INTOSAI Privatisation Working Group PWG

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INTOSAI Privatisation Working Group (PWG)

• Technical case study
• Series 2 Economic Regulation

2 Financial Services Sector Regulation and Audit
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Contents

• Summary
• The financial services sector
• The global financial crisis
• Role of regulation of the financial services
  sector
• Factors in the current financial sector crisis
• Models of financial services regulation
• The wider regulatory framework
• Perspectives on regulation and the current
  financial crisis
• What can SAIs do?
• Challenges and considerations for SAIs
• Case examples
• Lessons for auditors
• References

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Summary

• The financial services sector is vitally
  important for economic stability and is in the
  midst of an unprecedented global financial crisis
• There are a variety of models of financial
  services regulation no model focused enough on
  total system risks
• The role of SAIs in the oversight of financial
  services regulators and access rights vary
• The involvement of SAIs can improve
  accountability and help safeguard the public
  interest
• There are challenges in auditing financial
  services regulators such as deciding on the
  scope, having sufficient experienced resources
  and how to protect the SAIs reputation if
  audited bodies fail

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1. The financial services sector

• Definitions
• There is no single definition of the financial
  services sector. This case study defines the
  financial services sector as
• organisations such as - banks, financial
  intermediaries, mutual funds, insurance
  companies, pension funds that offer financial
  products and services"
• This is a broad definition to reflect the broad
  scope of the sector and its evolving nature. The
  financial services sector has expanded as a wider
  range of products and services have been
  developed.
• Traditionally, the sector has been categorised
  into three markets Banking Insurance and
  Securities. The boundaries between these markets
  have become blurred and are not always
  meaningful.
• The following are examples of products and
  services of the financial services sector
  Banking, Loans, Credit Cards, Foreign
  Exchange, Pension funds, Insurance
• Significance
• As developments since Summer 2007 demonstrate,
  the financial services sector is vitally
  important for economic stability in domestic and
  international markets.
• In the UK for example, the financial services
  sector generates up to 20 of UK Gross Domestic
  Product (GDP).

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2. The global financial crisis

• The financial services sector is in the midst of
  an unprecedented financial crisis
• Since August 2007 we have seen
• A liquidity crisis with banks refusing to do
  business with each other
• Failure of large financial institutions e.g.
  Lehman Brothers in September 2008
• Central bank intervention to improve liquidity
• Nationalisation of banks e.g. in Iceland,
  Ireland, Portugal and the UK
• Bank consolidations and restructurings
• Government measures to ensure the stability of
  the banking system, protect savers, businesses
  and borrowers
• Falls in stock markets including the Dow Jones
  losing 38 of its value in 2008, its worst year
  since 1931.
• Tightening of credit and loss of consumer
  confidence leading to recession, job losses,
  bankruptcies, repossessions, rise in living
  costs, fall in retail sales, falls in house
  prices
• According to the IMF in January 2009, world
  economic growth is set to fall to just 0.5 in
  2009, its lowest rate since World War II.
• In light of the current global financial crisis,
  the regulation of financial services has come
  under scrutiny.

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3. Factors in the current financial sector crisis

• Vulnerabilities arose in part because of
• International current account imbalances as a
  result of high savings in some countries,
  invested primarily in overseas government bonds
  at historically low yields
• Resulting in low real interest rates
• Driving credit expansion in some developed
  countries and a quest for higher yields
• Together with a growth in complex financial
  instruments and inadequate appreciation and
  management of the risks
• And big increases in the leverage of banks and
  corporations
• Problems were triggered when
• There were rising defaults on sub-prime mortgages
  in the US
• Many of which had been sold on to other banks and
  investors
• This created a lack of trust in the market banks
  did not want to lend to other banks and liquidity
  evaporated
• High risk lending and investment strategies
  (encouraged by risk taking incentive schemes)
  which had been dependent on liquid markets became
  unsustainable
• All of this taking place within a global market,
  featuring high levels of foreign investment and
  cross border activity severe global market
  disruption

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4. Role of regulation of the financial services
sector

• The following high level objectives are taken
  from the UKs Financial Services Authority and
  are generally applicable to other regulatory
  systems across the world
• Maintaining confidence in the financial system
• Promoting public understanding of the financial
  system
• Securing an appropriate degree of protection for
  consumers and
• Reducing the use of regulated businesses for
  financial crime.
• Different approaches to achieving these
  objectives are taken round the world
• Different structural models are used
• There are also issues about principles v rules
  approaches
• And light touch/low cost regulation v heavy
  regulation
• There is common agreement that all forms of
  regulation did not focus enough on the total
  system risks.

