Finacial Service Management, Risk and Regluation - Coursework Example

Introduction The emerging trends in the regulations in the financial as well as corporate markets are increasing in numbers and intensity as the increasing mismanagement and corporate scandals have forced regulatory authorities to look for the legal frameworks which help achieve the organizations more transparency as well as flexibility in their approach and responsibilities towards all the stakeholders in the firms. Some of the external events like the 9/11 incidents also played a major role in bringing in the new regulations into place so that traditional business channels specially the financial institutions are not being used for potentially harmful activities including terrorism. It was because of these reasons that regulations like BASEL II, Sarbanes Oxley, and The European Commissions Financial Services Action Plan were enforced to rationalize and revamp the existing regulatory framework. The essay will look into some of the benefits which these regulations will be providing to the various institutions as well as all stakeholders provided they are implemented and executed in their true sense. BASEL II & ITS BENEFITS The advent of BASEL II is the turning point in the field of Banking as it demands complete transparency and rational approach towards making banking more risk sensitive. BASEL II prompted me to look for this new and exciting avenue of Financial Risk Management as it not only involved a more prudent approach towards banking but it also demands a transparent and flexible banking structure to be in place to effectively manage the interests of various stakeholders in the banking sector. The principals of risk management suggest that the credit providing institutions must maintain a minimum level of financial capital in order to sustain the various risk shocks to which they are exposed to. The basic aim of this approach is to ensure that the banks and financial institutions must maintain financial soundness and retain the consumer confidence in order to ensure the stability of the financial system and protect the interests of the deposit holders. With these perspectives in mind, Bank of International Settlement formed a Basel Committee on Banking Supervision in 1974 to provide a comprehensive forum for dealing with banking matters of such magnitude. The Basel Committee is made up of senior officials responsible for banking supervision or financial stability issues in central banks and other authorities in charge of the prudential supervision of banking businesses. Members of the Basel Committee come from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the UK and the US. The accord have provided the banks an opportunity to overhaul their business processes aligning them with the more robust and technology driven. Apart from that, BASEL II have provided a uniform set of rules based on the size and characteristics of the organization rather than its geographical location thus streamlining the world banking system all around the world. BASEL II will allow bankers to make better decisions. The more advanced approaches of BASEL II require the risk differentiation on asset to asset basis therefore allowing more transparency into the decision making. The better decision making can be achieved not only at the portfolio level but also at the individual loan level allowing managers and senior management to view the risk management process from not only individual loan perspective however from the organizational perspective also. The strong approach to the data management and assessment under BASEL II allow financial institutions to make decision consistently. Probably the most important benefit of BASEL II is its ability to rationalize the practices of the banks to lending. Lending processes have not also become more transparent but also more risk sensitive disallowing the institutional memory loss. By aligning the capital of the financial institutions with the Risks of the individual assets, BASEL II has further aligned the business lending according to the economic cycle an economy is facing. This also banks to avoid the pro-cyclicality impacts on its balance sheet because with the adverse trends in the business cycles, if banks adapt the lending practices according to the best practices, they may avoid the impact of declining economic conditions. (Oracle, 2007). Sarbanes-Oxley The Sarbanes Oxley Act was promulgated after two of the biggest corporate scandals in the history of US. The Enron and World Com scandals were not only biggest in their intensity but they also exposed the existing legal framework as its ability to restrict and minimize the chances of incurring such large scale corporate frauds were not so good. As a result of those scandals, Sarbanes Oxley act was promulgated to improve upon the existing corporate laws in the country to increase and achieve more transparency and fix on responsibility on various stakeholders in the firms. The most important changes which brought in due the implementation of Sarbanes Oxley were the improved code of ethics as well as the tough corporate governance standards. Probably the biggest advantage which the act provides is the fact that it helps to strengthen the control environment within the organizations. Over the period of time, vague regulations allow organizations to promise on the control environment within the organization. With Sarbanes Oxley, organizations have to make extra disclosures in their various reports regarding the control environment in their organization besides offering more transparency in the process of reporting about the control environment. Control environments in the organization has been increased due to formation of various independent committees within the organization especially audit and ethics committees which oversea the processes in the organization and report their finding independently and are being made accountable to the board only. Basel II is related only with the Financial Institutions only where a risk based approach has been advocated however SOX as the Sarbanes Oxley is known talks about the risk related to the business processes directly with the financial reporting made by the firms. (Sun.com, 2006). It therefore gives an opportunity to the firms to effectively control and monitor their processes in order to not only contain the risk but also optimize the current processes. By making it mandatory for organizations to have good control environment, the information generation has becoming more reliable and standardized across the whole range of industries. This has not only simplified the process of regulatory follow up but also allowed firms to report information that can be trusted and relied upon not by the shareholders but also by other regulatory bodies as well. The standardization and reliability of information has further reduced the complexities of the internal businesses processes also as the firms are now faced with a uniformed set of rules against which their regulatory performance is going to be judged. This therefore has further resulted into the more