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Unified Financial Services Supervision in Latvia, the United Kingdom and Scandinavian Countries

Authors: Judith M Mvula BSc.HB (Zambia), MBcHB (Zambia)
Consultant
Kenneth Mwenda LLB, BCL, MBA, PhD, DBA, FCI, FRSA
World Bank
Issue: Volume 10, Number 1 (March 2003)

Contents:

Authors' Note: The interpretations and conclusions expressed in this paper are entirely those of the authors. They do not represent the views of any institution or body to which the authors are individually or jointly attached.

    Introduction

  1. This paper examines recent institutional and structural developments relating to unified financial services supervision in Latvia, the United Kingdom and Scandinavian countries. At the outset, it is important to stress that issues of regulatory organization are essentially second order issues. Far more important-and the first order issue-is the implementation of financial regulation, in particular supervisory capacity and its quality and the soundness of the legal framework underlying the regulatory process.

  2. Over the years, financial regulation and supervision, in many countries, has been organized around specialist agencies that have distinct and separate responsibilities for banking, securities and insurance sectors. But there has been an apparent trend towards restructuring the financial supervisory function in many countries in recent years, and in particular unified regulatory agencies-that is, agencies that supervise two or more of these areas. A number of papers and commentaries have been written on the subject of unified financial services supervision, highlighting, in part, the advantages and disadvantages of unified financial services supervision.[1]

  3. Scholars such as Briault have advanced further arguments on the advantages of a unified model. These arguments relate to issues such as economies of scale and scope that arise because a single regulator can take advantage of a single set of central support services; increased efficiency in the allocation of regulatory resources across both regulated firms and types of regulated activities; the case with which the unified regulator can resolve efficiently and effectively the conflicts that inevitably emerge between the different objectives of regulation; the avoidance of unjustifiable differences in supervisory approaches and the competitive inequalities imposed on regulated firms through inconsistent rules which have arisen across multiple specialist regulators; and, if a unified regulator is given a clear set of responsibilities then it should be possible to increase supervisory transparency and accountability.[2]

  4. This paper, taking a different approach, builds on that work and on other related papers to take stock of various developments relating to the organizational structure of financial services supervisory agencies. It seeks to provide a comparative perspective on the structural issues confronting financial services supervision in Latvia, the United Kingdom and Scandinavian countries. The paper argues that until there is a longer track record of experience with unified agencies, it is difficult to come to firm conclusions about the optimal structure of such agencies. In some countries, and for various reasons, some of which are political, the unification of all the major financial services regulatory bodies is desirable whereas it might not be appropriate to do so in a country that has a financial sector with limited inter-connectedness among the various sector components and, further still, where there is no practice of universal banking nor evidence of conglomerates.

  5. There are some countries that benefit better from unification of only a few regulatory agencies. For example, the unification of the two agencies responsible for the supervision and regulation of pension funds and insurance businesses in Poland, on 1st April, 2002, contributed to the strengthening of the Polish financial services regulatory framework.[3] Every framework must be structured, therefore, with the objective of meeting the challenges of the financial sector of that particular country. So, what, then, is the ideal structure of a unified financial services regulatory agency? There is no hard and fast way or rigidly fixed answer regarding the structure of a unified financial services regulator. Different countries have taken different routes and approaches. And, the reasons for these differences are varied and they include ideological, historical, economical and political factors.

    Unified financial services supervision: some preliminary issues

  6. Countries contemplating a reorganization of their financial regulatory structure are confronted by two fundamental questions:

    It is important that countries address these questions with reference to their own economic, institutional and political frameworks.[4]

  7. In some instances, the reorganization of the regulatory structure may be ill-advised. For example, in some countries there are more pressing financial and economic issues than the introduction of a model of unified financial services supervision. There is a question, for instance, as to whether countries facing major imminent challenges in their financial sector-those perhaps facing insolvencies among major banks-should be contemplating wholesale reorganization of the regulatory function which might deflect attention away from the problems at hand.[5]

  8. In other countries, there is very limited inter-connectedness between the various segments of the financial sector (i.e. the insurance, securities, pensions and banking sectors and hence maintaining the status quo would be more appropriate in the short-term). And, further still, some countries may not have enough financial resources and well-trained human capital to deal with the implementation of unified financial services supervision.

  9. Assuming a country chooses to initiate a restructuring of its regulatory organization what does country experience tell us about the way unified financial services supervision should be introduced? Case studies set out below help to shed light on these questions.

    Unified financial services supervision in Latvia

  10. This section examines the institutional and structural developments relating to unified financial services supervision in Latvia. No attempt is made to delve into the policy bases of introducing such a model in Latvia. An insightful analysis of the reasons why many countries, including Australia, have turned to unified financial services supervision is contained in a separate discussion.[6]

    Developments in Latvia's financial sector and the relationship with unified financial services regulation

  11. In order to provide a meaningful evaluation of the efficacy of the regulatory and institutional framework for unified financial services supervision in Latvia, it might be helpful, at the outset, to examine some notable developments in the financial sector of Latvia. For example, how has the financial sector performed and what is the aim of unified financial services supervision in Latvia?

  12. A recent International Monetary Fund (IMF) study observes that, in Latvia, macro-economic conditions are favourable for a sustained and balanced evolution of the financial sector.[7] Latvia has been recovering steadily from the slowdown triggered by the Russian crisis. In 2000, for example, the real Gross Domestic Product (GDP) of Latvia grew by about 6.5 percent whereas in the first half of 2001 it grew by 8.75 percent. This growth was spurred by exports and investment, while manufacturing, forestry, and services also showed some strong gains.[8]

  13. Notwithstanding the recovery of the Latvian economy in general, and the banking system in particular, the latter remains susceptible to an array of potential shocks.[9] As the IMF observes, none of these shocks seem to pose significant risks. The most important of the shocks, however, relate to the rapid growth in lending and associated competition among banks, the possible perception of money laundering, a possible increase in domestic interest rates, and the potential for exchange rate movements.[10] It is such factors that underpin the policy considerations of strengthening the regulatory and institutional framework for unified financial services supervision in a country such as Latvia.

  14. A further source of vulnerability in the Latvian economy, according to the IMF, may be associated with the large fraction of non-resident deposits in Latvian banks.[11] The IMF argues further that, in 2001, these deposits accounted for about one-half of total deposits in the Latvian banking system.[12] Indeed,

    "About one-half of the non-resident deposits are from the US, reportedly from Delaware-registered companies. Restrictive regulations in neighbouring CIS countries are a factor in the attractiveness of Latvian banks for the non-resident businesses. Hence, there is a risk both improved regulations and increased financial confidence in these countries may lead to a deposit outflow from Latvia, which may hamper the business prospects of those banks that are largely operating in CIS markets. While these deposits are usually invested in highly liquid OECD paper or redeposited abroad - with little maturity mismatch - the loss of this business could lead to a significant deterioration in profits with possible systemic implications."[13]

  15. The IMF notes also that Latvia is well advanced in the transition process and many of the economic and financial issues that it confronts are those typical of a small and open economy.[14] Further, most of the problems associated with the early stages of transition - the prevalence of the state in banking business, the persistence of state enterprises as a source of inefficiency, bad loans, and a weak credit culture - are no longer pertinent to Latvia.[15]

  16. In Latvia, according to the IMF,[16] although a number of privatisations still remain to be carried out, the enterprise sector is in an advanced stage of restructuring and there is now a firmer foundation upon which the relationship with the financial sector can be built. The banking sector - which is the largest component of the financial system of Latvia - has been greatly strengthened by the entry of foreign strategic investors.[17] And Latvia conforms, to a large extent, with most of the Basle Committee Core Principles for Effective Banking Supervision.[18]

  17. Most of the insurance companies in Latvia, by comparison, are generally well capitalized and they are profitable as well.[19] The total capital and surplus maintained by the industry as a whole is approximately 3.5 times the amount required.[20] A study done by the IMF reveals that all the insurance companies examined in Latvia were seen to be in compliance with the minimum standards of regulation.[21] Further, the insurance regulatory body of Latvia had adopted the solvency margin formula prescribed for the member countries of the European Union. That said, the insurance market in Latvia is not strongly inter-connected with the banking sector so as to present a potential systemic risk to the financial system, as a whole.