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5. Models of financial services regulation

• Broad Theories of Regulation
• Regulation by Function theory suggests that
  financial systems have a number of common
  functions (for example, the payments system)
  which can each be regulated by an autonomous
  regulatory body. The advantage of this is that
  the same rules can be applied to each regulator
  since they each perform a similar function.
  However, there is a high risk of overlap in
  regulation, which could waste time and resources.
  
• Regulation by Objectives theory suggests that
  financial systems have a number of common
  objectives for financial market regulation (for
  example, financial stability). Each objective
  will be the responsibility of an autonomous
  regulatory body. Regulated bodies will therefore
  be subject to control by a number of different
  regulators.
• Key Models
• Three key models of financial services
  regulation have been identified in practice
• Institutional approaches Separate regulators
  operate for each market within the financial
  services sector traditionally split between
  Banking Insurance and Securities. This system
  operates in the US and in Russia.
• Unified approaches A single agency acts as the
  overarching regulator for the whole financial
  services sector. This system operates in the
  United Kingdom and in Austria.
• Twin Peaks approaches Two regulators are
  established, one responsible for prudential
  financial regulation, and one responsible for
  conduct of business regulation related to
  financial products being offered to consumers and
  investors. This system operates in Australia and
  The Netherlands.
• Variations of these models can be seen further
  in the case study
• .
• What is the optimal model of financial services
  regulation?
• There is no consensus on this given recent
  failures. Although there has been a significant
  move towards more unified or integrated
  approaches to regulation (for example, by the
  Nordic countries in the 1980s) many countries
  still favour the institutional model.
• Models adopted across the world are based on a
  number of different factors such as objectives
  of regulation historical context political
  framework and structure of the economy.

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5. 1 Models of financial services regulation
Source Adapted from World Bank Institute
Presentation The Institutional Structure of
Financial Regulation - key issues and
international experience (Alex Fleming)
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5.2 Models of financial services regulation
institutional model

• Issues
• Changes in the sector The boundaries between
  different sectors of the market are becoming
  increasingly blurred. Categorising the sector
  into distinct markets such as Banking, Insurance,
  and Securities becomes more difficult as
  products, services and organisations may not
  easily fit into a single category.
• As a result
• 1. It may not always be clear which regulator
  should oversee an entity in the sector. This may
  result in gaps in supervision and duplication of
  some activities
• 2. There may be confusion amongst regulated
  bodies in terms of understanding which rules
  should be followed.
• Communication between regulators of different
  markets is important in the achievement of
  effective regulation for the whole financial
  services sector. Effective communication can be
  more difficult when there are more agencies
  involved.
• A Memorandum of Understanding between regulators
  can aid better dialogue, clarify roles and avoid
  disputes.

• Key Benefits
• Specialisation within the regulator An
  individual regulator for each market in the
  sector will build up specialist knowledge
  applicable to that market. Specialisation can
  help the regulator to act more efficiently in its
  role as it is has a greater understanding of the
  risks and issues facing that market.
• Management Regulating a smaller section of the
  sector, rather than the entire sector, may be
  easier for the regulator to manage as there are
  fewer organisations under its remit to oversee.

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5.3 Models of financial services regulation
unified regulatory model

• Issues
• Conflicting objectives A single regulator will
  have responsibility for a wider range of
  objectives that, if not clearly defined, may
  conflict. Similarly, a broader scope of
  activities entails the risk that rules may become
  arbitrary and not always best address the risks
  posed by different markets.
• Diseconomies of scale can arise from being too
  large. The ability for the regulator to manage
  its own organisation and the bodies it regulates
  may become more difficult. This is particularly
  so if processes become bureaucratic.

• Key benefits
• Accountability may improve where there is one
  regulator because they are readily identifiable.
  In practice however, this may not always be the
  case. Many unified regulators operate in a system
  that relies on information and input from other
  agencies. In the UK for example, the FSA operates
  in partnership with the Bank of England and the
  Treasury. There are also a number of other
  smaller bodies that the FSA works closely with.
• Economies of scale Efficiency savings can be
  made when one regulator has sole responsibility
  for the entire industry. For example
• Costs can be reduced due to shared
  infrastructure, acquisition of technologies and
  specialisation of staff larger organisations may
  find it easier to attract, train, and retain
  professional staff.
• The risk of duplication of activities can be
  lowered. This can save time and resources for
  both the regulator and the regulated firms.
• A single regulator may be able to better identify
  gaps in regulation.
• A single regulator allows for greater flexibility
  which can speed up the decision making process.

