An Introduction to the Main Regulatory Bodies You Should Know About

Regulatory Bodies - EU & International

Effective capital and financial markets are constructed through the worldwide framework of legal agreements and economic factors that enable international flows of capital and contribute to the creation and the development of wealth.

The main objective of the relevant legal framework, both at a national and international level, is the creation of confidence and trust among stakeholders.

A loss of confidence and trust may result in an adverse impact on the economy, potentially leading to recession and other negative outcomes for both specific countries and the world at large.

The risk of monetary loss due to market failures created the need for the implementation of rules and regulations for markets to function efficiently, effectively, and fairly, while protecting investors and the general public.

Considering that the financial markets have global reach, the need for international cooperation has increased and international cooperation has become vital. Furthermore, the need for internationally introduced regulations has been based on the challenge of restricting the criminals and terrorists using the financial system for money laundering, fraud, and tax evasion.

The objectives and main benefits of regulation can be seen as the following:

  1. Contributing to financial stability by building confidence and trust in financial markets, systems, and products.
  2. Encouraging economic development and wealth creation.
  3. Reducing the risk of market and system failures.
  4. Better protecting consumers, especially those that lack expertise and relevant knowledge.
  5. Improving information flow and the smooth functioning of the financial system in terms of the speed and accuracy to which market price responds to the release of new information.
  6. Fair terms and common standards for market participants.
  7. Reduced financial due to the number of regulatory requirements.

directive regulation

Defining Directives and Regulations

A directive is a legislative act, represented through the arrangement of rules, with preset goals that are required to be achieved.

The directive is usually introduced to a specific country or group of countries through national laws. Failure to apply a directive may result in enforcement of imposition, penalties, and/or sanctions.

A regulation is a legislative act with legal force in place on the implementation date that must be applied entirely and does not have the ability to be interpreted differently via national laws in cases where the regulation is implemented by several countries.

In the financial services industry, the objectives of legislative requirements are achieved through a combination of regulatory tools such and rules, standards, codes, etc.

world regulatory bodies

The World’s Main Regulatory Bodies

Regulatory bodies can be international (acting through “cross-border” principles), national (applicable on a country level), or self-regulatory (applied nationally or internationally) in nature.

The table below summarises the types of regulators as well as the jurisdiction(s) of enforcement of their powers:

 

Type

Jurisdiction

Members

Duties

1

International and national regulatory authorities with international reach

Regional jurisdiction, extraterritorial reach

Banking, insurance, and investment

Establish principles and develop detailed rules

2

National regulatory bodies (e.g., central banks)

Broad jurisdiction

Banking insurance and investment-related activities and products

Although national in focus, coordinate regulatory approaches due to the global nature of the financial markets

3

Self-regulatory bodies

National usually

Insurance markets and investment services, such as financial advice, investment management, mortgages, etc.

Focus on national implementation of regulations

4

Investment exchanges

National remit but becoming more international in nature

Members of the exchange, listed securities, and relevant financial instruments

Regulate registered members

International Regulatory Bodies

G-20

The G20 represents a group of major advanced economies and important developing and emerging market countries that are represented by heads of state, finance ministers and central bank governors and have become a centre of international collaboration on restoring trust in the financial system.

With cooperation of the European Central Bank, the G20’s principal outputs are the public statements that set out common policy priorities, objectives, and prescriptions.

Financial Stability Board (FSB)

The FSB is an international body that plays a key role in promoting the strengthening of financial systems and the stability of international financial markets to identify and manage systemic risks.

Located in Basel, Switzerland, members are organisations from different countries whose aim is to pursue the maintenance of financial stability and transparency of the financial sector.