  18. There are also a few pension funds in Latvia, and these do not represent a potential source of systemic risk at present.[22] The Latvian stock market is equally small and illiquid, and domestic institutional investors are just beginning to emerge. Indeed, the absence of a more active securities market limits the private sector's borrowing options and concentrates funding risks within the banking sector.[23]

  19. The structure of Latvia's financial sector, as at December 2000, can be summarized as follows.

     

    Table
    Latvia: Structure of the Financial System at End-2000

     

     

    Financial Institution

    Number

    Assets (millions of Lats)

    Size (percent of GDP)

    Banks

    21

    2,485

    57.4

    Credit Unions

    17

    1

    -

    Insurance Companies

    25

    115

    2.7

    Brokers

    22

    -

    -

    Pension Funds (third pillar)

    4

    6

    0.1

    Investment Funds

    3

    -

    -

    Leasing Companies*

    5

    140

    3.2

     

    * Five companies undertake the bulk of leasing, three of which are subsidiaries of Latvian banks. Their assets are deduced from banks’ assets (first row of the table). In addition, four banks undertake leasing activities in the order of LVL (Latvian currency) 85 million directly.

    Source: Bank of Latvia, Insurance Supervision Inspectorate, and Securities Market Commission, as quoted in IMF, The Republic of Latvia: Financial System Stability Assessment, Including Reports on Observance of Standards and Codes on the following topics: Banking Supervision; Payments Systems; Securities Regulation; Insurance Regulation; Corporate Governance; and Monetary and Financial Policy Transparency, IMF Country Report No. 02/67, (Washington DC: IMF, 2002), available Online at the IMF external web-site: http://www.imf.org/external/pubs/ft/scr/2002/cr0267.pdf


     

  20. Although the number of companies operating in the insurance market in Latvia fell from 42, in 1992, to [25] companies, in 2000 (17 non-life and 8 life insurance companies), higher levels of minimum capital to be maintained by these companies spurred a consolidation process.25 Indeed, by the end of 2001, life insurance companies were required to have at least LVL 2 million of base capital whereas non-life insurance companies were required to have at least LVL 1 million.[26] The Insurance Supervision Inspectorate managed the consolidation process in an orderly manner, and there were no insolvencies that resulted in losses for policyholders.[27]

  21. Generally, the domestic financial markets of Latvia are thin.[28] At the end of 2000, for example, government securities outstanding totalled LVL 226 million (about 5.25 percent of GDP).[29] The Lats inter-bank market is also shallow. The inter-bank market is concentrated in about five banks. Out of these banks, one accounts for about 25 percent of [30] percent of the market, a large enough percentage to move the market.30

  22. By contrast, the inter-bank market for foreign exchange is significantly deeper, and thus:

    "Commercial banks have access to lines of credit abroad, as approximately 70 percent of bank capital is foreign-owned. A result of these thin markets is volatility in money market interest rates. Commercial banks' liquidity forecasting is short-term with forecasts typically made for 3 to 6 month periods."[31]

  23. Today, the responsibility of supervising the financial sector in Latvia is vested in a unified financial services regulatory agency. The Financial and Capital Market Commission of Latvia started operating on July 1, 2001. The Commission has been established in accordance with the Law 'On the Financial and Capital Market Commission', adopted by the Latvian parliament in June 2000.[32] The Bank of Latvia observes:

    "The experience of the Scandinavian countries has shown that as a financial market develops and its range of services provided expands, merging several financial supervisory authorities into one provides for more efficient supervision of the transactions in the financial sector, including an opportunity to assess market conditions more objectively and duly identify risk factors that could affect the interests of market participants and clients...A unitary system for supervision of capital market has been successful in the Scandinavian countries, Australia, Canada, Japan, Korea, Singapore and Great Britain. Of the Central and East European countries, it has already been introduced in Hungary, and...Estonia."[33]

  24. There has been a smooth transition from the three Latvian supervisory agencies that regulated banking, securities and insurance activities, respectively, to a single unified regulatory body in Latvia. The Financial and Capital Market Commission of Latvia merged the operations undertaken by the Banking Supervision Department of the Bank of Latvia, the Insurance Supervision Inspectorate in the Ministry of Finance, and the Securities Market Commission. The creation of this unified regulator aims at enhancing the stability and safety of the financial markets in Latvia.[34]

    The organizational structure of the Latvian Financial and Capital Market Commission

  25. The organizational structure of the Financial and Capital Market Commission (hereinafter referred to as the 'Commission') in Latvia is arranged mainly along functional lines. Here, there is less emphasis on a silos approach. The lead departments of the Commission focus more on such functions as the overall supervision and licensing of financial intermediaries and institutions, irrespective of the type of intermediary, institution or business activity being supervised. Following below is a diagram illustrating the organizational structure of the Commission.

    Fig. 2.2 Organizational Structure of the Financial and Capital Market Commission

     

    Source: Financial and Capital Market Commission web-site at: http://www.fktk.lv/fcmc/structure/, visited on February 18th, 2003.

  26. The Commission has a staff number of more than ninety people.[35] This regulatory body has taken over from the Bank of Latvia the responsibility of supervising credit institutions, as well as the responsibilities previously held by the Deposit Insurance Guarantee Administration, the State Insurance Supervisory Inspectorate, and the Securities Market Commission.[36]

    Functions of the Commission

  27. The Commission has the following functions:

  28. The Commission is also responsible for establishing the procedure of licensing and registering financial and capital market participants; collecting and analysing information (data) relating to the financial and capital market, and publishing it; ensuring accumulation of funds with the Deposit Guarantee Fund and the Protection Fund for the Insured; the management and payment of compensation from the aforesaid two Funds in accordance with the Laws on Deposits of Individuals and the Insurance Companies and their Supervision; analysing regulatory requirements pertaining to the financial and capital market and drafting proposals for their improvement and harmonization with regulatory requirements of the European Union; engaging in systemic studies, analysis and forecasting of development of the financial and capital market; and, cooperating with foreign financial and capital market supervision authorities, and participating in international organizations of financial and capital market supervisory institutions.[38]

  29. In undertaking the aforesaid functions, the Commission can issue regulations and directives, governing activities of the financial and capital market participants; request and receive information necessary for the execution of its functions from the financial and capital market participants; in cases stipulated under the regulations, set forth restrictions on the activities of the financial and capital market participants; examine compliance of activities of the financial and capital market participants with legislation, and regulations and directives of the Commission; apply sanctions set forth by any regulatory requirement of financial and capital market participants (and their officials) in a case where the said requirement is violated; participate in the general meeting of financial and capital market participants so as to initiate the convening of meetings of the financial and capital market participant management bodies and thus specify items for their agenda (including participation therein); request and receive, from the Commercial Register and other public institutions, any information required for execution of its functions free of charge; and, cooperate with foreign financial and capital market supervision authorities and, upon mutual consent, exchange information necessary to execute its functions set forth by law.[39]

  30. The Commission can also carry out other activities permitted under normative acts (i.e. subsidiary legislation) of Latvia as part of the process of executing its statutory functions.[40] And, the regulations and directives issued by the Commission are binding on financial and capital market participants.[41]

  31. The relationship between the Commission, on the one hand, and the Bank of Latvia and the Ministry of Finance, on the other under the Law on the Financial and Capital Market Commission 2000, the Commission and the central Bank of Latvia are required to share statistics relevant to the execution of their tasks.[42] There is, however, no such equivalent statutory provision or requirement between the Commission and the Ministry of Finance.[43] That notwithstanding, at least once every quarter, the Commission is required by law to submit to the central Bank of Latvia and the Ministry of Finance information summarizing the situation in the financial and capital market.[44]

  32. The Commission must also inform the Governor of the Bank of Latvia and the Minister of Finance, in writing, about the short-term liquidity problems of any financial and capital market participant or its (i.e. the financial and capital market participant) potential or actual insolvency.[45] The Commission can also request the Bank of Latvia to extend a loan against collateral to any such credit institution.[46] Articles 11 and 12 of the Law on the Financial and Capital Market Commission 2000 provide as follows:

    "Article 11. The Commission shall provide information on the financial status of specific credit-institutions upon a written request of the Governor of the Bank of Latvia. Article 12. If not otherwise specified by regulatory requirements, the information referred to in this Section shall be considered restricted."

