If It Doesn’t Fit, You Must…

International regulatory bodies like the G20 and the Organization for Economic Cooperation and Development (OECD) are still pining for recommendations for regulators on how to avoid another financial crisis like the one that engulfed the global economy nearly six years ago.

The groups are increasingly leaning toward stronger consumer protection measures to prevent another catastrophe, just like sophisticated regulators in the United States and other countries across the globe. The OECD, unfortunately, is taking a shortsighted approach to its consumer protection recommendations by suggesting one-size-fits-all regulatory standards will work for every regulator across the globe. 

The OECD’s consumer protection recommendations won’t be issued, or received, lightly. And suggesting misguided policies is dangerous. The guidelines will be (rightly) considered by regulators in nearly every country, despite their very different levels of sophistication concerning financial markets and consumer awareness. We’ve seen movement on one-size-fits-all policies in this area for years, most recently with Solvency II and capital standard policies under consideration in Brussels. The latest version we struggle with is a recommendation for regulators on how to consider the OECD’s High-level Principles on Financial Consumer Protection. 

The principles are focused on the following areas:

• Legal, regulatory and supervisory framework
• Role of oversight bodies
• Equitable and fair treatment of consumers
• Protection of consumer assets against fraud and misuse
• Protection of consumer data and privacy
• Competition.

And the OECD recently issued draft guidance (framed as a “toolkit”) to address how best to approach the recommendations. Of course, each principle offers broad recommendations on how to manage issues affecting intermediaries. These could ultimately hit broker remuneration, transparency requirements, cooperation among supervisors and the like. And if the draft recommendations gain momentum, our ability to educate our regulators and shape sound consumer protection policies could be diminished. 

That’s why the World Federation of Insurance Intermediaries (WFII) has been following the proposed “toolkit” closely. The federation recently issued a strong response to the OECD’s suggestions, rightly calling out the organization’s shortsighted approach and its assumption that regulators should approach with the same vigor businesses large and small and products designed for individuals, multinational corporations and companies located anywhere in the world.

The comments filed with the OECD by WFII rightly stated: “the pure fact that an effective approach has been developed in a range of jurisdictions is, in our view, not an indication in itself that it is indeed an ‘effective’ approach. We believe that sound research, an impact assessment and a cost/benefit analysis should be undertaken each time by the regulator/supervisor of the particular jurisdiction before any of these so-called effective approaches summed up in this draft, regardless of them being categorized as a ‘common,’ ‘innovative’ or ‘emerging’ approach. We urge the drafting team to clearly include this need for sound research, an impact assessment and a cost/benefit analysis in the introduction.”

The federation went on to suggest that applying the same guidelines to multiple industries can be dangerous, and it suggested to the drafters that the language clearly define when various sectors should be considered equally and when they should be treated differently.

Perhaps the most relevant comment to our market is the federation’s position on regulating companies of widely disparate sizes and revenue models. The federation told the OECD that “proportionality is a fundamental principle that should be taken into account by all regulators and supervisors every time they consider imposing requirements on the financial sector. Given the importance of this principle, we believe requirements imposed on the financial sector should be proportional to the size of the market player and the complexity of its service.”

The federation concluded its comments by suggesting regulators should engage market players and industry representatives with direct knowledge of the market practices as key rules are written. This point is particularly important for emerging regulators to consider, as their markets are among the fastest-growing in the world. A thoughtful and democratic approach to market guidelines ought to be encouraged to ensure their continued strength.

Nearly every developed economy continues to struggle with how to avoid another economic collapse, and the OECD has a strong role to play by issuing sound recommendations. It’s our sincere hope the suggestions to scale back its one-size-fits-all approach are heard loud and clear.