FCA, CFTC: More post-pandemic coordination needed on financial sector standards

Global cooperation has created a resilient sector, with ESG disclosure the next frontier

by | June 24, 2021 | bobsguide

Regulators from Europe, the US and Japan called for stronger and faster cooperation on key aspects of global financial sector standards.

Directors from the UK Financial Conduct Authority (FCA) and the US Commodity Futures Trading Commission (CFTC) warned on Wednesday that even though global standard-setting since the 2008 crisis meant the sector was more prepared to weather the market shocks of the 2020 pandemic, more needed to be done to step up convergence on specific aspects of financial sector regulation.

While collaboration in enforcement is high, supervision cooperation “needs a lot more work,” said Mark Steward, executive director of enforcement and market oversight at the FCA, at the City Week 2021 conference.

“Cooperation is easier to obtain, if we have an agreed sense of what the outcomes need to be and what the standards actually are. It is much, much harder to get the right kind of cooperation if there is significant disagreement or divergence around outcomes and standards.”

Clark Hutchison, CFTC’s director of clearing and risk, argued that regulators now have the opportunity to use real-world data from the pandemic to do further stress testing and analysis and identify where improvements are needed.

“We have to stress test for extreme, but plausible conditions. Last spring was not only extreme but plausible and extraordinary.”

“We now have a unique chance to use real data that isn’t age data or contrived data, data made up by models, but real data of what happened last spring.”

Global regulation and coordination in the past decade “made the difference”, said Hutchison.

“If we don’t share [in managing] the risks, the risks tend to be infectious,” added Steward.

IFRS, SEC, EU and Japan speed up rules on ESG disclosures

Meanwhile, global standard setting for ESG disclosures has become a high priority this year as both retail and institutional investors drove demand for companies to disclose how their business impacts society.

The International Financial Reporting Standards (IFRS) is currently setting up a sustainability standards board using the principles developed by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TFCD) as a blueprint. The IFRS hopes to have the board up before this year’s United Nations Climate Change Framework Convention in November.

“Having a baseline for all the stakeholders to [use] is a really important step forward,” said at the City Week event Takashi Nagaoka, deputy commissioner for international affairs at the Japanese Financial Services Agency.

“This will offer the ability for investors to compare and that will further enhance the healthy functioning of financial markets worldwide.”

Benoit de Juvigny, Secretary General of the French Autorité des Marchés Financiers, agreed. He supports the IFRS initiative but said more can be done.

“This standard will be for my perspective only a baseline.

“On top of the baseline, Europe has begun to develop a more ambitious framework, current with IFRS standards, but also will encompass all ESG pillars and take on board what we call double materiality.”

While the IFRS will help develop global standards, domestic regulators are already developing their own ESG disclosure framework (in line with TFCD recommendations).

In separate remarks, Gary Gensler, chairman of the SEC, said he has directed staff to “put together recommendations for mandatory disclosures on both climate risk and human capital.”

He said the SEC is looking into what metrics are most relevant to determine this. “If a company says, ‘we’re going to be net zero emissions’, what stands behind that?”

Mandatory disclosures would also look at human capital and Gensler said these metrics could include workforce turnover, skills and development training, compensation, benefits and workforce demographics.

“Disclosures help company raise money. It helps efficient allocation of capital across markets, and it helps investors place their money in companies that fit their investment needs.”

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