I personally think principles-based regulation, if the regulators are on top of their game, is the best sort of regulation,” Hong Kong Securities and Futures Commission chief executive Ashley Alder said.
Alder said the United Kingdom had advocated a so-called light touch approach, whereby regulators sought cooperation over confrontation. He said a light touch was often confused with principles-based regulation, but the two were very different.
Alder made the comments at a two-day ASIC conference.
ASIC chair Greg Medcraft agreed on the merits of principles-based laws, but added the International Organisation of Securities Commissions (IOSCO), the member body for financial regulators, needed to make its principles more widely known.
“The problem with IOSCO is people don’t know much about IOSCO and its principles,” Medcraft told reporters.
However, he said the focus on heavy banking regulation meant trouble spots, such as unregulated investments, could go undetected.
“That unregulated population is not getting smaller, and it’s not going to get smaller because this intermediation is going to grow even faster and larger in the next decade,” he said.
“In Australia, we’re talking about how do we grow our corporate bond market? How do we grow our retail bond market? They’re having the same discussions in Asia. How do we grow our corporate bond market? How do we increase the amount of capital available?”
Meanwhile, Alder discussed the perception that Asian countries engaged in regulatory arbitrage, a regime’s decision to keep regulatory settings low to attract more investment money.
“There is absolutely no advantage to be had from a Hong Kong perspective in joining any kind of race to the bottom in terms of lowered regulations for financial markets,” he said.
“The simple reason for that is if you look at Hong Kong’s attractiveness as a place to invest and to intermediate China, basically it is founded on, firstly, the Asia growth story, and secondly, on the one-country, two-systems approach to rule of law. If we squander that at all, that’s the thin end of the wedge to failure.”
