Speeches
SHIFTING UP A GEAR—TRANSATLANTIC COOPERATION IN FINANCIAL SERVICES
Charlie McCREEVY
European Commissioner for
Internal Market and Services
US Chamber of Commerce
Washington, 6th March 2007
Good morning, Ladies and Gentlemen. It's good to be back and thank you for
inviting me. I appreciated the frank exchange of views we had here last year. I
am sure today will be no different.
Since we last met, the debate about the competitiveness of the US
capital
markets has hotted up. And I know that the Chamber of Commerce will be
publishing a report on this topic shortly. I look forward to reading it.
In the meantime, I would like to make a few basic points about this issue. In
the field of capital markets, many ingredients go in to make up the
competitiveness equation. But beyond doubt, regulation – and the burdens, the
costs and the risks it imposes – is one of the very key elements – both for
good and for bad.
Regulation of course is essential. Without it there would be no confidence in a
capital market. Without confidence there would be no investment and without
investment there would not be a market. So we need regulation: good, slim-line,
principles-based regulation. Prescriptive, rules-based, heavy-handed regulation
has no place in a market economy. Candidly, we must, where we can, get rid of
it. It slows strong businesses down. It drives struggling businesses under. It
locks new businesses out. And therefore it serves neither investors,
shareholders, nor consumers well.
The debate now taking place is timely. It is good news for you in the US and for
us in the EU. Good news too for other partners around the world. Economic
integration between our economies runs deep – nowhere deeper than in financial
markets. That’s why the spillover effects of regulation between us are
significant. Most of our major publicly-quoted companies – on both sides of the
Atlantic - are affected by US and EU rules. So the more we can do to move
forward together, to bring our rules closer, to achieve more convergence AND
more openness, the deeper and more liquid our capital markets will become, the
lower our cost of capital will become, the less the cost of regulatory
compliance will become and the more businesses, investors and consumers will
benefit.
Of course there are some strong, vested commercial and professional interests who
promote duplication, complexity and waste. But the overall economic good demands
that we work to defeat those interests.
What we need is a modern, open and reliable regulatory framework on both sides
of the Atlantic.
I was in a banker's office a few years ago. His job was to assess risk and then
to underwrite it. He had a poster up on his wall. It said: "Hide from risk and
you hide from its rewards": an appropriate poster for someone whose job was to
get the balance right between assessing and underwriting risk. Some regulators
might think that it is possible to hide or insulate people from risk. It isn't.
Every transaction on every capital market in the world contains risk. For anyone
working in the capital markets - whether in the front office or the back office,
hiding from risk means putting your own job at risk. And so it should. Without
risk-takers, there would be no rewards, and without rewards there would be no
risk-takers. It is risk-takers who provide liquidity, finance innovation, back
new ideas, create new opportunities – for more jobs, better living standards,
higher growth.
My approach to regulation is this: we cannot and should not try to prescribe
rules for every conceivable situation. In
accounting – as in other fields of
regulation – there will always be room for interpretation and there will always
be risk. Trying to eliminate risk is not only impossible; it invariably leads to
unintended consequences. I have mentioned some of them: less innovation and
growth. But it can also create a false sense of security, increase moral hazard
and reduce pressure on people to exercise their own judgement and to behave
responsibly. If people believe that they can insulate themselves from risk, then
instead of doing what they believe to be right or sensible they take no chances
– they simply follow the rules, tick the boxes and let someone else take the
blame for the outcome. Much of the regulation that has been so damaging in
recent times is that which imposes the heaviest burdens and restrictions on
those who should need them least: those who are paid to - and should be able to
– make sound judgements about what makes commercial sense, about what is the
difference between right and wrong, about what will be the consequences of their
actions - auditors, accountants, CEOs and company chairmen. They are paid to
think and make sound judgements - "Is this right and correct?" – in the spirit
of the basic principle.
We need a balance. A balance between a regulatory framework that guides peoples'
actions and economic freedom that allows them to innovate, experiment and take
risk. And we should make sure that the regulatory means we apply are measured
and appropriate so that the right balance can be struck. So that regulation is
fit for purpose. Flexible. Adjustable. And that the rules make economic sense.
Let me give you a couple of examples:
In Europe, there have been many calls for tougher regulation of hedge funds. I
agree that there is a need to monitor the financial stability implications of
hedge funds. This is being done by supervisors, like central banks. And by prime
brokers. Do we seriously think that major institutions doing prime brokerage
business are not monitoring their exposures? Do we really believe that any Joe
Sixpack who shows up at Goldman Sachs, Morgan Stanley or UBS will be given a fat
cheque to trade as a hedge fund? No. That is not what happens. For obvious
reasons. The major prime brokers are checking their hedge fund clients'
positions twice a day! It is their job to make sure that no element of the
banking industry is over-exposed.
