The world’s securities regulators gathered this week in Tel Aviv – ahead of what will be a momentous week for the shape of regulation in Europe and the US. On Wednesday 17th the US government will announce its plans to re-structure its regulatory structure. From a distance the US structure appears incoherent – described by the FT as “extraordinarily balkanized” – it clearly hasn’t kept pace with the changing structure of the US market or the forces of globalisation. Much of the debate also appears to be highly parochial – leaving the rest of the world suspicious about the willingness of the US to cooperate globally.
In a debate in Tel Aviv, Professor John Coffee of Columbia Law School described the numerous US regulatory agencies as “molehills” when comparing them to the unified regulators in markets like Japan and Great Britain – which he referred to as Alps or Himalayas. This widely shared perspective surely implies radical change is inevitable in the US. However, it now appears that radical change won’t happen – there’s simply too much politics involved. The Obama administration is clearly acting pragmatically and wants to focus on new regulations rather than new structures.
By contrast Europe talks constantly about structure. In Tel Aviv, FSA Chairman Lord Adair Turner looked back rather than forward. Widely assumed to be in favour of “more Europe” not “less Europe” he, pointedly, didn’t refer to the upcoming decision point about how Europe will be structured. Within a week European leaders will have to thrash out the power-sharing deal between the new entities being created. There are three levels of authority – at the top is the ESRC (the European Systemic Risk Council) likely to be an offshoot of the ECB. Next level down is the new ESA (European Securities Authority) widely assumed to grow out of CESR. The final level is the numerous domestic regulators – the FSA being the biggest and most internationally prominent. Under the current plans these regulators will become supervisors – responsible for implementation of the ESA rulebook. Turner didn’t mention this issue – and due to time constraints wasn’t able to take questions from the audience.
The upcoming discussions in Brussels are likely to be messy. The usual opaque horse-trading is inevitable – and the UK government negotiating position isn’t strong. The decisions don’t have to be unanimous – the UK can be outvoted – but it seems inconceivable that the plan can go ahead without UK agreement. My prediction? The most likely scenario is a short-term delay – the pace has been frenetic and surely there hasn’t been enough time for the political sherpas to do the backroom deals. But time is limited and the political elite is impatient. By the end of this year the UK will have compromised and the regulatory structure in Europe will have a radical new look.