    Management of the Commission

  33. A Council, which consists of five members, governs the Commission.[47] The Council members are as follows: the Chairperson; the Deputy-Chairperson; and, three other members who are also directors of the Commission's departments.[48] The Chairperson represents the Commission in its relations with state institutions, financial and capital market participants and international organizations.[49]

  34. Parliament appoints both the Chairperson of the Commission and his deputy for a period of six years each, based on a joint recommendation of the Minister of Finance and the Governor of the Bank of Latvia.[50] Thereafter, the Chairperson, in coordination with the Minister of Finance and the Governor of the Bank of Latvia, can appoint and remove other members of the Council.[51] A person can be appointed to the position of Chairperson, Deputy Chairperson or Council member provided that he or she is competent in financial management, and that he or she is of good repute.[52] The appointee must also have at least five years experience in the Latvian financial and capital market.[53]

  35. But, no person can be appointed as Chairperson, Deputy Chairperson or Council member if that person has a criminal record of committing a 'deliberate' offence (whether the criminal record has been annulled or removed), or has been deprived of the right to engage in a particular or any type of 'entrepreneurial activity'.[54] The Law on the Financial and Capital Market Commission 2000 does not, however, spell out what constitutes a 'deliberate' offence. Neither does it define the term 'entrepreneurial activity'. What is clear, though, is that parliament can only dismiss the Chairperson or the deputy Chairperson before the end of his term - this applies only where the Chairperson or his deputy has been deprived of the right to engage in a particular or any type of 'entrepreneurial activity' - if:

  36. That said, it is not clear what the statutory grounds are for the Chairperson to remove other Council members from membership of the Council. The Law on the Financial and Capital Market Commission 2000 is silent on this. Also, while the law provides that the Chairperson of the Commission has power to hire and dismiss staff of the Commission,[56] it does not state the grounds or qualifications upon which a staff member could be hired or dismissed. Articles 19 and 20 of the Law on the Financial and Capital Market Commission 2000 merely spell out the statutory responsibilities of officials and staff of the Commission. It is also not clear whether or not the Law on the Financial and Capital Market Commission 2000 provides judicial immunity to members and staff of the Commission for acts or omissions done in good faith and in the course of business.

    Meetings of the Council

  37. Meetings of the Council are convened and presided over by the Chairperson of the Council or, during his or her absence, by the deputy Chairperson.[57] The quorum for the Council to hold a meeting competently is four members.[58] The number four here includes either the Chairperson or the Deputy Chairperson.[59]

  38. Each member of the Council has the right to call a meeting of the Council by submitting a written application.[60] Meetings of the Council can be convened on an as-needed basis, although these meetings should not be held less frequently than once a month.[61]

  39. The Council has power to pass resolutions by a simple majority. And, in cases of vote parity, the vote of the Chairperson of the meeting will be decisive.[62] The Governor or Deputy Governor of the central Bank of Latvia and the Minister of Finance may participate in Council meetings in the capacity of advisors.[63] Heads of the public organizations (professional associations) of financial and capital market participants may also take part in Council meetings in such capacity, provided that these meetings have not been declared closed by a resolution of the Council.[64] And, all Council members attending a Council meeting should sign its minutes.[65] Where a Council member attending a Council meeting does not agree with a resolution of the Council and votes against it, his individual opinion should be recorded in the minutes and he will not be held responsible for the resolution of the Council.[66]

    Powers of the Council

  40. The Council of the Financial and Capital Market Commission has exclusive rights to do the following:[67]

  41. Other statutory rights accruing to the Council include specifying payments to be made by the financial and capital market participants to finance activities of the Commission, approving the structure of the Commission, its statutes and structural units, approving the annual budget of the Commission, establishing remuneration for the Commission's staff, approving the Commission's performance and annual report, approving the procedure for registration, processing, storage, distribution and liquidation of information at the disposal of the Commission, and passing resolutions on signing cooperation agreements with the Bank of Latvia and foreign financial supervision authorities on the exchange of information necessary for supervision and regulation of the financial and capital market.[68]

    A 'Consultative' Council of the Commission

  42. A 'Consultative' Council of the Financial and Capital Market Commission can be set up to promote efficiency in monitoring the financial and capital market and to promote the safety, stability and growth of the market.[69] The 'Consultative' Council would comprise representatives of the Commission and heads of the public organizations (professional associations) of financial and capital market participants.[70] The representation of public organizations would have to be done on the principle of parity.

  43. The 'Consultative' Council is deemed competent to conduct business if at least half of its members are present at its meeting.[71] The 'Consultative' Council can pass a resolution by a simple majority vote of the members present. In the case of vote parity, the resolution is considered not passed.

  44. Meetings of the 'Consultative' Council are presided over by the Chairperson or Deputy Chairperson of the Commission.[72] The Commission is responsible for the record keeping of deliberations of the 'Consultative' Council, and this Council is expected to be a collegial, advisory body, dealing with the following tasks:[73]

  45. The Consultative Council is also responsible for reviewing the Commission's annual budget and issuing its opinion thereupon, submitting proposals to the Chairperson of the Commission regarding improvement of the Commission's activities, and supervising the accrual of funds with the Deposits Guarantee Fund and the Fund for the Protection of the Insured and compensation payments from these Funds. [74]

    Strategic goals and objectives of the Financial and Capital Market Commission

  46. As noted earlier, the main strategic goal of the Commission is to ensure that there is overall stability in the financial and capital market of Latvia.[75] To achieve this stability, the Commission has promulgated the following objectives:

  47. The Commission postulates further:

    "1.3. Minimisation of potential losses. One of the tasks of the Commission is to follow whether the market participants are able to meet their liabilities. The solvency of the market participants depends on economic and other factors. The council, the board, and the largest shareholders of each market participant are responsible for the financial stability and activities of their firm in the market. Full responsibility is also born by the customers who are competent in financial issues, for instance, large enterprises and institutional investors. In order to minimise the risk of insolvency of market participants, the Commission will monitor the compliance with the requirements of minimum capital and capital adequacy, follow the activities of market participants, and will develop appropriate methodology for assessing the financial standing of market participants. The activities of the Commission are aimed to minimize the impact of potential insolvency of certain market participants on customers' trust in the financial system of the country in general."[77]

  48. The Commission observes also that its objectives include the need (a) to reduce possibilities of criminals to use the Latvian financial system to launder proceeds derived from criminal activities; (b) to promote safety of information technologies; and, (c) to promote cost effectiveness of the Commission's activities. [78]

  49. Recognising the necessity to ensure qualitative supervision of the financial and capital market, the Commission also takes into account interests of participants in the financial and capital market in effective allocation of financial resources. Simultaneously, the Commission precludes, and discourages the incurring of, expenses not related to its tasks.[79] Closely related to the objectives of the Commission are the Commission's strategic goals. These goals are to promote stability in the financial and capital market; to promote development of the financial and capital market; and, to protect interests of investors, depositors and the insured. [80]

  50. Apart from conducting prudential regulation and supervision, the Commission is expected also to strengthen overall public confidence and trust in the Latvian financial system.[81] Presently, this kind of trust seems weaker than in, for example, the European Union due to issues such as a public perception of money laundering in Latvia.

  51. The Commission is also charged with fighting money laundering, promoting competition, promoting public awareness of financial services and products, and a host of other tasks.[82] In order to promote the development of the financial sector, the Commission has promulgated the following three objectives:[83]

  52. These objectives guide the Commission in its daily functions. The Commission argues that the development of the financial sector in Latvia should be supported by the implementation of international accounting standards and the co-operation of the Commission with professional associations of market participants.[84] On the protection of interests of investors, depositors and the insured, the Commission observes, among other things, that it will 'follow whether the participants of the financial and capital market provide to the customers of the financial and capital market highly qualitative level of service corresponding to the norms of business ethics.'[85]

    The regulatory and institutional framework

  53. The Commission enjoys full rights as an independent and autonomous public institution.[86] The Commission files annually (during the proceeding year), with the Parliament of Latvia, a written report on its performance and its complete annual financial statements audited by a sworn auditor not later than July 1.[87] The Commission, as noted above, is charged with the main responsibility of regulating and monitoring the functions of financial and capital markets and their 'participants'.[88] According to article 4 of the Law on the Financial and Capital Market Commission 2000, 'participants' in the financial and capital markets are 'issuers, investors, credit institutions, insurers, private pension funds, insurance brokers, stock exchanges, depositories, broker companies, brokers, investment companies and investment consultants.'

  54. The Commission is required, by law, to make independent decisions within the limits of its authority. However, it is not clear whether decisions of the Commission can be challenged in a court of law, arguing that the decision was not made independently.

  55. The Commission is also entrusted with statutory powers to execute functions assigned to it by law and is responsible for the execution of these functions.[89] The Law on the Financial and Capital Market Commission 2000 prohibits any interference with activities of the Commission, except where such interference is by an institution or official authorized by law.[90] The 2000 statute is, however, not clear on the type of penalty that would be meted out to a culpable party acting in breach of this statutory prohibition.

