Regulator - September 2009

This edition of Regulator comes to you one year after the collapse of Lehman Brothers on 15 September 2008. Given this anniversary, it is perhaps fitting that September 2009 is emerging as a critical one for the future shape of financial markets regulation, with a number of key developments taking place this month both globally and locally.

Ahead of the G20 Finance Ministers’ meeting in London last week, the US Treasury released its proposals for the reform of US and international regulatory capital for banks and the Basel Committee outlined its five key measures to strengthen the regulation of the banking sector, each of which paved the way for APRA to issue last Friday its version of capital and liquidity requirements for Australian ADIs.

Meanwhile, IOSCO released its Final Report on the regulation of both securitisation and credit default swaps, which we analyse in articles by Paul Smith and Jeremy Green. The key issue now is for Australia to implement the recommendations in a way which recognises market practice in this country and ensures its continued and efficient access to these global markets. (For market practitioners, it was also pleasing to note that the Report reaffirmed the importance of securitisation to the global economy and the role played by the CDS market.)

A question of balance

The Lehman anniversary has been notable in another respect: It has heightened the calls for reform and the noise levels from commentators who are cynical about the reform process.

For example, the G20 outcomes got a thumbs down from Theo Francis and Peter Coy writing in BusinessWeek, who predicted that Pittsburgh would likely lead to "a package of worthy but lukewarm reforms that leave the global financial system … exposed to another costly bust some years down the road”. New York Times columnist, Paul Krugman marked the Lehman anniversary by giving modern economics a slap, arguing in his widely cited New York Times essay last week that economists “have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds” .

For his part, President Obama noted yesterday: “The growing stability from these [government] interventions means we are beginning to return to normalcy. But what I want to emphasise is this - normalcy cannot lead to complacency.”

Mallesons agrees entirely; but we stress that any global reform to capital and liquidity rules, and any changes in Australia, need to balance the level of regulation and control, the need for effective supervision and oversight and an organisation's ability to conduct its business and generate acceptable outcomes for all of its stakeholders.

Governments and regulators should resist the temptation to pull on the reins too tightly. As Mark McFarlane and Damien Richard note in their article on ASIC’s new market regulatory powers, ineffective over-regulation - as occurred with Sarbanes Oxley - risks stifling our markets at a time of intense financial sector innovation.

Also this month

Among other articles in this edition, Scott Farrell writes on the draft US legislation for regulating the over-the-counter derivatives industry, John Canning reviews the Personal Properties Securities reforms, warning that banks and financial institutions will need to be fully prepared or risk diminished value through loss of security and Katherine Forrest provides an update on the consumer credit law reforms. We believe it is crucial for financial institutions and others to consider these reforms as a package, to ensure they obtain the maximum long-term benefits for their businesses and that operational disruptions and implementation costs are minimised.

On the other side of the Atlantic, UK authorities have been similarly active over the last month, with director disqualification orders in competition cases now under review by the Office of Fair Trading. Dave Poddar and James Marshall contribute this month with an analysis of the OFT review and its implications for directors in Australia facing competition law issues.

We round out this edition of Regulator with a brief update from Tim Bednall on recent legislative developments in relation to the executive remuneration reform proposals. As it was at the G20, reform of compensation practices and corporate governance remains a frontline issue for the Rudd Government.

Enjoy. As always, we welcome your feedback.