AF: In Spain the CNMV does not have the power to evaluate the degree of truth in a listed company’s balance sheet. What is the situation in other markets?
DW: In general, I’m not convinced that non-binding codes have succeeded. And I am not talking about Spain, I am talking in general. The arguments in favour of these codes are that cultures are different and company’s are different etc etc. Well, if someone can convince me that applying these codes in not just a good thing, but also provides a good economic incentive-then I will be happier. But I would be even happier if I knew that people who abused their positions in firms whatever they are would be liable to go to jail if the offence was serious enough. You see, if you are a young person joining a financial firm today, let’s take a financial firm.
AF: What should be the role of the supervisor?
A: Well supervisors have got to supervise. I think some of the rules have to be binding, because the costs for society are too high. You see, we are not defending firms, we are defending the public interest.
AF: But when you have institutions that do not have binding power, what purpose do they serve?
DW: Well they have to have the powers to sanction. There is always this problem in many countries. There is a difference between civil sanctions and penal sanctions. Often, going to the penal courts is very difficult. The balance of evidence is extremely difficult to establish. In the US, in a civil case, you need the balance of evidence on your side. In Europe, the benchmarks tend to be much higher, which I’m not sure is a good thing. Maybe for penal commissions you need a more persuasive set of arguments. But what I am talking about is getting the incentives right. I think that there are never going to be enough supervisors, so the supervisors are going to have to concentrate on where they think the biggest failures in the system are. They can’t do everything.
The CMNV will not have the resources to carry out all its functions. They have to prioritise. In anything you do in life you have prioritise and one thing that helps in your prioritisation is if you have good databases. Today, the global regulators do not have good databases. Dr Spock has just died. On the Starship Enterprise he had a wonderful set of controls. We don’t have that for the financial system. We don’t have someone sitting in front of a screen like they have for transport flows around Madrid, or the rail network. We don’t having someone seeing the stocks and flow of how the system functions. We don’t have that. It’s really quite extraordinary, really quite extraordinary. So what I am saying is: Regulators have got to a much better job at understanding, measuring, valuing, thinking hard about where the dangers are, where these risks are. And these risks are changing-every day they change. Cyber crime is a good example. Nobody talked about cyber crime a few years ago-not even on their radar screen. Can you imagine the damage that could be sewn on to the global financial system if the payments infrastructure broke down. These risks are changing. One of my first meetings in IOSCO was in Buenos Aires, and we discussed risk, and some of the delegations from the West Indies were talking about the concerns the had about retail Forex trading. Well low and behold, a few days later when they took the cap off the Swiss franc and it appreciated by 20% overnight, an awful lot of lot of retail Forex traders just went belly-up, and an awful lot of people lost an awful lot of money. So, understanding these risks, we in IOSCO spend an awful lot of our time thinking and discussing these risks and thinking about these risks, and how they proliferate from one market to another. Very really important this. Really, you can’t do enough of this-sharing experiences.
AF: I am curious about your take on the Swiss oversight audit system: banks payed the regulator and the regulator was the one choosing and paying the auditing firms. The auditing company had in some way to report to the State. What do you think of this system no longer in force?
DW: What we have got is a system here which, we have an auditing system which has got fundamental conflicts at the heart of it. You said that. So me the firm, I pay the auditors, okay? That’s a conflict of interest. An even bigger conflict of interest is if my auditors are doing non-audit work for me. The Netherlands has now banned auditors from doing non audit work for the same firm. We have got another set of conflicts here, which is that the standards for auditing, are drawing up by who? Auditors. Not by credit rating agencies or public authorities, but by auditors. This is the reason that at IOSCO we are concerned about audit quality, we are now working at looking at how we can strengthen the global oversight of the audit profession.
We are looking at the role of audit committees to see if they can be strengthened, and we are looking at how the standard function works with so-called IFAC, which is three standard setting bodies, but the majority of people on those standard setting bodies are auditors. I don’t find it comfortable that the audit profession still has a very strong role, if not the decisive role in setting its own standards. I don’t think that’s right. And I think most people think its got to change, the question is how you change it.
*You can check the first part of this interview here.