    Assets of the Commission

  56. Pursuant to provisions of article 3(1) of the Law on the Financial and Capital Market Commission 2000, the Commission is entitled to be assigned property owned by the state, and the Commission must have an independent balance sheet. Also, the Commission has a seal bearing its full name, plus other corporate requisites and an account with the Bank of Latvia.[91]

    Financing of the Commission

  57. Activities of the Commission are financed from payments of participants in the financial and capital market made in amounts specified by the Council of the Commission and not exceeding the amount set by law.[92] This statutory rule helps to promote the independence and autonomy of the Commission. Indeed, in many cases, say, where a regulatory body is funded from the central government budget, the functional and operational autonomy of the regulator is compromised. And, closely related to this problem is the likelihood that the regulatory body will not have adequate political independence to carryout its duties effectively and efficiently given the weight of political interference from the executive arm of the State.

  58. We now turn to examine developments relating to unified financial services supervision in Scandinavian countries.

    Unified financial services supervision in Scandinavian countries

  59. Among the Scandinavian countries, Norway was the first to move towards a model for unified financial supervision.[93] In 1986, after a long process of consolidating its regulatory system, Norway merged its Banking and Insurance Inspectorates.[94] This development followed an experience of:

    "... having been influenced by broadly similar considerations in making the move towards an integrated approach to regulation and having reaped many of the same benefits from this approach. Chief among these benefits has been obtaining economies of scale in the use of scarce regulatory resources in comparatively small, highly concentrated financial systems in which financial conglomerate groups predominate.[95] ...Its Bank Inspectorate could trace its history back to the end of the last century, when it was established for the supervision of savings banks. The supervision of the commercial banks was added to its responsibilities in the 1920's. Banking supervision has thus never been formally part of the responsibilities of the Norwegian central bank, and hence the creation of a unified regulatory authority did not involve any significant dilution of the central bank's range of powers. Indeed, a proposal in 1974 for the merger of the bank inspectorate with the central bank was defeated in parliament. In 1983 the Banking Inspectorate further acquired some of the functions of the securities bureau of the Ministry of Finance."[96]

  60. On the one hand, while the Ministry of Finance continued to be responsible for regulating the Oslo Stock Exchange,[97] on the other hand, the Banking Inspectorate was entrusted with powers to undertake prudential supervision of specialist securities firms and investment management firms.[98] And given that the Norwegian banks were already the most active participants in the securities markets, placing the supervision of non-bank securities firms under the Bank Inspectorate was simply a natural extension of its role in overseeing activities of securities firms.[99] Indeed, since 1986 Norway's single regulatory agency, the Kredittilsynet, has performed the regulation of banks, non-bank investment firms, and insurance companies, primarily in respect of their solvency.[100]

  61. However, although the Norwegian regulatory agency is also responsible for the regulation of real estate brokers and auditing firms, it had, by November 1999, still not been granted the formal authority and responsibility to supervise the Oslo Stock Exchange.[101] The transfer of these powers to the agency from the Ministry of Finance was, however, expected any time after November 1999.[102]

  62. Section 1 of the Norwegian statute regulating the supervision of credit institutions, insurance companies and securities trading (the Financial Supervision Act, No. 1 of 7 December 1956) provides that the Financial Supervision Act 1956 deals with 'the supervision of commercial banks; savings banks; non-life insurance companies, including the general agents (principal agents) in Norway of foreign non-life insurance companies; life insurance companies, including general agents (principal agents) in Norway of foreign life insurance companies; branches of credit institutions, as mentioned in the Financial Institutions Act, No. 40 of 10 June 1988, section 1-4, first paragraph, subparagraph 4, insofar as their activities in Norway are concerned; finance companies and mortgage companies (cf. the Financial Institutions Act, No. 40 of 10 June 1988, section 3-10); any person who is required, under the Financial Institutions Act, No. 40 of 10 June 1988, section 4-1, to notify the Kredittilsynet (the Banking, Insurance and Securities Commission) of organised or commercial intermediation of loans; any undertaking falling within the Financial Institutions Act, No. 40 of 10 June 1988, section 1-3, first paragraph, subparagraph 1 to 6, or which the King pursuant to section 1-3, second paragraph, excepts from any of the provisions of the said Act, when it is decided that the Kredittilsynet shall supervise the business; auditors and firms of auditors approved under the Auditors Act; maritime insurance associations (cf. Act No. 2 of 3 July 1953); representative offices in Norway of foreign financial institutions; investment firms and other undertakings carrying on business connected with securities trading, and of compliance with provisions on securities trading issued in or pursuant to the law; private, municipal and county municipal pension funds; and, other undertakings to the extent provided in or pursuant to a special law.'

  63. A Board of five members manages the Kredittilsynet, Norway's unified financial services regulatory body.[103] The King appoints the members and deputy members of the Board.[104] And, the King nominates the chairman and vice chairman of the Board.[105] The King appoints the director-general of the Kredittilsynet for a period of six years.[106] The members and deputy members of the Board are appointed for a period of four years.[107] The King has powers also to lay down instructions for the Board.[108] It is not, however, clear what degree of political independence and what amount of functional and operational autonomy the Kredittilsynet enjoys.

  64. Two members of the Board of the Kredittilsynet are elected by and from among the employees to supplement the Board when it deals with administrative business.[109] The election arrangement is agreed upon by negotiation with the employees, and in the absence of such agreement is stipulated by the Ministry.[110] The Norges Bank has an observer status on the Board of the Kredittilsynet. The observer is entitled to speak and to submit proposals, but not to vote. The Ministry appoints the observer and his or her deputy for a period of four years following a proposal from the Norges Bank.[111]

  65. In Sweden, by contrast, the Finans Inspektionen, which is the institution charged with the responsibility of undertaking unified financial supervision, was set up in 1991.[112] As the Finans Inspektionen observes:

    "Finansinspektionen (the Swedish Financial Services Supervisory Authority) is a public authority that is responsible for supervising companies in the insurance, credit and securities markets. Our overall objective is to contribute to the stability and efficiency of the financial sector in Sweden, and to promote satisfactory consumer protection."[113]

  66. The Finansinspektionen monitors and analyses trends in the financial market.[114] It also assesses the financial health of individual companies, the various sectors and the financial market as a whole.[115] Furthermore, the Finansinspektionen examines risks and control systems in financial companies and it supervises compliance with statutes, ordinances and other regulations.

  67. In Sweden, business operations that involve offering financial services require a permit from the Finansinspektionen.[116] The unified regulatory body of Sweden, the Finansinspektionen, also issues regulations and general guidelines and assesses whether existing legislation needs to be amended. In addition, the Finansinspektionen supervises compliance with the Swedish Insider Dealing Act, and investigates cases of suspected offences and share price manipulations.[117] The Finansinspektionen also works to ensure that companies disclose complete and accurate information to their customers. Finally, the Finansinspektionen prepares rules for financial reporting by financial companies.[118]

  68. The Swedish Finansinspektionen's counterpart in Denmark, the Danish Finanstilsynet, was established pursuant to a merger of that body's banking and insurance regulatory agencies in 1988.[119] Section 3(2) of the Danish Financial Business Act 2001[120] provides that the Danish Financial Supervisory Authority may lay down rules and guidelines on honest business principles and good practise. And, where such rules and guidelines involve aspects regarding marketing and competition, the Danish Financial Supervisory Authority will carry out negotiations with the Danish Consumer Ombudsman and the Competition Authority of Denmark.

  69. Both the Swedish and Danish regulatory bodies have responsibilities akin to those of the Norwegian Kredittilsynet. In Denmark, as in the case of Norway, the banking supervisory authority had enjoyed a long history as an agency outside the central bank and it had also combined the prudential supervision of non-bank securities firms as part of its responsibilities prior to the creation of a fully unified agency.[121] However, the creation of the Danish framework for unified financial supervision was 'largely an administrative arrangement, and there was no fundamental review of legislation governing its supervisory activities at the time of the merger.'[122] As such, it is argued that the Danish unified regulatory body operates under a number of different statutes inherited from predecessor organizations.[123] Indeed, 'the sector legislation has been adjusted and harmonized successively during the nineties. Similarly, its governance arrangements have not been fully unified.'[124]

  70. In Sweden, the creation of the Finans Inspektionen was prompted by the banking crisis that hit Sweden in 1990-91.[125] There was also a political desire by Sweden to keep up with developments in other Scandinavian countries which had already established a framework for unified financial supervision.[126] In addition, and apart from the fact that Sweden, unlike Norway and Denmark, is a member of the Basle Committee on Banking Supervision and, thus, most likely to be attracted to achieving economies of scale and enhancing its international presence, there is also a long history of enhanced links between the banking and insurance sectors in Sweden.[127]

  71. By contrast, Finland has opted not to adopt a fully unified approach to financial supervision. However, for some time the Finnish regulatory framework mirrored that of Norway, Denmark and Sweden until the late 1980s.[128] A number of institutional changes were introduced to the Finnish system and these focused mainly on enhancing the link between banking supervisors and the Bank of Finland.[129] It is against this background that the Finnish Financial Supervision Authority (FSA) was established.