effective use of the automated as well as manual control processes of the organization. On the whole SOX is a regulatory framework which is comprehensive in nature as well as provide a very detailed description of how the transparency, corporate governance and ethical issues in the organizations should be in order to bring in more transparency and reliability in financial reporting of the firms. The European Commissions Financial Services Action Plan The EU financial Services Action Plan was designed in order to open a single market for financial services in the Europe. Starting from 1999, it comprises of more than 40 measures designed to harmonize the rules of various member states. These measures apply to the insurance companies, securities, mortgages, pensions and all other forms of financial services firms. Since 2004, almost all the rules have been adapted by all the member states and the action plan is now completely being adapted and implemented in the region with all member states enjoying the harmonized rules. (Euractive.com, 2007). This framework attempted to provide a one size fit for all solutions to the financial institutions including insurance companies. This has allowed the firms to be more focused in their approach to adapt the various regulations on a uniformed legal framework thus bringing every financial institution under one set of rules. “To improve the EUs economic performance, it was thought vital to mobilize savings and allocate them more efficiently. The FSAP would seek to remove entrenched protectionist barriers to the cross-border integration of wholesale financial services for large companies, and to the retail sale to ordinary consumers of financial products across borders.”(Europe’s World.com, 2008). The implementation of Solvency II would allow the integration of Europe’s insurance sector as the growing consolidation would allow bigger players in the market to further consolidate and streamline their processes in order to be more efficient and effective. Though solvency II try to mimic the Sarbanes Oxley therefore its focus is on brining in the more transparency by bringing in more strict corporate governance rules. Probably the most important implication of the implementation of the action plan is the fact it allows EU to consolidate and unify the entire regulatory environment within the region to provide a common background of best practices to follow. This will allow firms to remove their local regulatory bottlenecks as well as deficiencies which these local regulations had, thus providing them an opportunity to avoid local rules and follow practices which were widely used across the best banks in the world. Lastly the solvency II and MiFD increase the scope of these regulations to bring in more institutions under their ambit thus comprehensively covering the whole strata of the financial institutions thus better safeguarding the various stakeholders involved in the whole financial sector. Anti-Money Laundering Rules Anti-money laundering rules are the part of the tightening of the banking regulations especially after the 9/11 incident. The subsequent investigations revealed the use of banking channels by the terrorist organizations to transfer money across the countries to be used in the terrorist activities. It was because of this reason that the new regulations were put into place to maximize the chances of spotting the transfers of money being used in potentially harmful activities. Apart from that, it must also be noted that the anti-money laundering rules were put in place to effectively check in the process of making banking transactions without proper authentication. Know your customers’ rules were also part of the same process and they became more stringent and tough in order to get maximum information about the customers so that the proper information should have been in hand before properly authorization and executing the transactions on behalf of the costumers. Thus the biggest benefit of the anti-money laundering rules is to make banking channels unavailable for the use of financing to the terrorist organizations as well as to restrict the flow of bad money into the economy. (usinfo.state.gov, 2003). It is also further believed that risk based approaches to the anti-money laundering will bring in more benefits to the firms rather than the existing legal framework on the anti-money laundering regulations in place. (SAS Institute, 2006). “The most obvious reason for anti-money laundering measures is to stop criminals from enjoying the personal benefits of their profits and prevent them reinvesting their funds in future criminal activities. Anti-money laundering measures provide a vital basis for detecting and investigating criminal activities by establishing an audit trail and evidentiary links between criminal acts and major organizers.”(AMLU,2004). Conclusion The various regulations discussed above provide various benefits to the organizations however what is common in all the regulations is the fact that they enforce more transparency in the reporting mechanism of the organizations. The providing of more information into the annual reports of the organizations as well as the increased role of audit committees in the organization necessitated that the business processes in the organizations are transparent and more robust in nature. It must also be noted that besides attempting to restrict the use of black money through banking channels to white it, these regulations were also aimed to improve upon the existing systems and procedures of the organizations also in order improve their capabilities and productivity. References 1. Oracle. (2007). The Basel II Accord -- How it may benefit banks that comply. Available: http://www.ameinfo.com/33652.html. Last accessed 16 April 2008. 2. sun.com. (2006). Discover the Hidden Benefits of Sarbanes-Oxley. Available: http://www.sun.com/solutions/documents/articles/fn_sox_aa.xml. Last accessed 16 April 2008. 3. Euractive.com. (2007). Financial Services Action Plan Available: http://www.euractiv.com/en/financial-services/financial-services-action-plan/article-132874. Last accessed 16 April 2008. 4. Europes World.com. (2008). BANKING & FINANCE: Europe’s bumpy road to a single financial marketplace. Available: http://www.europesworld.org/EWSettings/Article/tabid/78/Default.aspx?Id=33bdf551-3910-4bd1-b65b-07b544262a66. Last accessed 16 April 2008. 5. usinfo.state.gov. (2003). New Anti-Money-Laundering Rules Effective, Official Says. Available: http://usinfo.state.gov/ei/Archive/2004/Jan/07-590731.html. Last accessed 16 April 2008. 6. SAS Institute. (2006). Anti-Money Laundering Reappraised: The Benefits of a Holistic, Risk Based Approach. Available: http://www.zdnet.com.au/whitepaper/0,2000063328,22445519p-16001329q,00.htm. Last accessed 16 April 2008. 7. Anti-Money Laundering Unit. (2004). ANTI-MONEY LAUNDERING REFORM. Available: http://www.ag.gov.au/agd/WWW/rwpattach.nsf/viewasattachmentpersonal/(CFD7369FCAE9B8F32F341DBE097801FF)~0+Issues+Paper+3+-+Dealers+in+Precious+Metals+and+Stones.htm/$file/0+Issues+Paper+3+-+Dealers+in+. Last accessed 16 April 2008. Read More