Members are committed to sound implementation of international financial standards, including 15 key international standards and codes, and are represented by:

– G20 Heads of State

– International Monetary Fund (IMF)

– World Bank

– Bank for International Settlements (BIS)

– Organisation for Economic Cooperation and Development (OECD)

– European Central Bank (ECB)

– ECB Banking Supervision (SSM)

– European Commission

– Basel Committee on Banking Supervision (BCBS)

– International Association of Insurance Supervisors (IAIS)

– International Organisation of Securities Commission (IOSCO)

– International Accounting Standards Board (IASB)

– Committee on the Global Financial System (CGFS)

– Committee on Payments and Market Infrastructures (CPMI)

Its key objectives are to:

  1. Assess vulnerabilities of the global financial system.
  2. Promote sound national financial systems and international financial stability by coordinating the work between national financial authorities and international standard-setting bodies.
  3. Develop and promote the implementation of effective regulatory, supervisory, and other policies focusing on economic and financial standards that are generally accepted internationally.
  4. Promote the exchange of information between financial authorities.
  5. Strengthen domestic financial systems through sound regulation and supervision, transparency, efficient and robust institutions, markets, and infrastructure.
  6. Monitor and advise on best practices and market developments.
  7. Promote international financial stability through better-informed lending and investment decisions, improving market integrity, and reducing the risks of financial distress and contagion.
  8. Collaborate with the International Monetary Fund (IMF).

Bank for International Settlements (BIS)

Located in Basel, Switzerland, the BIS is a financial institution that serves as a bank for central banks with the main goal of securing monetary and financial stability for its members at an international level.

Consisting of 60 central banks as members, the BIS is responsible for setting monetary policies, as well as coordinating and implementing monetary reforms when required. Monetary policies of note include capital adequacy and transparency.

The regulatory guidelines produced by the BIS do not have any force in national or international law, and countries that chose to implement the guidelines are required to make changes within their national legal and regulatory processes.

Basel Committee on Banking Supervision (BCBS)

Founded in 1974 and headquartered in Switzerland, the BCBS consists of 45 institutions from 28 jurisdictions with the objective of enhancing financial stability through improved banking supervision. In essence, the BCBS is setting global standards and prudential regulation for banks.

In 1992, BCBS introduced the internationally accepted regulatory framework Basel Capital Accord, or Basel I, which aimed to set global standards on the level of capital adequacy and liquidity that banks should maintain.

The accord set a minimum capital risk-to-weighted-assets ratio of 8%. The framework has been modified since via Basel II and Basel III, addressing further requirements related to credit risk, market risk, and a new capital adequacy framework, which provided for the calculation of minimum capital requirements (e.g., regulatory capital and common equity, conservation buffer, countercyclical capital buffer, capital adequacy and internal assessment process, effective disclosures of regulated entities, leverage ratio, minimum liquidity ratio, margin requirements, central clearing obligations through central counterparties, standardised approach for measuring credit risk, operational risk, core principles for effective banking supervision, agreement on cross-border banking supervision).

International Monetary Fund (IMF)

The IMF is an international financial organization consisting of 190 member countries with headquarters in Washington, D.C.

The main goal of IMF is to foster global growth and economic stability, facilitate international trade, sustain economic growth, reduce the poverty in developing countries, and assist them in achieving macroeconomic stability.

World Bank (WB)

Headquartered in Washington, D.C., the World Bank is an international financial institution providing loans to governments with the aim of reducing poverty, monitoring the development and improvement of the health sector, and tackling climate change.

The WB is made up of two institutions: The International Bank for Reconstruction and Food Security Development (“IBRD”) and the International Development Organisation (“IDA”).

Organisation for Economic Cooperation and Development (OECD)

The OECD is an international organisation responsible for the establishment of international standards and policies related to social, economic, and environmental challenges.

The headquarters are in Paris, France, and consists of 37 countries.

International Association of Insurance Supervisors (IAIS)

The IAIS is an organization of insurance supervisors and regulators that is based out of Basel, Switzerland, with members in more than 190 jurisdictions.

The IAIS promotes the globally accepted standards for effective supervision of the insurance industry through development of principals for the effective supervision of insurance related activities. 