  72. Section 1 of the statute establishing the Finnish FSA provides that the Finnish FSA, operating in connection with the Bank of Finland, has powers to supervise financial markets and 'entities' operating in the market. However, separate statutory provisions apply to the supervision of insurance and pension institutions.[130]

  73. Under section 2 of the Finnish Financial Supervision Authority Act 1993, 'supervised entities' are classified as 'a credit institution, as referred to in the Credit Institutions Act (1607/93); a guarantee fund of a deposit bank; a deposit guarantee fund, as referred to in chapter 6a of the Credit Institutions Act (19.12.1997/1349); a branch of a foreign credit institution; a representative office of a foreign credit institution; a management company and a custodian (29.1.1999/50); an investment firm; an investor compensation fund as referred to in the Investment Firms Act (579/96), (10.7.1998/521); a branch of a foreign investment firm; a representative office of a foreign investment firm; a stock exchange; an options corporation; a market maker, as referred to in chapter 1, section 4 of the Act on Trading in Standardized Options and Futures; a clearing corporation and a clearing party (20.12.1996/1077); a central securities depository, the fund of a central securities depository and the clearing fund of a central securities depository (20.12.1996/1077); an authorized book-entry registrar; a pawnshop; a cooperative society as referred to in paragraph 1 of section 41a of the Cooperative Banks Act (1126/93); an amalgamation and a central body of the cooperative banks, as referred to in section 7a of the Cooperative Banks Act; a holding corporation of a credit institution and an investment firm and (22.10.1999/972); a corporation holding a controlling interest in a stock exchange, options corporation, clearing corporation or a central securities depository as referred to in chapter 1, section 5, of the Securities Markets Act. (25.1.2002/46); and, a holding company of a financial conglomerate, as referred to in the Act on the Supervision of Financial Conglomerates (44/2002), where the Finnish FSA is the coordinating supervisory authority of the financial conglomerate as defined in the Act (25.1.2002/46).'

  74. The Finnish FSA also works closely with the Finnish Insurance Supervision Authority and other authorities involved in the supervision of financial markets.[131] Although administratively connected to the Bank of Finland, the Finnish FSA is independent in its decision-making.[132] That said, on the one hand, the political independence of the Finnish FSA remains to be seen, especially that the President of the Republic of Finland appoints the director-general of FSA.[133]

  75. On the other hand, members of the Parliamentary Supervisory Council have administrative duties, regarding FSA, to (a) appoint three members of the Board and their personal deputies for three years at a time on the basis of proposals by the Bank of Finland, the competent Ministry and the Ministry responsible for insurance business; (b) appoint the chairman and the deputy chairman of the Board, and, on the basis of a proposal by the Board, a deputy to the director-general; (c) decide upon bases for determination of the director-general's salary, leave of absence and annual leave; (d) decide upon reprimanding the director-general and on other matters related to his employment relationship; and, (e) confirm the rules of procedure of FSA on the basis of a proposal by the Board.[134]

  76. Contrasting the model for unified financial supervision in many Scandinavian countries and from that found in the UK, it can be argued:

    "For different reasons, the United Kingdom's adoption of unified regulation stands out as something of an exception among northern European countries. Unlike the Scandinavian countries, the UK is home to an international financial centre and its domestic financial services industry is much larger, more diverse and less concentrated than in Scandinavia. Furthermore, the UK's Financial Services Authority is responsible for both prudential and conduct of business regulation, unlike its counterparts in Scandinavia which have focused on prudential regulation only... Finally, the formation of the UK Financial Services Authority has been undertaken as a radical, 'Big Bang' measure, bringing together nine existing regulatory bodies. By contrast, the Scandinavian integrated regulators were the product of a long process of agency consolidation, and were formed primarily from the merger of banking and insurance inspectorates... the growth of bancassurance business - i.e. financial conglomerate groups combining both banking and insurance activities - was regarded as a powerful reason for adopting an integrated approach to supervision (i.e. in most Scandinavian countries)... None of the three Scandinavian integrated regulatory bodies (i.e. the Swedish, Norwegian and Danish bodies) was created by removing the banking supervision function from the central bank: in each case the regulation of commercial banks had long been conducted by a specialist banking supervisory body."[135]

    Unified financial services supervision in the United Kingdom

    Overview and the organizational structure of financial services supervision

  77. In the UK, the Bank of England Act 1998 now transfers from the Bank of England to the Financial Services Authority the Bank's former banking supervision functions.[136] Prior to the enactment of this piece of legislation, the legal pedigree for powers of the Bank to conduct financial services supervision rested not only in provisions of the Banking Act 1987, but also in section 101(4) of the Building Societies Act 1986 and in provisions of the Banking Coordination (Second Council Directive) Regulations 1992. Under these laws, the core purposes and strategy of the Bank of England included monetary stability, monetary analysis, monetary operations, banking activities, financial stability, supervision and surveillance. The Financial Services Authority has now acquired the powers to supervise banks, listed money market institutions (as defined in the Financial Services Act 1986,[137] section 43) and related clearing houses (as defined in the Companies Act 1989, section 171).[138] Furthermore, under section 153 of the Financial Services and Markets Act 2000, the Financial Services Authority has power to exercise its rule-making powers in writing.

  78. The current institutional and regulatory framework under the Bank of England Act 1998 endeavours, among other things, to place a balance between the role of the Bank and that of the Treasury. As Blair observes:

    "This aspect is the one that has attracted the greatest amount of public attention. So far as the law is concerned, section 10 removes from the Treasury the power to give directions to the Bank in relation to monetary policy. That said, the Treasury have... important powers to condition the general strategy in relation to monetary policy. Critically, section 12 enables the Treasury to specify what price stability is to be taken to consist of, and what the government's economic policy is to be taken to be. These are the two elements, and the only two elements, of the Bank's statutory objectives in relation to monetary policy, though the second of them contains a subsidiary reference to objectives for growth and employment."[139]

  79. In general, the areas which are expected to be influenced in the aftermath of the enactment of the Bank of England Act 1998 include the overall stability of the financial system as a whole, and in particular; the stability of the monetary system; the financial system infrastructure, especially payments systems; the broad overview of the (financial) system as a whole; the ability to conduct what loosely may be described as official support operations; and the efficiency and effectiveness of the financial sector, with particular regard to international competitiveness. [140]

  80. It was believed that the system that existed prior to the introduction of the Financial Services Authority in the UK lacked transparency and adequate accountability partly due to its fragmented regulatory structure.[141] By contrast, consolidated prudential supervision of multi-functional financial groups, it was argued, provided for an efficient way of managing risks related to different financial activities (e.g. traditional retail banking and securities trading).[142] Also, a unified model for financial supervision was expected to be more publicly accountable and transparent.[143]

  81. Today, the Financial Services Authority is expected to carryout prudential financial supervision in accordance with a number of EU directives in the area of financial services, all of which have been implemented in the UK. As Bartolini observes, 'most recently, the EU's Capital Adequacy Directive (CAD) and CAD II (implemented in the UK on January 1, 1996, and on September 30, 1998, respectively) have extended the UK supervisory picture to cover market risk and have provided scope for internal value-at-risk (VaR) models to determine risk capital.'[144]

  82. It is, however, argued that the UK regulators do retain significant flexibility with respect to these directives and other internationally agreed standards.[145] An example often cited is that the UK typically sets capital ratios above the Basle Accord guideline of a minimum of 8 per cent.[146]

  83. Another example is that of the UK setting required capital ratios in firm-specific fashion, taking into account credit and market risk factors specific to a firm's business, and applying them on a consolidated basis to all financial firms within a group.[147] Furthermore, the prudential requirements applicable to authorized firms place limits on maximum exposure toward single (or related groups of) counter-parties.[148] This entails that liquidity requirements emphasize two major areas; that is, securing an institution's access to enough cash and high-quality near-cash assets to meets its obligations, and provisioning for bad and doubtful debts.[149]

  84. However, experience has shown that some of the shortcomings of a unified model for financial services supervision include the following:

