Evolution of Accountability Mechanisms Post-Crisis

Much of the post-financial crisis effort focused not only on the improvement of standards, but also on evolving mechanisms to foster accountability in the context of soft law. Initial goals focused on monitoring and reporting on im-plementation of standards developed by the standard setters and have also moved towards greater assessment and peer review. There may be further in-terest in identifying mechanisms to ensure compliance and enforcement once assessment and peer review mechanisms are defined and begin providing re-sults. Countries may need to consider the tension between a cooperative ap-proach based on standards and soft law and a greater emphasis on compli-ance. In this context, countries may need to confront whether more binding legal mechanisms are required in the traditionally non-binding frameworks of the financial sector standard setters.

 Starting in London, G-20 leaders began to focus on accountability in order to bolster country commitments to refrain from raising new in-vestment and trade barriers in goods and services. Leaders committed to notify the WTO of any such measures, and called on the WTO – to-gether with other international bodies – to “monitor and report publi-cally on our adherence to these regulatory undertakings”. The OECD and WTO have subsequently produced reports on trade restrictive measures imposed by countries. In the financial regulatory reform area, finance ministers were instructed to implement the London decisions, and the IMF and FSB were asked to “monitor progress, working with the Financial Action Task Force and other relevant bodies, and to pro-vide a report”.

 Continuing this theme in Pittsburgh, G-20 leaders stressed a commit-ment to deal with ‘non-cooperative jurisdictions’ in three areas: on money laundering and terrorism finance in the context of FATF, in dealing with tax havens in the OECD context and expanding the scope

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of non-cooperative jurisdictions (NCJs) on prudential standards, and information exchange in the FSB context.

 In Toronto, leaders established a ‘fourth pillar’ of the global financial reform agenda called “transparent international assessment and peer review”. The Toronto communiqué pointed to two core elements of this pillar: the IMF/World Bank Financial Sector Assessment Process and robust and transparent peer review through the FSB, including through the “adherence to prudential standards”. In an annex to the communiqué, leaders welcomed the implementation of the FSB’s evaluation process on adherence to prudential information exchange and international cooperation standards in all jurisdictions.

 Carrying this mandate forward, in a paper from March 2010, the FSB laid out a framework to encourage adherence by all countries and ju-risdictions to international financial standards, including by identifying NCJs, which in large part were modelled on the work of the OECD in the tax area and FATF for standards on combating money laundering and terrorism finance. FSB member jurisdictions were asked to “lead by example” by first committing to implement and adhere to interna-tional cooperation and information exchange standards in the financial regulatory and supervisory area. The paper laid out an evaluation mechanism through a process of dialogue and evaluation. Lastly, the FSB paper noted possible consideration of “a toolbox of possible measures” – both positive and negative – to promote adherence. The 2010 paper holds out the possibility of sanctions, including a list of sanctions that potentially include restrictions on financial institutions, restrictions on transactions by international financial institutions, and restrictions on cross-border financial transactions.

 In November 2011, the FSB made a public statement on the initiative to promote adherence and identified three categories of adherence: ju-risdictions demonstrating sufficiently strong adherence, juju-risdictions taking the actions recommended or making material progress towards demonstrating sufficiently strong adherence, and NCJs.

Regulatory standard setters in the financial sector have traditionally used a model to achieve international goals that departs from the internation-al law model where an internationinternation-al organisation or group of countries seek to define internationally binding standards with possible compliance measures or regimes. The efforts of the regulatory standard setters such as the Basel Committee and IOSCO have been characterised by the issue of

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standards or principles with the goal of establishing a harmonised interna-tional regime through nainterna-tional level implementation of regulatory standards as domestic law. The standard setters, with support from participating mem-bers, have used peer pressure to foster implementation of standards defined at the international level. The FSB effort to promote adherence to the princi-ples and standards laid out by the standard setters (IAIS, Basel Committee, and IOSCO) through peer review and assessment is consonant with this ap-proach.

The FSB approach, however, also contemplates the possibility of nega-tive measures. The March 2010 paper notes that if jurisdictions fail to make sufficient progress towards adherence, “FSB members would call upon its members to take further measures”. It goes on to note that the implementa-tion of any such measures will be subject to “any legal constraints that mem-ber jurisdictions might face”, and prudential carve-out provisions included in many trade and investment agreements that permit countries to take measures in the financial services area for prudential reasons or to ensure the integrity and stability of the financial system. In effect, the FSB seeks to mesh its soft law approach with a hard law component at the international level. Whilst the principles and standards defined by the standard setters do not have legal-ly binding effect, and neither the FSB nor the standard setters can directlegal-ly ef-fectuate compliance, the model proposed by the FSB would indirectly use national law regimes to “enforce” compliance. As such, the practical model being carved out by the FSB is in some respects distinct from the regimes es-tablished by the WTO and IMF (hard law compliance) and the soft law ap-proaches of the standard setters.

5. Conclusion

In conclusion, the FSB and G-20 represent different facets of reforms in the legal architecture and their development will continue to be of interest. The FSB evinces a trend towards institutional capacity and compliance, necessary to design and implement the significant measures sought by countries to sta-bilise the international financial system. It is, however, premised on a distinct legal model and with a compliance mechanism that relies on national-level implementation, rather than internationally mandated legal direction. The G-20 continues the longstanding approach of the G-7, and G-8, by providing di-rection and guidance to international mechanisms – the international finan-cial institutions and standard setters – but without significant movement to-wards an institutional structure or binding mechanisms.

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2.5.

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