Iris H-Y Chiu

Macroprudential supervision: critically examining the developments in the UK, EU and internationally

Macroprudential supervision has become a key aspect of financial regulation in the UK, EU and globally in the aftermath of the global financial crisis. This article examines the UKs and EUs post-crisis reforms in establishing regulatory infrastructures to carry out macroprudential supervision. The new regulatory infrastructures at the UK and EU levels would be based on two key aspects: comprehensive information surveillance and networked cooperation between key agencies but centred around central banks. The article critically discusses the difficulties and challenges in information surveillance in the UK and EU and draws some comparative insights with the Office for Financial Research established in the US. The article also argues that macroprudential supervision in the UK would likely be dominated by the Bank of England although a networked agency structure supports such supervision. Some implications of such domination are discussed. Central bank dominance in macro-prudential supervision is also likely to be the case at the EU level as well. However, the article warns that macroprudential supervision at the EU level remains vague and is likely to be bound up with other policies and objectives.

Enhancing responsibility in financial regulation – critically examining the future of public–private governance: part II

This article will be published in two issues of LFMR as Parts 1 and 2. Sections A and B are published here in Part 1, and Sections C and D of the article will be published in Part 2. Section A of the article argues that “financial regulation” is essentially a regulatory space, ie a landscape where a variety of actors and interest groups may have resources, capacity and ability to exert influence over the governance of issue areas in the landscape. The regulatory space is dominated by the industry and regulatory agencies, giving rise to governance driven by industry interests and objectives as well as public interest. Section B of the article then provides a literature review of modern governance and regulation theories to show how “public–private” models in governance have been developed in contemporary theory and practice. Section C draws on the literature review to discuss specific areas in financial regulation represented by different models of “public–private governance” and critically examines the nature of “public–private governance” in the context of the global financial crisis. Section D argues that “public–private governance” in financial regulation has given rise to problems of unaccountability, agency and capture, and some suggestions are made in relation to the dynamics of the “public–private governance” going forward.

A new era in fintech payment innovations? A perspective from the institutions and regulation of payment systems

ABSTRACT This article analyses the existing institutions and infrastructure for payments. Authoritative settlement based on central bank support is seen as being essential for both large value and retail payment systems; and, in the EU, UK, and US, the importance of regulating for the protection of consumers who use retail payment systems is recognised. In this institutional context, payment innovations (including Bitcoin and distributed ledger or autonomous organisation technologies) are assessed. It is suggested that, while competition at certain levels is likely to bring social benefits through commercial developments, the maintenance of public interest objectives necessarily delineates the scope of competition. While this might limit the disruptive impact of payment innovations, it is argued that, in the light of the public policy needs for a stable and efficient public infrastructure and the social needs of confidence and trust in a predictable and regulated payment system that meets commercial and social expectations such as in consumer protection, this is not necessarily undesirable.

The Law on Corporate Governance in Banks

Corporate governance in financial institutions has come under the spotlight since the banking crisis in the UK in 2008-9.

A New Milestone in Corporate Regulation: Procedural Legalisation, Standards of Transnational Corporate Behaviour and Lessons from Financial Regulation and Anti-Bribery Regulation

ABSTRACT Governing transnational corporate behaviour is a challenging area that has been canvassed in much academic literature. Transnational corporations make extensive use of regulatory arbitrage and corporate structures in order to avoid or mitigate the reach of legal and regulatory governance. Moreover, international soft law standards that encourage multinational corporations to be more responsible are not always effective or enforceable. Against this context, we explore an emerging regulatory trend in corporate regulation that has the potential to overcome some of the currently perceived limitations in the regulatory governance of transnational corporations. There is an intensifying trend in adopting procedural regulatory strategies for corporations. This involves prescribing various control systems and processes that corporations have to institute, such as compelling them to develop due diligence requirements within their commercial operations. We suggest this is a new milestone in ‘new governance’ design that we call ‘procedural legalisation’. Procedural legalisation is being adopted at an unprecedented level in financial sector and corporate regulation, and offers a new promise in changing corporate culture and behaviour, possibly addressing longstanding limitations in effectively regulating corporations. We present two case studies to explore how procedural legalisation is applied to regulate corporations in the financial sector and in anti-bribery.

From Shareholder Stewardship to Shareholder Duties: Is the Time Ripe?

In the context of the increasing institutionalisation of global equity, this chapter examines the development of the soft law of shareholder stewardship originating in the UK Stewardship Code and provides insights into its prospective evolution into hard law standards of behaviour for institutional shareholders. We argue that the time is ripe for the development of shareholder duties on the part of institutional investors. We contend that the proposed Shareholder Rights Directive is already taking a step towards that direction by introducing a semi-hard law of a fiduciary duty to demonstrate engagement at a pan-European level. We argue that such a duty is relevant to different European jurisdictions; even if ownership structures are still rather different across the EU there is a shifting balance between traditional blockholders, such as families, and institutional investors.

Operationalising a Stakeholder Conception in Company Law

UK company law, in its arguably insular shareholder-focused framework, has been called into question regarding its fitness for purpose1 in the continuing litany of corporate malpractices and scandals2 since the 1992 resolve to reform corporate governance.3 The excessive focus on shareholder interests, rights and powers in UK company law is starting to reveal failures that not only jeopardise companies’ viability but also give rise to adverse social impact. We argue that the shareholder primacy-led foundations for UK company law should be revisited, and that the adoption of a stakeholder conception in company law can be both normatively and positively supported. We suggest the contours of legal reform in company law: to introduce stakeholder covenants with the company, and recalibrate shareholder powers and enforcement. We believe that these key aspects of reform are possible and important to usher in a new framework for company law that will address the efficiency and social legitimacy needs of the company.