    "...advocates of a narrow role for central banks argue that if the central bank (or whichever institution performs the role of the LOLR[150] must provide liquidity assistance to avert a financial crisis, then it should do so only by providing liquidity to the market at large, e.g., through open market operations, leaving to the market the task of allocating liquidity to worthy borrowers. This conduct would minimise moral hazard, both for potential beneficiaries of liquidity rescues (which would have fewer incentives to assume socially excessive risks) and for other banks (who would need to step up peer monitoring and associated market discipline.) Expanding the role of a central bank to include supervisory responsibilities may also significantly raise the cost of a supervisory failure, which would damage the central bank's reputation and the credibility of its monetary policy. Furthermore, the mandates of banking supervision and of price stability are subject to a potential conflict of interest: a central bank responsible for supervision could lean towards lax monetary policy if this was perceived to avert bank failures... A widely held view among advocates of an active LOLR mandate is that central banks (or whoever performs the function of LOLR) may deter the banks' tendency to assume excessive risk by keeping details of the LOLR practices 'constructively' ambiguous, i.e., by retaining discretion as to whether, when, and what conditions, emergency liquidity support will be provided."[151]

    Recent developments in the UK on the regulatory framework

  85. A new single Financial Services Ombudsman is now in operation in the UK. On December 1st 2001, the Financial Services Ombudsman received full powers, under the Financial Services and Markets Act 2000, to assume voluntary jurisdiction over mortgage lenders not authorised by the Financial Services Authority (FSA) and firms not authorised by FSA, whose activities were previously covered by membership of a former ombudsman scheme.[152] The Financial Services Ombudsman itself, under section 227 of the Financial Services and Markets Act 2000, makes rules relating to the scope of voluntary jurisdiction of the Financial Services Ombudsman. It must be pointed out that,

    "The Financial Services and Markets Act 2000 (FSMA) provides the statutory framework for the new UK market abuse regime, which became effective on 1 December 2001. The FSMA market abuse regime provides new powers to the Financial Services Authority (FSA) to sanction anyone who engages in 'market abuse', that is misuse of information, misleading practices, and market manipulation, relating to investments traded on prescribed UK markets. It also applies to those who require or encourage others to engage in conduct that would amount to market abuse. FSMA's stated objective is to fill the 'regulatory gap' by giving the FSA substantial powers to punish unregulated market participants whose market conduct falls below acceptable standards, but does not rise to the level of a criminal offence..."[153]

  86. The main statutory provisions prohibiting insider dealing in the UK can be found in Part V of the Criminal Justice 1993. Section 118 of the Financial Services and Markets Act 2000, and the proposed European Union Directive on Market Abuse,[154] reinforce these insider dealing statutory provisions.

  87. In general, the Financial Services Ombudsman receives and handles consumer complaints that do not rise to the level of a criminal offence. This effort is pursued so that the UK Financial Services Authority can accomplish its tasks, which include supervising wholesale markets in over-the counter derivatives.[155] As the IMF observes:

    "... the FSA's goal is to promote 'awareness of the benefits and risks associated with different kinds of investment or other financial dealing' while safeguarding 'the general principle that consumers should take responsibility for their decisions' (Financial Services and Markets Bill, Clauses 4(2)(a) and 5(2)(c))[156]

    ... In practice, the FSA plans to protect consumers of financial services by intervening at several stages: 1) by vetting firms at entry, to ensure that only those found to be 'fit and proper' are permitted to conduct financial business; 2) by setting and enforcing prudential standards; 3) by using its powers of investigation, enforcement, and restitution against firms that fail to meet expected standards; 4) by setting a 'one-stop' arrangement for resolving disputes between consumers and authorised firms - the single 'Financial Services Ombudsman Scheme'; 5) by overseeing the compensation of investors when an authorised firm is unable to meet its liabilities... Unsurprisingly, the approach taken by the FSA to balance consumer protection with the preservation of strong elements of caveat emptor - consumers must take significant responsibility for their own financial decisions - has spurred a lively debate in the UK."[157]

  88. Under the new system, which introduces the FSA, the existing five compensation schemes are to be merged into a single compensation scheme, the UK Financial Services and Markets Compensation Scheme (FSMC).[158] One of the notable aims of FSMC is to safeguard, partially, consumers of financial services against failure of authorized institutions to deliver on their obligations.[159] Today, the Financial Services Authority has taken on new roles that were not covered by the previous regulatory regimes, and these roles include the following:[160]

    Conclusion

  89. Although unified financial services supervision has been adopted differently in many countries, its application has varied from country to country and there is no single right way of introducing or implementing unified models of financial services supervision. Experience so far seems to suggest that, in order for a country to manage effectively the transition to a unified supervisory agency, one of the factors to consider include the effective and efficient co-ordination of information sharing among the major stakeholders in the unified supervisory system, namely, the Ministry of Finance, the central bank, and the unified supervisory agency. Also, where there is an independent deposit insurance agency and an independent payments and settlements clearing agency, they, too, must be consulted. Co-ordination and consultation here provides for efficient means of sharing information between the various stakeholders.

  90. In making its case that the application of models of unified financial services supervision has varied from country to country and that there is no single right way of introducing or implementing such models, the paper provided case studies of Latvia, the UK and Scandinavian countries, highlighting differences, say, in the skills mix of regulators and the legal frameworks for unified financial services supervision. Also, the functional matrix of organizational structure, in contrast to the sectoral approach, showed that different countries have approached the introduction and implementation of unified financial services supervision differently. In those countries where segments of the financial sector are quite inter-connected, a good case of moving towards unified supervision exists. In such countries, the nature of banking and financial services business is often developing and encompasses more complex and multi-functional operations.

  91. Until there is a longer track record of experience with unified agencies, it is difficult to come to firm conclusions about the restructuring process itself, and the optimal internal structure of such agencies.

Notes

[1] See, for example, the bulk of the literature reviewed in the following papers: K.K. Mwenda and A. Fleming, "International Developments in the Organizational Structure of Financial Services Supervision: Part 1," Journal of International Banking Law, Vol. 16, No. 12, 2001; K.K. Mwenda and A Fleming, "International Developments in the Organizational Structure of Financial Services Supervision: Part 11," Journal of International Banking Law, Vol. 17, No.1, 2002; and, K.K. Mwenda, "Integrated Financial Services Supervision in Poland, the UK and the Nordic countries," Tilburg Foreign Law Review, Vol. 10, No.2, 2002.

[2] See generally C. Briault, "The Rationale for a Single National Financial Services Regulator," Occasional Paper Series No. 2, (London: Financial Services Authority, May 1999). In another paper, Briault (see generally C. Briault, "A Single Regulator for the UK Financial Services Industry," Financial Stability Review, (November 1998)), observes that the benefits of a unified regulator include the harmonization, consolidation and rationalization of the principles, rules and guidance issued by the existing regulators or embedded within existing legislation, while recognizing that what is appropriate for one type of business, market or customer may not be appropriate for another; a single process for the authorization of firms and for the approval of some of their employees, using standard processes and a single database; a more consistent and coherent approach to risk-based supervision across the financial services industry, enabling supervisory resources and the burdens placed on regulated firms to be allocated more effectively and efficiently on the basis of the risks facing consumers of financial services; a more consistent and coherent approach to enforcement and discipline, while recognizing the need for appropriate differentiation; and, in addition to a single regulator, single schemes for handling consumer complaints and compensation, and a single independent appeals tribunal. Further readings, see also M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, Policy Research Working Paper 2223, (Washington DC: The World Bank, 1999), p. 11.

[3] See generally K.K. Mwenda, "Integrated Financial Services Supervision in Poland, the UK and the Nordic countries," Tilburg Foreign Law Review, op cit.

[4] M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 2, argue that: "An important issue in deciding to adopt a unified supervisory agency is to consider whether it should be concerned exclusively with prudential (i.e. safety and soundness) regulation, or whether it should also have responsibility for conduct of business... it should be noted only the United Kingdom, of the countries surveyed, has created a unified regulator with both prudential and conduct of business responsibilities." Cf. C.A.E Goodhart, P. Hartman, D.T. Llewellyn, L. Rojas-Suarez, S. Weisbrod, Financial Regulation, (London and New York: Routledge, 1998); M. Taylor, Twin Peaks: A Regulatory Structure for the New Century, (London: Centre for the Study of Financial Innovation, December 1995); M. Taylor, Peak Practice: How To Reform the United Kingdom's Regulatory System, (London: Centre for the Study of Financial Innovation, October 1996); C.A.E. Goodhart, "The Costs of Regulation," in A. Sheldon (ed.), Financial Regulation or Over-regulation, (London: Institute of Economic Affairs, 1988); and C. Briault, "The Rationale for a Single National Financial Services Regulator," Occasional Paper Series No. 2, (London: Financial Services Authority, May 1999).