Many of the calls for the regulation of hedge funds appear to be coming from
people who don't seem to know what exactly it is they want regulated and why.
Even if they have an idea as to what should be done, they seem much less clear
about the knock-on consequences of doing it, be it driving hedge funds offshore
or undermining the huge benefits that hedge funds have brought.
The evidence that hedge funds have increased the efficiency of our capital
markets and increased liquidity is indisputable. That they are also keeping
company managers on their toes is also indisputable. My suspicion is that much
of the criticism levelled at hedge funds is based on the critics' view that
management should be protected from shareholder activism, that they should be
wrapped in cotton wool and have their diapers changed hourly. I do not share
that point of view.
On the contrary, we should go on strengthening the rights of shareholders and
keep the managers under the spotlight: those who take the shilling must follow
the drum!
Auditors' liability is another area where we must get the balance right.
I am delighted that the debate on reforming auditor liability has gained
momentum in the US. And well done to the US Chamber of Commerce for getting this
debate started, and also to the Committee on Capital Markets Regulation who have
argued in favour of limiting auditors' liability. I see no sense whatever in
unlimited liability. Over time it will have several adverse effects:
First, the risk that there will be another catastrophic loss claim at some stage
in the future against one of the "Big Four" must inevitably be very high. Think
of the consequences of that for business – for competition between audit firms,
for the supply of auditors and the attractiveness of the profession, for the
future cost and availability of insurance and the knock-on consequences for the
cost of audits, and in turn the knock-on costs to end-consumers.
Secondly, unlimited liability is too often considered as insurance against any
and every deficiency in financial statements. Yet auditors can only give a
reasonable, and not an absolute assurance that financial statements provide a
true and fair view of the company’s financial position.
Thirdly, major audit firms risk being seen as the “deep pockets.” Already, with
the increase in the litigation culture as the major audit firms have been seen
as the "deep pockets," two trends have become marked: not only has the amount of
claims increased significantly, but also available insurance has fallen
significantly.
Opponents to any reform often argue that audit quality would be affected if
auditors' liability were limited. However, I am convinced that audit regulators
- not judges or courts - should play a much more important role in seeking to
maintain the top audit quality which companies and investors deserve.
In these and other areas, it is of paramount importance that differences in
regulation and implementation between the EU and the US are minimised.
The
EU-US Financial Markets Regulatory Dialogue has produced many tangible
results already. In
deregistration, the SEC has published a proposal that was
widely welcomed by European industry and also the European Commission. In
reinsurance, the National Association of Reinsurance Commissioners is examining
a proposal to abolish the current collateral regime that we view as
discriminatory for foreign firms. In accounting, we are advancing on the roadmap
to get rid of the reconciliation requirements between US GAAP [Generally
Accepted Accounting Principles] and IFRS [International Financial Reporting
Standards] by 2009 –
based on the principle of equivalence.
Later on today I will hand over to Fed Chairman Ben Bernanke the European
Commission's formal comments on the Notices of Proposed Rulemaking for Basel II.
What's important is that we minimise any differences in the implementation of
Basel II to keep regulatory burdens down for our companies.
This morning PCAOB chairman Mark Olson and I have agreed to deepen EU-US
cooperation on audit regulation. The starting point for cooperation between
oversight bodies should be the home country principle. This is why we have
agreed today to launch roadmap discussions on equivalence of our respective
auditing systems. We want to move towards full reliance on our respective
auditor public oversight systems, in the same spirit as in accounting.
Equivalence does not require systems and standards to be identical but robust
enough to ensure investor confidence. Robust enough for each of us to have
confidence in each other. I believe that we should also work to find a way to
narrow down differences in auditing standards. The aim is to have, by 2009,
inspections of audit firms carried out by their home-country public oversight
body - and not by host country inspections which are legally and organisationally cumbersome.
The agenda is ambitious and we will need to work hard to achieve it. But I am
confident and I look forward to building on the experience we have gained in the
area of accounting.
Conclusion
To conclude, let me also say that accounting - like auditing – is one of the
outriders, the precursors to the much deeper EU-US cooperation that Chancellor
Merkel is hoping to build with her interesting and exciting transatlantic
initiative. The time is ripe for some bold thinking – and acting. More
convergence, more open markets in securities, banking, insurance, accounting,
auditing and others. Companies have moved way beyond national borders.
Legislators, regulators and supervisors have to move beyond their traditional
domestic focus, too. There is good progress being achieved across the Atlantic
already. It will be of benefit to investors and consumers alike. But now is the
time to build on what we have achieved already, to push forward across a broader
front. The rewards will be worthwhile. That’s why we must now shift up a gear.
With determination and leadership on both sides, I am confident that the best is
yet to come.