The main goal of IAIS is the identification, assessment, and mitigation of systemic risk in the insurance sector, and the development and maintenance of fair, safe and stable insurance markets for the benefit and protection of policyholders, as well as contributing to the maintenance of global financial stability.

The IAIS is the member of the FSB and the International Accounting Standards Board (IASB)

International Organisation of Securities Commission (IOSCO)

Located in Madrid, Spain, IOSCO is an international body that sets the objectives and core principals of securities regulations.

Its more than 220 members include ordinary (e.g., securities commission), associate (e.g., international governmental regulators, intergovernmental international organizations) and affiliate (e.g., self-regulatory organizations, securities exchanges) bodies in 130+ jurisdictions.

IOSCO does not have enforcement powers, although it prevents and detects breaches to securities laws and regulations through the implementation of global enforcement cooperation via the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU).

IOSCO sets 38 principles and 3 main objectives that include: a) protecting investors, b) ensuring that markets are fair, efficient, and transparent, and c) reducing systemic risk.

The principals are enhanced through disclosure and transparency, management of conflicts of interest, and the overall improvement of auditors’ independence and oversight.

The 38 principles are grouped into the ten following categories:

Category

Range

Principles

1

1-8

Relating to the regulator

2

9

Relating to self-regulation

3

10-12

Relating to enforcement

4

13-15

Relating to cooperation

5

16-18

Relating to issuers

6

19-23

Relating to auditors, credit rating agencies, and other information providers

7

24-28

Relating to collective investment schemes and hedge funds

8

29-32

Relating to market intermediaries and entry standards in relation to authorisation, supervision, capital adequacy, conduct of business rules, and other prudential requirements

9

33-37

Relating to secondary and other markets

10

38

Relating to clearing and settlement

International Accounting Standards Board (IASB)

Based in London, IASB is the independent body responsible for setting accounting standards, also known as the International Financial Reporting Standards (IFRS)

It consists of 14 members, which are appointed by the Trustees of IFRS Foundation, and aims to set accounting standards related to auditing, financial reporting, and accounting education, which are in turn introduced to over 100 countries.

Committee on the Global Financial System (CGFS)

CGFS is one of the BIS committees comprised of 31 central bank governors and which seeks to identify, assess, and monitor the stability of the financial markets and global financial system with special attention given to structural changes.

CGFS is responsible for publishing policies and disclosures related to international banking, financial crises, statistics, foreign direct investment, stress testing, risk management, credit risk transfer, systemic risk, derivatives, market infrastructure, market liquidity, and monetary policy, among others.

Committee on Payments and Market Infrastructures (CPMI)

CPMI is an international standard setter and member of FSB without a formal supranational authority.

CPMI is hosted by BIS with the duty to establish, promote, monitor, and make recommendations pertaining to the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy.

CPMI members are central banks from all over the words and actively collaborates with IOSCO and BIS. Its governing body is the Global Economy Meeting (GEM).

European Regulatory Bodies

The European System of Financial Supervision (ESFS) consists of the European Systemic Risk Board (ESRB) and three European supervisory authorities (ESAs), namely:

  1. European Banking Authority (EBA)
  2. European Securities and Markets Authority (ESMA)
  3. European Insurance and Occupational Pensions Authority (EIOPA)

Their goal is to strengthen and enhance the EU supervisory framework and raise the standards of the National Supervisory Authorities (NSAs) across the EU.

The ESAs’ role is to provide a single rulebook to the EU via the development of draft technical standards, guidance, and recommendations to NSAs and firms. The ESAs’ role is to resolve disputes between NSAs in cases of disagreement. Plus, they have the power to investigate activities of NSAs in cases where they believe that they are failing to comply with EU law, as well as to temporarily ban certain financial activities.

European Systemic Risk Board (ESRB)

ESRB is an independent body with headquarters in Frankfurt Germany and hosted by the European Central Bank (ECB).

Its mandate include the macro-prudential oversight of the EU financial system with the main aim being the prevention and mitigation of systemic risks within the EU. ESRB provides warnings and issues recommendations for remedial actions.