[5] Addressing some of the recent developments in bank regulation, Llewellyn draws an analogy and argues (D.T. Llewellyn, "Some lessons for bank regulation from recent cases," a paper presented at the conference on Regulation and Stability in the Banking Sector, at De Nederlandsche Bank, Amsterdam, 3-5 Nov. 1999, abstract page): "The causes of systemic bank distress are complex and multi-dimensional involving economic, financial, regulatory and structural weaknesses. This also means that regulatory approaches also need to be multi-dimensional... an optimum 'regulatory regime' needs to incorporate seven key components: regulation (the rules imposed by official agencies), official supervision, incentive structures within banks, market discipline, intervention arrangements in the event of distress, corporate governance arrangements with banks, and the accountability of regulatory agencies. All are necessary but none alone are sufficient for systemic stability. As there are trade-offs between the components, regulatory strategy needs to focus on the overall impact of the regime rather than only the regulation component."

[6] See K.K. Mwenda and A. Fleming, "International Developments in the Organizational Structure of Financial Services Supervision: Part 1," Journal of International Banking Law, op. cit.; and, K.K. Mwenda and A Fleming, "International Developments in the Organizational Structure of Financial Services Supervision: Part 11," Journal of International Banking Law, op. cit. See also K.K. Mwenda, "Integrated Financial Services Supervision in Poland, the UK and the Nordic countries," Tilburg Foreign Law Review, op cit.

[7] See IMF, The Republic of Latvia: Financial System Stability Assessment, Including Reports on Observance of Standards and Codes on the following topics: Banking Supervision; Payments Systems; Securities Regulation; Insurance Regulation; Corporate Governance; and Monetary and Financial Policy Transparency, IMF Country Report No. 02/67, (Washington DC: IMF, 2002), available Online at the IMF external web-site: http://www.imf.org/external/pubs/ft/scr/2002/cr0267.pdf, visited on March 31st 2003.

[8] See IMF, Ibid., p. 11.

[9] See IMF, Ibid., p. 11.

[10] See IMF, Ibid., p. 11.

[11] See IMF, Ibid., p. 11.

[12] See IMF, Ibid., p. 11.

[13] See IMF, Ibid., p. 11.

[14] See IMF, Ibid., p. 4.

[15] See IMF, Ibid., p. 4.

[16] See IMF, Ibid., p. 4.

[17] See IMF, Ibid., p. 4.

[18] See IMF, Ibid., p. 20

[19] See IMF, Ibid., p. 17.

[20] See IMF, Ibid., p. 17.

[21] See IMF, Ibid., p. 17.

[22] See IMF, Ibid., p. 17.

[23] See IMF, Ibid., p. 17.

[24] Five companies undertake the bulk of leasing, three of which are subsidiaries of Latvian banks. Their assets are deduced from banks' assets (first row of the table). In addition, four banks undertake leasing activities in the order of LVL (Latvian currency) 85 million directly.

[25] IMF, The Republic of Latvia: Financial System Stability Assessment, Including Reports on Observance of Standards and Codes on the following topics: Banking Supervision; Payments Systems; Securities Regulation; Insurance Regulation; Corporate Governance; and Monetary and Financial Policy Transparency, op. cit., p. 8.

[26] IMF, Ibid., p. 8.

[27] IMF, Ibid., p. 8.

[28] However, the shallow domestic Lats market is compensated by the ability of banks in Latvia to access the Bank of Latvia's lending facilities. While the inter-bank market is the primary means of satisfying day-to-day liquidity needs, the Bank of Latvia provides additional liquidity support.

[29] See IMF, The Republic of Latvia: Financial System Stability Assessment, Including Reports on Observance of Standards and Codes on the following topics: Banking Supervision; Payments Systems; Securities Regulation; Insurance Regulation; Corporate Governance; and Monetary and Financial Policy Transparency, op. cit., p. 9.

[30] IMF, Ibid., p. 9.

[31] IMF, Ibid., p. 9.

[32] See Bank of Latvia, "On Establishing the Financial and Capital Market Commission in Latvia," Press Release of May 22, 2001, available Online at: http://www.bank.lv/eng/main/sapinfo/lbpdip/index.php?30816&PHPSESSID=4560d09b0de5f4b291ea190bbc69477a, visited on February 18th 2003.

[33] See Bank of Latvia, "On Establishing the Financial and Capital Market Commission in Latvia," Press Release of May 22, 2001, Ibid.

[34] See IMF, The Republic of Latvia: Financial System Stability Assessment, Including Reports on Observance of Standards and Codes on the following topics: Banking Supervision; Payments Systems; Securities Regulation; Insurance Regulation; Corporate Governance; and Monetary and Financial Policy Transparency, op. cit., p. 19.

[35] A. Vanags, "Latvia's New Super-Regulators Have a Mission," Transition Newsletter, at the following web-site: http://www.worldbank.org/transitionnewsletter/octnovdec01/pgs35-36.htm, visited on February 18th, 2003.

[36] See Ibid.

[37] The Law on the Financial and Capital Market Commission 2000, art. 6.

[38] Ibid., art. 6.

[39] Ibid., art. 7(1).

[40] Ibid., art. 7(2).

[41] The Law on the Financial and Capital Market Commission 2000, art. 8.

[42] Ibid., art. 10(3).

[43] In other countries, such as the United Kingdom and Hungary, the sharing of information between the unified regulator and other stakeholders in the financial system (e.g. the central bank) is facilitated by a Memorandum of Understanding. Generally, a Memorandum of Understanding, unlike a piece of legislation, can be likened to what some jurisprudents call 'soft law'.

[44] The Law on the Financial and Capital Market Commission 2000, art. 10(1).

[45] Ibid., art. 10(2).

[46] Ibid., art. 10(2).

[47] The Law on the Financial and Capital Market Commission 2000, art. 13(1),(2). This 2000 law repealed the Latvian Law on Securities Market Commission (Zinotajs of the Parliament of the Republic of Latvia and the Cabinet of Ministers, 1995, No. 20; 1997, No. 14; 1998, No. 23).

[48] The Law on the Financial and Capital Market Commission 2000, art. 13(2).

[49] Ibid., art. 18(3).

[50] Ibid., art. 13(3).

[51] Ibid., art. 13(4).

[52] Ibid., art. 13(5).

[53] Ibid., art. 13(5).

[54] Ibid., art. 13(6).

[55] Ibid., art. 14.

[56] Ibid., art. 18(2).

[57] The Law on the Financial and Capital Market Commission 2000, art. 15(1).

[58] Ibid., art. 15(2).

[59] Ibid., art. 15(2).

[60] Ibid., art. 15(3).

[61] Ibid., art. 15(4).

[62] Ibid., art. 16(1).

[63] Ibid., art. 16(2).

[64] Ibid., art. 16(2).

[65] Ibid., art. 16(3).

[66] Ibid., art. 16(4).

[67] Ibid., art. 17.

[68] The Law on the Financial and Capital Market Commission 2000, art. 17.

[69] Ibid., art. 21(1).

[70] Ibid., art. 21.

[71] Ibid., art. 21.

[72] Ibid., art. 21.

[73] Ibid., art. 21(1).

[74] Ibid., art. 21(1).

[75] See also Financial and Capital Market Commission, at the following web-site: http://www.latvianbanks.com/banks/Financial_and_Capital_Market_Commission.htm, visited on February 18th, 2003.

[76] See Ibid.

[77] See Ibid.

[78] Ibid.

[79] Ibid.

[80] See Ibid. See also article 5 of the Law on the Financial and Capital Market Commission 2000.

[81] A. Vanags, "Latvia's New Super-Regulators Have a Mission," Transition Newsletter, at the following web-site: http://www.worldbank.org/transitionnewsletter/octnovdec01/pgs35-36.htm, visited on February 18th, 2003.

[82] See Ibid. See also article 9 of the Law on the Financial and Capital Market Commission 2000.

[83] Financial and Capital Market Commission, at the following web-site: http://www.latvianbanks.com/banks/Financial_and_Capital_Market_Commission.htm, visited on February 18th, 2003.

[84] Ibid.

[85] Ibid.

[86] The Law on the Financial and Capital Market Commission 2000, art. 2(1).

[87] Ibid., art. 27.

[88] Ibid., art 2(1).

[89] Ibid., art. 2(2).

[90] Ibid., art. 2(2).

[91] Ibid., art. 3(2).

[92] Ibid., art. 22(1).

