G20 Produces Tougher Financial Regulations, Tax Information Update

by Ulrika Lomas, for LawAndTax-News.com, Brussels

30 September 2009

The G20 at its meeting in Pittsburgh agreed to strengthen the international financial regulatory system, including bankers’ compensation, and to maintain the main focus of the effort to improve tax transparency and the exchange of information between jurisdictions.

The final communiqué of the G20 committed the participating countries to act together to raise capital standards, to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking, to improve the over-the-counter (OTC) derivatives market and to create more powerful tools to hold large global firms to account for the risks they take. A timetable was set for all the reforms.

With regard to the strengthening of the international financial regulatory system, the G20 said that substantial progress has already been made in strengthening prudential oversight, improving risk management, strengthening transparency, promoting market integrity, establishing supervisory colleges, and reinforcing international cooperation.

The Financial Stability Board (FSB) has been tasked with coordinating and monitoring progress towards strengthening financial regulation and will report back to the G-20 Finance Ministers and Central Bank Governors in advance of the next Leaders summit.

The G20 committed to take action at the national and international level to raise regulatory standards together, so that the national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage.

The G20 therefore called for agreement on an international framework of financial reform in building high quality capital, including a commitment to develop, by the end of 2010, internationally agreed rules to improve both the quantity and quality of bank capital and to discourage excessive leverage. These rules will be phased in over the following two years, although this aspiration will be somewhat dependent on financial and economic conditions improving.

Key measures have recently been agreed by the oversight body of the Basel Committee to strengthen the supervision and regulation of the banking sector. In addition, the G20 supported the introduction of a leverage ratio as a supplementary measure to the Basel II risk-based framework. To ensure comparability, the details of the leverage ratio will be harmonized internationally, fully adjusting for differences in accounting. All major G-20 financial centres have committed to have adopted the Basel II Capital Framework by 2011.

With regard to reforming compensation practices to support financial stability in the banking system, a full endorsement was given to the implementation standards of the FSB aimed at aligning compensation with long-term value creation, not excessive risk-taking. That would include avoiding multi-year guaranteed bonuses; requiring a significant portion of variable compensation to be deferred, tied to performance and subject to appropriate clawback; ensuring that compensation for senior executives and other employees having a material impact on the firm’s risk exposure align with performance and risk; and limiting variable compensation as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base.

According to the G20, financial supervisors should have the responsibility to review firms’ compensation policies and structures with institutional and systemic risk in mind and, if necessary to offset additional risks, apply corrective measures, such as higher capital requirements, to those firms that fail to implement sound compensation policies and practices. In addition, supervisors should have the ability to modify compensation structures in the case of firms that fail or require extraordinary public intervention.

Firms were called on to implement these sound compensation practices immediately, and the FSB was asked to monitor the implementation of its standards and propose additional measures as required by March 2010.

Finally, all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. Non-centrally cleared contracts should be subject to higher capital requirements. The FSB was asked to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.

With regard to tax transparency and the exchange of information, the G20 renewed the resolution to fight "non-cooperative jurisdictions" (NCJs). They re-stated the commitment to maintain the momentum in dealing with tax havens and prudential standards. They welcomed the expansion of the Global Forum on Transparency and Exchange of Information, including the participation of developing countries, and the agreement to deliver an effective programme of peer review.

It was said that the main focus of the Forum’s work will be to improve tax transparency and exchange of information so that countries can fully enforce their tax laws to protect their tax base. The G20 concluded that they are ready to use "countermeasures" against tax havens from March 2010.

The FSB has been called on to report progress to address NCJs with regards to international cooperation and information exchange in November 2009 and to initiate a peer review process by February 2010.

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