The future of financial services Internet regulation

Only workable basis is home country regulation

This requires convergence of national laws

• harmonisation within transnational groups
  • e.g. EC Second Banking Directive
• mutual recognition of foreign supervision
  • based on internationally agreed principles
  • role of organisations such as IOSCO, BIS

Outstanding problems

• effective consumer protection
• enforcement of customers’ rights against Internet financial services organisations

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The future of financial services Internet regulation

What should by now be clear is that the current basis for regulating financial activities cannot work for institutions seeking to operate on a global market. Regulation by nearly 200 jurisdictions is simply unworkable. A new basis for regulation needs to emerge, and the “home country regulation” model adopted in the Second Banking Directive, the draft directive on electronic commerce and most electronic signature laws is the only realistic candidate.

This model requires foreign legislators to trust the regulatory system of the home jurisdiction to ensure that the Internet financial institution does not act improperly in transactions with foreign customers. That trust is achieved through general agreement on the basic principles for authorisation and supervision. In the financial sector these are already fairly clear:
• fit and proper management;
• financial adequacy (both capital and liquidity); and
• sound and prudent operation.

However, national laws need to converge, as has occurred in the EU, before the model becomes workable.

The main barrier to the adoption of this model is not financial regulation but consumer protection issues. Currently, the effect of financial regulation is to partition the global market into national markets; the result is that consumer protection is provided by the law which is common to both institution and customer, and can thus easily be enforced. Similarly, the consumer’s private rights are more easily enforceable than would be the case if the institution is in a different country. The next challenge is to find methods of ensuring effective enforcement, perhaps through self regulation or else through granting powers to national bodies to enforce laws for the benefit of foreign beneficiaries.