[93] K.K. Mwenda, Banking Supervision and Systemic Bank Restructuring, (London: Cavendish Publishing, 2000), p. 113.

[94] Ibid., p. 113.

[95] An integrated model represents a significant concentration of power, ensuring that its powers are not used to serve political rather than administrative purposes.

[96] M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., pp. 4-5.

[97] The only organised financial market in Norway.

[98] M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 5.

[99] Ibid., p. 5.

[100] Ibid., p. 5.

[101] See Ibid., p. 5.

[102] Ibid., p. 5.

[103] Norway's Financial Supervision Act 1956, sec. 2.

[104] Ibid., sec. 2.

[105] Ibid., sec. 2.

[106] Ibid., sec. 2.

[107] Ibid., sec. 2.

[108] Ibid., sec. 2.

[109] Ibid., sec. 2.

[110] Ibid., sec. 2.

[111] Ibid., sec. 2.

[112] M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 7.

[113] Finansinspektionen (the Norwegian unified regulator), FI in Brief, available Online at: http://www.fi.se/english/index.asp, visited on March 31st 2003.

[114] See Ibid.

[115] See Ibid.

[116] See Ibid.

[117] See Ibid.

[118] See Ibid.

[119] M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 6.

[120] This statute contains provisions implementing Council Directive No. 86/635/EEC, Official Journal of the European Communities No. L 372, page 1, (annual accounts and consolidated accounts for mortgage credit institutions), Council Directive No. 90/618/EEC, Official Journal of the European Communities No. L 330, page 44, (amendment of the 1st and 2nd non-life insurance directives), Council Directive No. 90/619/EEC, Official Journal of the European Communities No. L 330, page 50, (2nd non-life insurance directive), Council Directive No. 91/674/EEC, Official Journal of the European Communities No. L 374, page 7, (annual accounts and groups accounts for insurance companies), Council Directive No. 92/49/EEC, Official Journal of the European Communities No. L 228, page 1, (3rd non-life insurance directive), Council Directive No. 92/96/EEC, Official Journal of the European Communities No. L 360, page 1, (3rd life insurance directive), Council Directive No. 93/22/EEC, Official Journal of the European Communities No. L 141, page 27, (investment services directive), Council Directive No. 95/26/EU, Official Journal of the European Communities No. L 168, page 7, (BCCI directive), European Parliament and Council Directive No. 98/78/EU, Official Journal of the European Communities No. L 330, page 1, (insurance group directive), European Parliament and Council Directive No. 2000/12/EU, Official Journal of the European Communities No. L 126, page 1, (credit institution directive), and European Parliament and Council Directive No. 2000/64/EU, Official Journal of the European Communities No. L 290, page 27, (exchange of information).

[121] See M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 6.

[122] See M. Taylor and A. Fleming, Ibid., p. 6.

[123] See M. Taylor and A. Fleming, Ibid., p. 6. On relevant Danish legislation, see for example: the Consolidated Insurance Mediation Act, 2001; the Consolidated Insurance Business Act, 2002; the Investment Companies Consolidated Act, 2000; the Commercial Banks and Savings Banks, etc. Consolidated Act, 2001; the Mortgage Credit Act, 2001; the Danish Supervision of Company Pension Funds Act, 1999; and, the Consolidated Act on Measures to Prevent Money Laundering and Financing of Terrorism, 2002.

[124] See M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 6.

[125] Ibid., p. 7. See also generally B. Drees and C. Pazarbasioglu, The Nordic Banking Crisis: Pitfalls in Financial Liberalisation ?, Occasional Paper 161, (Washington DC: IMF, April 1998), where it is argued that although the banking crises in Norway, Sweden and Finland in the early 1990's followed a similar pattern, and appear to have had similar causes, their impact on the structure of regulation differed significantly between Norway and Sweden, on the one hand, and Finland, on the other.

[126] See M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 7.

[127] See Ibid., p. 7.

[128] See Ibid., p. 7.

[129] Ibid., p. 8.

[130] Financial Supervision Authority Act, 1993, of Finland, sec. 1.

[131] See Ibid., sec. 4(6).

[132] See M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., p. 8.

[133] Financial Supervision Authority Act, 1993, of Finland, sec. 8.

[134] See Ibid., sec. 5.

[135] See M. Taylor and A. Fleming, Integrated Financial Supervision: Lessons from Northern European Experience, op. cit., pp. 9, 17.

[136] See Bank of England Act 1998, sec. 21. It is important to delineate clearly the roles of any other supervisory authority so as to avoid potential for conflict of interests. For further readings see C. Lindgren, Authorities' Roles and Organizational Issues in Systemic Bank Restructuring, Working Paper WP/97/92-EA, (Washington DC: IMF, 1997).

[137] Under consideration for repeal.

[138] See C. Ryan, "Transfer of Banking Supervision to the Financial Services Authority," in M. Blair, R. Cranston, C. Ryan and M. Taylor, Blackstone's Guide To The Bank of England Act 1998, (London: Blackstone Press Limited, 1998), p. 39.

[139] M. Blair, "Introduction and Overview," in M. Blair, R. Cranston, C. Ryan and M. Taylor, Blackstone's Guide To The Bank of England Act 1998, Ibid., p. 5.

[140] See M. Blair, "Introduction and Overview," in Ibid., pp. 6-7.

[141] See L. Bartolini, "The Financial Services Authority: Structure, Mandate, and Policy Issues," in H. Samiei, J K. Martijn, Z. Kontolemis, and L. Bartolini, International Monetary Fund: United Kingdom. Selected Issues, (Washington DC: IMF, February 17, 1999), p. 32.

[142] See Ibid., p. 31.

[143] See Ibid., p. 32.

[144] Ibid., p. 27.

[145] See Ibid., p. 27.

[146] See for example, Ibid., p. 27.

[147] See Ibid., p. 27.

[148] See Ibid., p. 28.

[149] L. Bartolini, "The Financial Services Authority: Structure, Mandate, and Policy Issues," in H. Samiei, J K. Martijn, Z. Kontolemis, and L. Bartolini, International Monetary Fund: United Kingdom. Selected Issues, Ibid., p. 28.

[150] The IMF argues that while countries such as Germany, Japan and - recently - Australia have established separate functions of banking supervision and Lendor-of-last-resort (LOLR), the US, Italy and (to some extent) France have opted for a broad central bank role, combining both monetary policy/LOLR and banking supervision. For a detailed discussion, see L. Bartolini, "The Financial Services Authority: Structure, Mandate, and Policy Issues," in H. Samiei, J K. Martijn, Z. Kontolemis, and L. Bartolini, International Monetary Fund: United Kingdom. Selected Issues, Ibid., pp. 36-37.

[151] L. Bartolini, "The Financial Services Authority: Structure, Mandate, and Policy Issues," in H. Samiei, J K. Martijn, Z. Kontolemis, and L. Bartolini, International Monetary Fund: United Kingdom. Selected Issues, Ibid., pp. 36, 41.

[152] See The Financial Ombudsman Service, Our Voluntary Jurisdiction, available Online at: http://www.financial-ombudsman.org.uk/vj.htm, visited on 31st March, 2003.

[153] K. Alexander, "Insider Dealing and Market Abuse: The Financial Services and Markets Act 2000," working paper whose abstract appears Online at: http://ideas.repec.org/p/cbr/cbrwps/wp222.html, visited on March 31st 2003.

[154] For a further reading, see generally K. Alexander, "Insider Dealing and Market Abuse: The Financial Services and Markets Act 2000," Ibid.

[155] L. Bartolini, "The Financial Services Authority: Structure, Mandate, and Policy Issues," in H. Samiei, J K. Martijn, Z. Kontolemis, and L. Bartolini, International Monetary Fund: United Kingdom. Selected Issues, op. cit., p. 29.

[156] Bartolini (see Ibid., p. 26) argues that one of the main innovations the regulatory reform has introduced into UK financial system is the separation of the functions of banking supervision (now undertaken by the Financial Services Authority) from the provision of emergency liquidity (or the Lender-of-last-Resort, for which the Bank of England will continue to be responsible).

[157] L. Bartolini, "The Financial Services Authority: Structure, Mandate, and Policy Issues," in H. Samiei, J K. Martijn, Z. Kontolemis, and L. Bartolini, International Monetary Fund: United Kingdom. Selected Issues, op. cit., p. 33.

[158] Ibid., p. 30.

[159] Ibid., p. 30.

[160] See Financial Services Authority, New Responsibilities, available Online at the FSA web-site: http://www.fsa.gov.uk/what/new_responsibilities.html, visited on March 31st 2003.

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