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5.4 Models of financial services regulation -
twin peaks model

• Issues
• Potential for overlap and duplication The two
  objective are not mutually exclusive, so a
  duplication of regulation may occur.
• Issues may fall between the cracks Regulatory
  issues which fall outside the agencies objectives
  maybe neglected or not considered.
• Conflict of objectives The different objectives
  may create conflict between the two agencies if a
  clear precedence is not set.

• Key benefits
• Regulation by function The creation of two
  highly specialised agencies with clearly defined
  and understandable roles should enable efficiency
  gains and a better standard of regulation.
• Addressing Conflict of objectives When
  prudential concerns appear to conflict with
  consumer protection issues, the prudential
  supervisor in the twin peaks system may give
  precedence to safety and soundness mandates,
  because these are closely intertwined with
  financial stability. The Twin Peaks Approach may
  help to force a resolution to this conflict.

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6. The wider regulatory framework

• In light of the global reach of the current
  financial crisis questions about the wider
  regulatory framework, particularly in reference
  to international regulatory bodies, are very
  topical.
• Financial service regulators work amongst a
  number of domestic and international bodies that
  have similar aims and objectives. SAIs can be
  more effective in their audit of regulators if
  they understand the role of these bodies and the
  best practice guidance that they provide to
  regulators.
• International bodies
• Basel Committee on Banking Supervision An
  institution created to set best practice
  standards and guidelines relating to banking for
  member countries to follow.
• Financial Stability Forum (FSF) The FSF brings
  together senior representatives of national
  financial authorities to promote international
  financial stability through information exchange
  and international cooperation in financial
  supervision and surveillance.
• The Economic and Financial Affairs Council
  (ECOFIN) ECOFIN is part of the European
  Council that deals with matters of EU policy
  relating to financial and capital markets,
  amongst other issues.
• The Organisation for Economic Cooperation and
  Development (OECD) Financial Markets
  Committee The main OECD body which deals with
  issues in financial markets, i.e. banking,
  securities, derivatives, and other financial
  services (except insurance).
• Credit Rating Agencies (CRAs) CRAs are companies
  that assign credit ratings for issuers of certain
  types of debt obligations.
• European Central Bank (ECB) The central bank for
  the euro. The ECBs main task is to maintain the
  euro's purchasing power and thus price stability
  in the euro area.
• Financial Services Assessment Program (FSAP) A
  joint World Bank and IMF initiative which aims to
  increase the effectiveness of efforts to promote
  the soundness of financial systems in member
  countries.
• Internal methods of oversight
• Internal Audit Departments
• Audit Committees
• Risk committees

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7. 1 Perspectives on regulation and the current
financial crisis

• Some parties assert that regulation has not
  failed (as such) on the following basis
• No country has been sheltered due to their
  regulatory model e.g. the UK has a unified
  approach whilst the US has an institutional
  approach. Since there is no optimum model there
  will always be shortcomings the current crisis
  is unique and could not have been prevented by
  regulation.
• There is nothing that regulators as overseers
  could have done the crisis is the fault of the
  banks, financial investors, financial
  accountants, credit ratings agencies and other
  financial sector actors.
• The crisis is unique and it has not been widely
  agreed where the responsibility lies. However, it
  will not be allowed to happen again by banks,
  shareholders or the government therefore there
  is no need to overhaul regulatory systems.
• The existing principles of good regulation remain
  valid - the current model(s) must become more
  efficient, effective, economical, better focused
  but there is no need for fundamental reform.
• Some parties assert that current regulation is
  excessive
• Too much regulation encourages regulation
  avoidance we do not need more regulation, we
  need more intelligent regulation.
• It is important that regulation does not hinder
  the private sector in creating wealth.
• Heavy regulation may encourage investors to go to
  other countries.

