The Problem with Maintaining Compliance with the IOSCO Principles - Coursework Example

Title: Iosco Principles Name: Institutional Affiliation: Tutor: Date: The Problem with Maintaining Compliance with the IOSCO Principles Introduction International organization of securities commissions is national securities regulatory commissions which operates in a global scale. Members of the international organization of securities commission are the main financial regulators from each country. The members of IOSCO are in over 100 different countries and regulate more than ninety five percent of the world securities markets. The role of this organization is to assist the members in order to promote high standards of regulations to enhance cooperation with each other and other international organizations (IMF, 2002). Equity market is a market in which shares are issued and traded either through exchanges over the counter markets. It is one of the important areas in economy because it gives companies’ access to capital and investors a part of ownership in the company with the potential to realize gains based on its future performance (Mishnik, 2000). The international organization securities commissions has set regulations which have the objective of protecting of investors, ensuring that markets are fair, efficient and transparent and reduce the systemic risk. Public issuers of securities, secondary markets, asset management products and market intermediaries make up security regulations. (Ana Carvajal & Jennifer Elliott, 2007). These regulations are designed to address the information which is shared between the user’s all those who are involved in the transactions. They may include stockholders, consumers and financial negotiators. These regulations are meant to guarantee that transactions, clearance, and payments which inhibit market disorder therefore the enabling of trust and assurance to the investors. The regulations also provide those involved such as agents, traders and advisors have seamless entry and exit from the market so that they are able to conduct financial transactions with their clients in a transparent manner. Although these regulations have been enforced in many countries, there is a problem in the compliance of the principle which has been set by the IOSCO. Internationally there is a problem that countries are faced with inadequate law and policy frameworks, they have little funds, absence of governmental resolve and proficiencies have halted regulators ability required for full execution of these regulations. The availability of public entities all over the world which are responsible for regulating and overseeing all players is key to market improvement. This means that regardless of the chosen structure, of more importance is clear definition of the regulators accountability so that it is able to carry out their functions. One the problem regarding the IOSCO principles relating to the regulator is that many regulators are not sufficiently independent. This is makes it difficult for investors to comply with this principle. The government structures in many countries, like the Bahamas, allow the interference of the regulator’s daily activities. This is because of human and capital resource allocation procedures that invite external rule. It creates a problem with clients complying with these principles because some regulators are not able to give or withdraw a license which is mandatory for supervision. The power to do this remains with the ministry of finance. According to the principle, there should be independence of the regulator to the financial market. It is a challenge to comply with this principle since there exist political impediments which raise the potential of interference with the activities of these regulators. There is also a inadequate capital which is an obstacle to many watchdogs with only few countries being able to meet the required threshold by the IOSCO. This is in particular, countries where the budget is from the state. This problem leads to the regulator not being able to discharge its functions well. This is comes in because the regulator is not able to pay the staff according to the requirement of the employee pay scale which is stipulated by the government, meaning the regulators are not able to recruit the qualified personnel required (Pratt, 2014). In other countries for example Ghana, which is a third world country, there is insufficiency of the expertise required by the IOSCO. The threshold is too high and some countries are not able to get the qualified auditors and accountants. There is also the lack of sufficient licensing power, which in turn, limits the ability for the regulators to authenticate the capability and in addition the worth of traders. This in turn, hinders the ability to be able to regulate and supervise the laws and regulations which are enforced. The other IOSCO principle is about self-regulation. In reference to international organization securities commission, it is an institution different from the constitutional watchdog that is a regulator. It varies widely and some countries rely upon it in some extent for market oversight and the regulation of intermediaries. The compliance with the principle is a challenge since it is only in some countries which are able to comply. The weakness of self-regulation is widespread in many countries and only a few of the jurisdictions are compliant with it. In many countries, there is lack of enough resources which are required by the regulator in order to be able to have the capacity to be an oversight of the financial market. The lack of resources, in turn, leads to lack of inspections programs of the self- regulatory organizations. The move to deregulate the markets is stimulated by the fact that these IOSCO principles are not achievable in every country. There is the weakness of governing structures of some self-regulatory organization. In Kenya for example, there