The Commission’s approach to regulation - 2004

Welcome to the first Commissioner’s newsletter for 2004. As we start the New Year I felt it would be helpful to set out our approach to how we seek to regulate. The statutory basis for our regime 1 is contained in the Financial Services Commission Ordinance (FSCO), together with the other Ordinances for which the Commission (or the Authority has been tasked). Our work is aimed at achieving the statutory requirements set out in those Ordinances:

Objectives of supervision

In meeting our statutory requirements we seek to achieve the following:

(a) To promote market confidence;

(b) The reduction of systemic risk

(c) To promote public awareness

(d) The protection of the reputation of Gibraltar;

(e) The protection of consumers; and

(f) The reduction of financial crime, including the funding of terrorism.

These direct us to prevent or mitigate a wide range of risks. They cover both prudential and conduct of business failures that may adversely affect market confidence and consumer interests. And they also direct us to other tasks, such as increasing public understanding of the financial system, countering market abuse, and reducing the extent to which financial crime occurs through regulated firms. For example, as part of our work to protect consumers we recently issued a booklet providing advice on avoiding frauds and scams.

The FSCO avoids, however, imposing a simplistic formula, such as requiring us simply to eliminate all risks to our objectives or to users of financial services without constraint.

Principles of good regulation

In addressing our objectives, we have regard to several principles of good regulation. These are not set out in statute but rather represent what we consider necessary to achieve our statutory objectives.

1. The need to use our resources in the most efficient and economic way; The ordinances primarily place responsibilities upon the Authority (currently the Commissioner), rather than the Commission per se. However for the sake of ease of understanding we have referred to these powers and objectives as being Ours collectively. For the precise division of roles please refer to the relevant ordinances.

2. The principle that the duty to manage a business falls upon the senior management of that business. The Directors of a licenceholder, both executive and non-executive have ultimate responsibility for ensuring that the business is properly run and operates in accordance with regulatory requirements;

3. The principle that a burden or restriction which is imposed upon authorised firms should be commensurate with the benefits expected to result from such action, so ensuring that the Authority is striking the right balance between achieving the statutory objectives and ensuring that the impact on those being regulated is not such as to be counterproductive;

4. The desirability of facilitating innovation in connection with regulated activities;

5. The international character of financial services and markets and the desirability of maintaining the competitive position of Gibraltar; and

6. The need to consider the adverse effects of regulation on competition and consumer choice; The overall effect of these principles is to direct us to operate a regime that is both market-based (i.e. looks to market solutions) and risk-based. Above all, they reinforce the point that in seeking to reduce or remove risk, we cannot pursue our objectives in isolation from the wider economic context.

As this newsletter outlines, there will be circumstances, consistent with the principles, where firm failure or conduct lapses occur but which do not represent regulatory failure.

The first principle, for example, recognises that our resources are finite. These are derived from fees paid by regulated firms (which are therefore reflected in the prices that consumers pay for financial services), together with a contribution [as reflected in our Annual Report] from the Government of Gibraltar.

But the number of regulatory actions we might undertake is potentially unlimited. Against this background, we must therefore decide how to use our resources in the most efficient way.

As well as the direct financial cost, employing resources in a given function has an opportunity cost (i.e. resources devoted to one function are not available to another). This requires a rigorous process for determining priorities among the tasks we undertake

In the second principle, we expect a firm’s management to be responsible for its activities and for ensuring that the firm complies with regulatory requirements. This guides us away from being unnecessarily intrusive and towards placing responsibility on a firm’s management to adopt proper controls.

The principle of proportionality means that we have to assess the cost of any proposed solution against the benefits that are likely to result. It also requires us to assess whether lower cost options are available.

The fourth principle guides us towards actions that facilitate innovation by avoiding unreasonable barriers to entry or restrictions on firms launching new products or services. This principle is linked to the following three in that diverse and competitive markets are most likely to promote consumer choice and product development.

Under the fifth we consider the impact of overseas factors on the Gibraltar markets and consumers. It, too, is concerned with competition, making specific reference to the need to preserve the competitiveness of the Gibraltar finance industry internationally.

The last principle addresses competition directly. Their starting point is that competition confers benefits, and therefore we should avoid unnecessarily impeding competition and should choose options that promote it where possible. This includes avoiding creating barriers to entry into markets.

It is upon these principles that we base our approach to regulation. It is my intention, in future Commissioner’s, newsletters to build upon these to provide further transparency in the way in which the regulatory structure in Gibraltar operates in practice.