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7.2 Perspectives on regulation and the current
financial crisis

• Some parties assert that current regulation is
  insufficient
• The regulators missed things e.g. incentives for
  high risk taking, excessive lending why did
  they not predict that there was a problem on the
  horizon and act to mitigate its effect?
• The regulators have underestimated the impact of
  bonuses. In future they need to regulate bonus
  structures to ensure that they are aligned with
  the public interest.
• On a macro level
• Do structural frameworks for regulation need to
  be reformed?
• On a micro level
• Is a rules based or principles based approach to
  regulation more appropriate?
• It will take a long time for new structures and
  enhanced procedures to be put in place and longer
  still for them to work effectively rushing to
  change the regulations could make things worse,
  it is necessary to be wary of knee jerk reactions
  and consider long term, sustainable solutions.
• Trust needs to be rebuilt in the system this
  will demand oversight and accountability systems
  that can compensate for the credibility lost in
  the crisis.

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7.3 Perspectives on regulation and the current
financial crisis

• Some parties assert that international regulation
  must be improved
• Leaders of the G20 declared in Washington,
  November 2008
• regulation is first and foremost the
  responsibility of national regulators who
  constitute the first line of defence against
  market instability. However, our financial
  markets are global in scope, therefore,
  intensified international cooperation among
  regulators and strengthening of international
  standards, where necessary, and their consistent
  implementation is necessary to protect against
  adverse cross-border, regional and global
  developments affecting financial instability.
• The Leaders stated that regulators should
  strengthen international coordination and
  cooperation and review national regulatory
  systems in order to ensure that they are
  compatible with an increasingly globalized
  financial system.
• The Leaders also stressed their commitment to
  reforming international financial institutions so
  that they may better support, inform and promote
  international regulation.
• Some parties question whether we are too global
  if we werent so interdependent then the impacts
  would have been lessened / we wouldnt have a
  crisis in the first place. Others consider this
  to be an irrelevant point. We cant escape the
  fact that we are interdependent, therefore we
  must try to do something about it global
  regulation. An issue to consider is whether
  better national regulation would stop a bank
  getting into trouble if its parent bank elsewhere
  was working outside of national regulations?

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8. What can SAIs do - their role in the oversight
of financial services regulators

• Dependent on Access Rights
• Access Rights vary
• Access rights vary from country to country. There
  is no optimal access rights framework for
  countries to benchmark themselves against. The
  key consideration in relation to access rights is
  one of accountability. The regulator should be
  accountable to an appropriate body such as
  parliament. The SAI can provide the mechanism for
  this if there are access rights in place.
• What access rights do SAIs have over financial
  service regulators?
• Input from INTOSAI PWG members provides an
  insight into the different types of access rights
  that exist
• - Some members are authorised by legislation to
  carry out annual financial audit and/or non
  financial audits for all or some financial market
  regulators, for example, Bulgaria, Turkey,
  Albania, Czech Republic, and Israel.
• - Some members indicate that their legislation
  does not permit the SAI to have access to the
  financial services regulators. For example,
  Latvias system of regulation is operated by
  their Financial and Capital Markets Commission
  (FCMC) which oversees the regulation of banks,
  insurance, securities, and the Central Bank. The
  SAI does not have legislative power to audit the
  FCMC however it does have power to audit the
  Central Bank and therefore carries out an annual
  financial audit of this institution.
• More examples eg Norway which carries out
  audits .

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Dependent on Access Rights (cont)- Some members
indicate that they have access rights under
certain circumstances. For example, in the UK,
the FSA is required through the Treasury to
report to parliament. Treasury can also appoint
an independent person to carry out a value for
money review. This is set out under section 12 of
the FSMA 2000 through which the UK National Audit
Office carried out their review in April 2007.
INTOSAI PWG members that have carried out a
financial or performance audit of their financial
services regulator(s)
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8.1 What can SAIs do? Role in the oversight of
financial services regulators

• Maintaining and promoting confidence
• Important for economic stability in order to
  avoid
• large swings in economic activity
• high inflation
• excessive volatility in exchange rates and
  financial markets.
• Promoting confidence in the sector can be
  achieved by strengthening accountability amongst
  the regulators. SAIs that are able to check if
  the regulators are performing their roles
  properly and recommend improvements will give the
  wider public greater confidence in systems of
  regulation. They will also be able to help
  regulators fulfil objectives in protecting the
  consumer.
• Greater confidence in the financial services
  sector can help to increase output of the economy
  and reduce the negative impact of downturns in
  the economy.
• In the current financial crisis, potentially SAIs
  could help to rebuild trust in the financial
  sector.