is overlap of the accountabilities between the watchdog and the self-supervised organizations. In some cases, there is also the problem of conflict of interest. A good example of this is how at the stock market listing oneself is treated and also that of its stockholders. Enforcement of securities regulation; This gives the watchdog a comprehensive inspective, investigation and oversight powers. He should also have all-inclusive application powers and the regulator classification should guarantee that there is reliable use of examination, investigation and oversight powers and the compliance program is implemented in the right way. In this setting, enforcement is the ability to affect amenableness with regulation and also its capability to bring into action when there is violation of the rules required. An effective regulator should be able to effectively acquire information from regulated entities at the required time. This is not the case with some of the regulators, since they do not have comprehensive enforcement and investigation controls, for example, the ability to enter into some of the offices and be able collect information when they need it. Some of the regulators are not able to adhere to this rule since they are not able to independently execute administrative approvals and they can only seek criminal authorities to help them in enforcement. This means that there is no credibility and effectiveness in their operations. There is also lack of skilled personnel which is required in order to able to enforce these regulations. In enforcement according to the principles, there must be supervision programs as well as disciplinary actions (Singh, Ajit, & J. Hamid, 1992). This is not the case in many states because the program does not require on-site inspections. In developing countries and in the emerging markets, the poor quality and the ineffectiveness in jurisdiction system impacts negatively on the enforcement efforts. It is a requirement in the IOSCO principles that there must a judicial regulation in order to allow for effective regulation. This is not able to be achieved in every country since, some lack fair and impartial judicial system that is able to settle disputes and implement authorizations within a sensible framework. There is the principle of cooperation in regulation. This requires that the regulator should have authority and be able to share both the foreign and domestic counterparts. The regulators should come up with an information distribution mechanism able to share both non-public and public information with their foreign and domestic counterparts. Only few countries are able to share public and non- public information with domestic and foreign counterparts. The other principle is about regulation of public issuers. The key to credibility in the financial sector is having quality of revelation to the investors by the issuers of the securities and the treatment of the minority in a fairly. The intermediaries, investors and analyst should enable the reliance of the information which is given by the issuers in order to appropriately value securities. This information can range from, financial information, disclosure of ownership interests, business plans and conflict of interests. Although this is a requirement by IOSCO, there is lack of proper review, particularly in the review of prospectus. In this jurisdictions may meet the measures which are set out in the regulation but can be unsuccessful in conveying to financiers and other stakeholders. In some countries there is lack of continuous disclosure requirements. In a lot of unindustrialized states constant disclosure doesn’t exist and are not particularly obligatory in the cases where companies trade on an exchange. The price sensitivity information is not always time and does not provide investors with transparency (Friedman, Felice B. & Grose, 2006). Regulation of collective investment schemes; this principle is meant to ensure that there are rules which govern the collection of investments. It is one of the retail investments and it attracts a larger percentage of customer regulation protection. According to Bernard (2001), The regulation of collective investment schemes is an vital part in the market place, and consequently, there is the need for precise assessment of assets. It is evident that there is high level of enactment in the use of IOSCO principles, the weakness which make it not possible for compliance with these principle is the legal and the regulatory framework. Some collective investment schemes regimes lack licensing scheme for the managers. This is because though licensing is a requirement in many countries it is not all-inclusive. In some states, they comprise a slight requirement level of capital and one finds that, the ability to verify that all the requirements either technical of operational are not available. There are some deficiencies when it comes to the requirement of the technical and operational requirements of the managers. There is no strict examination to prove that manages are efficient. It becomes a dilemma to comply with this principle because in most of the jurisdictions the regulator may be excluded from the on-site checks as part of the supervisory programmes. This brings us to the conclusion that the managers cannot be relied upon because they are not able to fulfill their role as required. There is also the lack of complete set of market conduct and business guidelines for the collective investment schemes. Because of lack of appropriate market conduct and business set rules, the investors jeopardize the possibility of miss-selling and being exposed to other abuses. Most of the jurisdictions in majority of the countries have enough regulations when it comes to the legalities and the structure of the collective investment schemes. The problem is that, there is insufficient separation of the assets of the customers and those of the manager. One