Learning from the UK in the Proposed Shareholders’ Rights Directive 2014? European Corporate Governance Regulation from a UK Perspective

This article examines the driving forces for European Corporate Governance Regulation (ECGR) and argues that ECGR has moved from a gradual bottom-up approach based on learning from diversity to an approach that blends into harmonised capital markets regulation at EU level. The gradual bottom-up approach in ECGR was largely due to inconclusive debates regarding the value of comparative corporate governance and its impact on market integration. However, with the advent of overt public interest rhetoric, that has paved the way for direct corporate governance regulation of the financial sector post global financial crisis. Elements of corporate governance are now being regarded as suitable for hard harmonised legislation, such as in shareholders’ say on pay and (perhaps) the regulation of aspects of shareholder engagement. This article examines the UK’s role as norm-pioneer in the developments in ECGR and argues the EU developments on say on pay is still largely couched in the vein of bottom-up development maturing into hard law, and the UK’s role as a norm-providing leader in that area has had significant influence. Although the UK’s say on pay norms are largely responsive to domestic concerns, the UK’s international influence on this issue has been possible because of ‘fit’ conditions at both the micro and macro levels in many jurisdictions. On shareholder engagement, the UK’s development of its stewardship concept is largely rooted in its domestic context although the concept has been exported to other jurisdictions. The UK’s stewardship concept appears ostensibly to have influenced ECGR in the European Commission’s proposals on regulating shareholder engagement. However, the Commission’s proposal has arguably upstaged the UK’s norm-pioneering leadership as the proposal is more akin to a form of harmonised capital markets regulation. ECGR can be used for extending the scope of securities regulation harmonisation. It is uncertain if such a development is indeed optimal. There are different micro and macro conditions in the capital markets of Member States and it may be inappropriate at this point in time to standardise the norm of shareholder engagement.

PREFACE: THE LAW OF THE CORPORATE GOVERNANCE OF BANKS AND FINANCIAL INSTITUTIONS

The corporate governance of banks and financial institutions came under the spotlight in the wake of the global financial crisis 2008–09, the subsequent conduct scandals such as the manipulation of the London Inter-Bank Offered Rate by several UK and international banks, and other miss-selling, corruption and financial crime scandals. Although misjudgements in risk and sub-optimal corporate behaviour are not uncommon in the corporate sector, the utility and systemic risk profiles of the banking sector, in particular, are important attributes that warrant public concern with any failings in the internal governance of banks that could culminate in excessive risk-taking or sub-optimal corporate behaviour. In this volume, we address key themes in the internal governance of banks and financial institutions that we believe are of topical interest. The law and Corporate Governance Code discussed in this volume are stated as at March 2014. In Chapter 1, Andreas Kokkinis discusses the governance structure of most widely held banks and financial institutions, and the incentives that may result in excessive risk-taking. He reveals that conventional agency-based corporate governance frameworks may be unsuitable for banks and financial institutions as they arguably do not address the governance challenges in banks and financial institutions and may indeed entail counter-productive incentives exacerbating governance problems. In Chapter 2, Edward Walker-Arnott discusses the importance of the board as collectively managing and making key decisions in banks and financial institutions, and argues that neither company law nor financial regulation address the issue of collective responsibility and how that can be boosted to improve board stewardship. This thought-provoking chapter takes stock of recent policy discussions and proposals for legislative reforms but critically asks if new law and new provisions in governance codes are really on the right track. In Chapter 3, John Lowry and Rod Edmunds shift the focus from collective directorial responsibility by asking whether individual directorial responsibility for banks and financial institutions could be enhanced via the application of the directors’ disqualification regime. They highlight that to date it has not been applied notwithstanding some clear political pronouncements (including those of UK’s Business Secretary, Dr Vince Cable) that it should be harnessed to prevent certain named directors in the UK’s failed banks (RBS and HBOS in particular) from holding directorships in the immediate future. As the chapter indicates, the reasons why disqualification proceedings have not been initiated is all the more intriguing in the

Financial benchmarks: proposing a governance framework based on stakeholders and the public interest

Regulatory regimes for financial benchmarks have been introduced in the wake of benchmark manipulation in a number of non-equities markets. Although such regulatory responses introduce various measures to improve the governance processes relating to the production of financial benchmarks, this article suggests that the current regulatory designs can be improved in order to harness the benefits of market-based governance and yet meet the objectives of regulatory governance. This approach advocated in this article as a proportionate and appropriate form of regulatory capitalism. The article argues that the existing regulatory regime in the UK, the proposed regulatory framework in the EU and the IOSCO–OICU recommendations are based on achieving some balance between market-based and regulatory governance for benchmarks, but certain aspects of these regimes could compromise regulatory goals while not optimally harnessing market-based governance. The article advocates the adoption of a user-centric analysis to first determine the nature of financial benchmarks and argues that the scope and design of regulation for financial benchmarks should be based on that fundamental analysis. The regulatory framework should then address the healthy balance between market-based and regulatory governance for the benchmarks determined to be appropriately subject to regulation. This article critically evaluates the UK, EU and OICU–IOSCO regimes and makes recommendations that are theoretically rooted and are capable of international adoption.