MEMBERS OF THE governance body Chartered Secretaries Australia (CSA) believe it is time to increase debate on the international regulation of global financial markets.

A report by CSA, titled Global Regulation of Finan cial Markets, established that nearly two thirds (62 per cent) of those working in governance believe that the financial markets should be regulated globally because of the recent economic upheaval.

“As one respondent commented, it is a global issue that transcends international boundaries, so any solution needs to be focused internationally,” said CSA chief executive Tim Sheehy.

However, despite majority support for global reg ulation, 38 per cent of respondents are not convinced that it would succeed. Concerns ranged from anxiety that global regulation would involve compromises that could lower standards in Australia, to the poten tial for heightened risk with supervision situated in one body only.

Nonetheless, there is no question that the increased complexity of the international financial markets – and the use of derivatives and other finan cial instruments to enhance short-term profitability – has set in motion the debate about the need for a better assessment framework.

An overwhelming 87 per cent of CSA respon dents stated that, if global regulation was intro duced, investment banks should be the focus, with 74 per cent seeing a role for the global regulation of banks and 61 per cent for other financial institu tions and market operators.

Rating agencies were criticised because they were unable to “truly understand the dicing and slicing that has been behind much of the derivatives on the mar ket”, as one respondent noted. Such views prompted 65 per cent of respondents to argue that rating agencies should be truly independent, and take none of their funding from either issuers or investors.

“Clearly, rating agencies have a conflict of interest, so it is up to governments, and indeed financial institu tions themselves, to consider what alternatives exist for establishing credible risk-evaluation processes that will rebuild confidence in the rating process,” Sheehy said.

Given the Australian approach to governance issues, it is probably not surprising that CSA prefers any global regulation to be principles-based, rather than the pre scriptive, black-letter law approach favoured in the US, the world’s largest capital market. Respondents in favour of a principles-based approach noted it would provide regional flexibility while still providing an overall risk management structure.

“A prescriptive approach would require uniform enforcement, which was considered unfeasible by many, and also too inflexible, as it would not allow for the necessary autonomy to fit the circumstances in different countries,” Sheehy says.

Some CSA members suggested a combination of prescriptive and principles-based approaches. A tem plate for such a compromise is the recent activity sur rounding the move by US accounting standard setters to harmonise generally accepted accounting standards (GAAP) with the international financial reporting standards (IFRS).

“In fact, one respondent correctly made the point that, as with accounting standards, there needs to be some movement towards comparability in regulation, given that funds can be borrowed globally,” Sheehy says.