European Banking Authority (EBA)

EBA is an independent EU authority headquartered in Paris, France, that promotes transparent and fair markets for the consumers of financial products and services.

EBA’s main objective is to ensure confidence of potential investors, protect depositors and consumers through harmonised EU regulation, offer recommendations for the consistent application of prudential rules and technical standards, and develop guidelines and common methodology for issuing and reporting information.

EBA developed the common EU framework, which is based on Basel’s international standards, forming a common ground for operating conditions for all banking institutions in the EU single market, including financial institutions, credit intermediaries, non-bank creditors, payment institutions, mortgage credit providers, and electronic money institutions.

Furthermore, EBA assesses the potential risks and vulnerabilities in the EU banking sector by performing EU-wide stress test exercises and, as such, scrutinises the resilience of relevant institutions with regard to adverse market developments and systemic risks in the EU financial system.

EBA also provides training, technical assistance, and other supporting services to Member State’s authorities, including the regular monitoring of how requirements are applied. EBA has the power to investigates alleged breaches or non-applications of EU legislation and provides recommendations by setting out the actions that must be followed to comply with EU law.

Finally, EBA serves as a mediator among competent authorities within the EU and helps reaching an agreement. In cases where an agreement cannot be reached, the EBA has the power to take binding decisions in order to ensure compliance with EU legislation.

European Securities and Markets Authority (ESMA)

ESMA is an independent EU authority for securities and capital markets supervision with headquarters in Paris, France. Its main purpose is to improve investor protection and promote stable and orderly financial markets.

ESMA directly supervises specific financial institutions, including credit rating agencies (CRAs), trade repositories (TRs), and securitisation repositories (SRs).

Through risk assessment and the introduction of a single rulebook for EU financial markets, ESMA develops TRs, promotes transparency and investor protection, ensures orderly markets by introducing standardised supervisory practices, assesses the risks related to markets and financial stability, promotes transparency and investor protection, and helps with the consistent implementation and application of best practices in NSAs across Member States.

ESMA’s role is also to assess the impact and effectiveness of its supervisory strategy and approach through investigations and/or market studies, taking ad hoc supervisory measures on NSAs and individual entities. ESMA is endowed with powers to intervene in cases of adverse developments that threaten financial stability within the EU through its decision-making powers. ESMA also has the power to coordinate the actions of NSAs and, in exceptional circumstances, decide to use intervention powers directly and prohibit or restrict the marketing, distribution, or sales of financial instrument(s) if there is a significant risk to investor protection, market integrity, or financial stability.

Furthermore, ESMA has introduced requirements on relevant entities regarding licensing-registration, corporate governance and decision-making process, business development process, internal monitoring, systems and controls, TRs, credit ratings verification techniques, enforcement for breaches and fines, governance, risk management, and reporting of exchange traded and/or OTC derivative contracts to registered TRs (under EMIR).

ESMA’s also promotes the consistent application of IFRS.

European Central Bank (ECB)

Headquartered in Frankfurt, Germany, the ECB is the Central Bank of the 19 EU Member States that use the Euro as their national currency.

The ECB sets and implements the monetary policy for the Eurozone with its primary objective being price stability within the region.

The activities of ECB consist of carrying out foreign exchange operations, taking care of the foreign reserves of the EU Central Banks, authorising issuance of Euro banknotes and coins, restructuring public and private debts, and forcing governments to adopt bailout programmes and structural reforms.

The ECB has the authority to conduct supervisory reviews, on-site inspections and investigations, grant or withdraw banking licences, assess a bank’s acquisition and disposal of qualifying holdings, ensure compliance with EU prudential rules, and set higher capital requirements (buffers) in order to counter any financial risks.

European Insurance and Occupational Pensions Authority (EIOPA)

EIOPA brings together the relevant NSAs in insurance and occupational pensions in each EU Member State. It is in charge of supervision at the EU level, leaving day-to-day supervision to the national level.

national regulatory bodies

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