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8.2 What can SAIs do? Role in the oversight of
financial services regulators

• Safeguarding the public interest
• Where financial service regulators are funded,
  even in part, by public money, the SAIs oversight
  role is strengthened. The regulators must be
  accountable to the SAI for the public money
  spent.
• For example, the Austrian Financial Markets
  Authority is funded by a 50 levy on the private
  sector and 50 from government. Funding from the
  government amounted to Euros 3.5million in the
  year to 31 December 2006.
• Where regulators are not funded by public money
  SAIs may still have a legitimate role to play.
• Working with other SAIs

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9. Challenges and considerations for SAIs in the
audit of financial services regulators

• Scope of audit
• SAIs should consider the scope of the audit to
  be carried out. Will it be limited to an annual
  financial audit? Will there be an assessment of
  Value for Money? The answers to these questions
  are partly dependent on the SAIs access rights.
• Resources
• As with all audits undertaken, the SAI will need
  to ensure that there are sufficient resources in
  place to carry out the audit effectively,
  including appropriately skilled staff and access
  to extended expertise if required.
• Models of financial service sector regulation
• Different models of regulation may impact
  differently upon the audit of the regulator. For
  example an institutional model may raise
  questions such as should all of the regulators
  be audited, or is there one key player resources
  could be directed at? A unified model of
  regulation may increase the complexity of the
  audit due to the large size and diversity of the
  regulator and therefore may require greater
  planning.
• Reputation
• Is there a risk to the SAIs reputation if work
  is undertaken and things within the regulator go
  wrong? For example, the collapse of large
  financial institutions may promote interest from
  the media.

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10. Case Example 1 United Kingdom

Background to the UK Financial Services Authority
(FSA) The FSA is the unified regulator for the
financial services market in the UK. It is
governed by the Financial Services and Markets
Act 2000. The FSAs remit includes authorising
and regulating banks, insurance, mortgage
lending, insurance and mortgage advice and
investment business. The FSA is an independent
body from government and is funded by levies
charged on the firms it regulates. The FSA works
closely with the Bank of England (central bank)
and HM Treasury in what is known in the UK as a
tripartite system of regulation. Prior to the
establishment of the FSA, regulation was
conducted by eleven separate bodies. These were
merged to form the FSA. Output by the National
Audit Office The Financial Services Authority
A Review Under Section 12 of the Financial
Services and Markets Act 2000 (Published April
2007) The NAO published its first review of the
FSA in April 2007. It is a review on the
economy, efficiency, and effectiveness of the
FSA. This was following an invitation by HM
Treasury under the appropriate legislation
section 12 of the FSMA 2000.
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10.1 Case Example 1 United Kingdom
Issues found in the NAO report on the FSA and
possible issues for other SAIs to consider
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10.2 Case Example 1 United Kingdom

• Practical experiences from the NAO team who
  audited the FSA
• The NAO was invited by Her Majestys Treasury
  (HMT) to carry out the first independent review
  of the FSA. The Terms of Reference (ToR) for the
  review was set by HMT.
• Three issues emerge from this
• An invitation from HMT was required because the
  NAO does not have access rights. Other SAIs may
  too experience this. A common assertion to why
  the NAO does not have direct access rights is
  that given that the work of the FSA is highly
  important to the financial economy, public
  scrutiny by the NAO (or any other body in fact)
  could cause shockwaves in financial markets and
  de-stabilise the economy. Part of this risk is
  managed by restricting the NAOs access. The
  NAOs report into the FSA was the first
  independent report by any organisation.
• 2. The set ToR were both a blessing and a
  pain, according to the audit team. An advantage
  of the set ToR was that the team was able to get
  on with the review without having to spend much
  time scoping out study ideas. A disadvantage was
  that the set ToR perhaps restricted the ability
  of the NAO to look at all of the issues of
  interest with respect to the FSA. There is a risk
  that important issues were not covered.
• 3. The audit of the FSA was different to the
  NAOs usual audits, as it was highly focused on
  liaising with individuals and organisations in
  the private sector. This presented a number of
  particular challenges for example, managing
  expectations of stakeholders not familiar with
  the process and dealing with complex regimes of
  the financial services industry. These issues
  were managed effectively with skilled staff.