finds that, in many countries there is no regulation concerning the separation which is vital in safeguarding customers from dissolution or incase the manager becomes bankrupt. In other countries, though the jurisdiction is there, the implementation is a challenge. Another challenge when it comes to the compliance of IOSCO principles is that the principles of collective investment schemes requires that there should be disclosure for the public offers of CIS, but a weakness exist whereby the quality of disclosure is always questionable. There has been an increase in the number of mergers and acquisition in the international market. This is due to the increasing globalization of the collective investment schemes industries and the growth of a few domiciles that has resulted to the increase of cross-border mergers. The main concern which is a challenge on the application of these IOSCO principles is the level of information supplied and the necessary required approval from the investors. Such cases are mostly heightened in cases of cross-border mergers. The problem with compliance with principle is approximately half of the mergers would not permit amalgamations with a CIS domicile which is outside the home jurisdiction under any circumstances. Another hindrance is that, some regulators which are regulated cannot merge with ones that are not regulated. One of the countries that permit unregulated CIS is Canada. Majority of jurisdictions do have rules regarding mergers of different types of CIS, for example mergers of retails with institutional CIS. Ireland, UK, Luxembourg, Spain and Mexico require that unitholders have the ability to redeem out of the CIS before the implementation of the merger (OICU-IOSCO, 2004). There is the issue of market abuse in the flow of confidential and sensitive information when it comes to equity transactions, as in regards to situations, where there might be mergers and acquisition activities in a business. India is one of the countries which are affected by this situation. There might be the potential of market abuse. This flow of information may increase in a bigger size and complexity in the transactions involved in the case that many parties become involved. In the case where the jurisdiction does not have sufficient market which is able to solve this abusive mechanisms, the investor confidence can be affected and this in turn affect the liquidity investors who are willing to provide to the issuers in time to come (Claessens, 2006). The principles of regulation of market intermediaries’ requirements are that the regulation should always avail the minimal entry standards for the market intermediaries. It also states that there should be ongoing capital and initial prudent requirements for the market intermediaries that are show the dangers that the market intermediaries go through. The principle also states that market intermediaries are supposed to comply with the internal as well as operational conduct that always aim to protect the clients’ interests, ensuring adequate management of any risk .the principle also stipulates that there should be a procedure which should be used to deal with market intermediaries in case of failure. The challenge which makes the compliance of this principle to be difficult is that, there are weaknesses in regulation. The objective of market intermediaries is to ensure clients protection against insolvency, to ensure that the clients are not affected by disruption in the market and to certify that the mediators are always just in their dealings. Many regulators lack the expertise which is required to supervise market intermediary activities and also to set standards which are detailed for risk management and internal controls. The lack of understanding inhibits regulators from undertaking inspections which leads to failure of noticing potential insolvencies. This weakness poses the challenge of non-compliance to IOSCO principles in the move to deregulate equity markets. Regulation of secondary markets entails the establishment of a trading system whereby securities are included and they are supposed to be substance to supervisory authority and oversight. The regulation should also provide transparency when it comes to trading. The regulation also should be able to deter and detect unfair trade practices. It should aim at ensuring that there is appropriate management of default risk, great revelations and market disturbance. The ancillary markets are controlled in order to certify that there is proficiency and reliability of the market mechanisms. The IOSCO principles cover these issues which have mixed levels of implementation. The challenge comes in because of the difficult in supervision of secondary markets operations and regulatory activities. There is the lack of enough capacity to be able to form the required skills and knowledge to monitor the markets. Attention to technology is also an issue. Although most of the countries meet the required threshold of transparency, some of the countries lack basic transparency in their financial markets. It also evident that the implementation on the IOSCO principles on the market is abused hence it is still a challenge. The part of the principle which is not able to be implemented is very high. It is also evident that not all the standards of accounting and auditing measure up to the international standards. Conclusion Weakness in enforcement, in supervision and oversight, the availability of poor valuation of rules and principles and lastly the absence of understanding of management of risk and in-house control in the market participants is the problem in maintaining compliance with the IOSCO principles. To ensure a level independence and availability of resources are major tests to regulators, this is due to, lack of development and enough programs for the supervision of market participants internationally. 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