It is important that regulatory bodies are independent of the organizations they are regulating, but that does not mean that they should not listen to their concerns. Ideally regulation of Islamic banks and Islamic subsidiaries of conventional banks should be undertaken with a “light touch,” rather than imposing heavy bureaucratic procedures. The regulators will need assurance that the management is competent, there is no fraud, that the quality of assets is acceptable, and that adequate provisions are made for any non-performing assets. Prudential control is important, and Central Banks will want to know that any systemic risks are minimized. Management of operational and credit risks are areas of particular concern, but regulators should not be too intrusive, as the job of banks, including Islamic banks, is to manage risks themselves. Regulators are ultimately accountable to governments, but they should be independent in terms of their day-to-day actions and executive functions. International bodies such as the Bank for International Settlements can give better advice than Ministries of Finance, and in the case of Islamic banks, the Islamic Financial Services Board has a vital role to play in providing guidelines on regulation. National sovereignty is becoming much reduced in matters of banking regulation and Central Banks need to pay more attention to Basel I and II requirements than often fickle domestic political concerns.
PROFESSOR RODNEY WILSON:
A “regulatory body” usually serves different parties: • the good functioning of the market itself (represented by the owner of the market – either a public or private body); • the actual market participants (brokers, banks, agents); • the ultimate beneficiaries (the clients); and • in a broader sense, general public interest. On one side it can be argued that the market owner has a discretionary position because if he did not regulate sufficiently the market will punish him in the long run and the market players would look for better organized, transparent and impartial markets. However, while the overall interest of the market owner lies in organizing a secure market where all the market players have confidence, it will be clear that sometimes short-term, market driven arguments (competition with other markets) can influence decision-making on the regulation and/or the application of the market regulations. In the best world possible, therefore, the regulatory body should be neutral whilst regulating and sanctioning, whilst the market owner takes care of the actual de facto day-to-day market organization. Whether the regulator can also be the party that sanctions is again another issue. PAUL WOUTERS: Of Counsel, Bener Law Office
In an ideal world, self-regulation is the optimal solution, since only “insiders” fully understand the business in which they are engaged, with independent regulators necessarily being “on the outside looking in.” Unfortunately, the world is far from ideal. Markets have developed from their decentralized but disconnected origins – where individuals were physically present in local trading foray – to the current centralized but connected architecture, where individuals are present in the market through intermediaries.Regulation has evolved with this trend, so that massive centralized regulators such as the UK’s Financial Services Authority (FSA) and the U.S. Securities and Exchange Commission (SEC) have developed to regulate the activities of the intermediaries who dominate global markets, typically through trading on exchanges. Unfortunately global markets are now massively exposed in terms of financial stability to regulatory problems arising out of the concentration of risk in a small number of central counter-party “clearing houses.” Moreover, this financial risk is exacerbated by the global regulatory “black hole” arising from the limited ability of national regulators to access information in relation to the trading activities of proprietary traders generally, and hedge funds in particular, in their unregulated activities “off-exchange,” or “OTC.” Even were regulators to have access to such trading information, they generally have no jurisdiction over market participants operating off-shore. I believe that this current global market architecture is unsustainable, and will be replaced by the final evolution of markets – which will be decentralized but connected – ie a market network of all market participants operating on a neutral market platform incorporating a “transaction registry.” Such a market user group has great potential as a self-regulatory body capable of setting and enforcing market standards, backed by the simple – but drastically effective – sanction of suspension or termination of the right to register transactions. CHRIS COOK: Principal, Partnership Consulting LLP
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