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10.3 Case Example 1 United Kingdom
Practical experiences from the NAO team who
audited the FSA (Cont) Conclusions Auditing
the UK financial services regulator is complex
and highly sensitive. Public reports about the
regulator may have a significant impact on the
economy managing this risk is therefore very
important. The SAI can provide some valuable
benefits in terms of improving Value for Money of
the business but they may require additional
expertise in its teams to undertake the work
effectively, given the complex nature of the
financial services industry. Recent
Developments Since the NAOs report, the UKs
financial markets have become destabilised. The
FSA were slow to highlight and act to negate the
risks. Under the ToR set out for the NAOs study,
examining the FSAs assessment of risk and
validating its effectiveness was outside the
scope of the study. This highlights the
importance of the ToR in determining the SAIs
scope and also limits the accountability of the
SAI in the wake of the current events.
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11. Case Example 2 Office of the Comptroller
and Auditor General, Ireland

• Background to The Financial Regulator
• The Financial Regulator was established in May
  2003 and is part of the Central Bank and
  Financial Services Authority of Ireland (CBFSAI).
  The bodies it regulates include credit
  institutions (banks building societies),
  investment firms (stockbrokers, exchanges, and
  collective investment schemes), providers of life
  and non life insurance and reinsurance, credit
  unions and money lenders.
• Activities that fall outside the scope of the
  regulator are occupational pension schemes, An
  Post Savings schemes and the actions of credit
  intermediaries and pawn brokers.
• Output by the Office of the CAG, Ireland
• Special report No. 57 - Financial Regulator
  (Published 27 July 2007)
• The Office of the CAG, Ireland, published a
  Value for Money report on the subject of their
  financial services regulator, the Financial
  Regulator. The report looked at all areas of
  activity of the Financial Regulator covering in
  particular the regulators approach to setting
  standards, monitoring compliance of regulated
  bodies, monitoring mechanisms used to deal with
  cross border financial services, promoting its
  consumer mandate and accounting for costs bourn
  by the regulator in carrying out its duties.

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11.1 Case Example 2 Irish Audit Office
Setting standards Findings The EU Financial
Services Action Plan (FSAP) was adopted in 2000
with the aim of creating EU-wide markets for
wholesale and retail financial services. FSAP is
taking longer to implement across the EU than
originally envisaged, however the directives have
generally been transposed into Irish law in a
timely fashion and the Financial Regulator has
also been prompt in issuing associated rules and
guidance. Suggested implications for the SAI
SAIs could review that this was being done
efficiently and effectively. For example, are
technical issues being dealt with consistently
across member states? Is there a standard format
or best practice regulators could share? Were the
regulators working with the relevant
stakeholders? In the wider EU context, SAIs
should review how efficiently (if at all)
regulators are assisting the implementation of
national and international standards.
Monitoring Compliance Findings Following on
from a value for money report on by the Irish SAI
in 1999, the Financial Regulator has developed a
formal risk rating model, which is used to
allocate the available resources, thus achieving
a form of risk-based supervision. Suggested
implications for the SAI SAIs could review
supervision procedures in place and possibly
benchmark these against procedures used by
regulators in other countries. The report
specifically recommended that the regulator seek
peer reviews for the inspection process they use.
Cross-border financial services provision
Findings The Financial Regulator regulates
those bodies operating and based in Ireland. Some
bodies will have parent companies in other
jurisdictions and therefore it follows that
cooperation between national financial regulators
is required to avoid duplication and ensure there
are no gaps in supervision. Suggested
implications for the SAI Forums such as INTOSAI
PWG are ideal places to exchange information on
related issues in order to facilitate cross
border cooperation in financial regulation.
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11.2 Case Example 2 Irish Audit Office
Consumer Protection Findings Part of the
Financial Regulators mandate is concerned with
consumers, and focuses on informing consumers and
setting business standards. The Financial
Regulator uses its website as a medium for
disseminating information, however the report
found there were gaps in the coverage and
information was hard to find. The Financial
Regulator has developed a unified Consumer
Protection Code and follows this up with
consumer-focused inspections. The scale of the
inspections are determined by the available
resources, however the Irish SAI felt the
allocation should be based on risk. Suggested
implications for the SAI This highlights ways in
which the regulator could make relatively simple
changes to more effectively achieve its
objectives. Simple improvements to web design can
help to achieve Value for Money and SAIs could
review regulators web pages in light of
this. Cost of regulation Findings The
increase in functions at the Financial Regulator
has resulted in an increase of costs, which is
reflected by the Financial Regulators
operational expenditure increasing by 15 between
2004 and 2005 and a further 13 in 2006 to 45.7m
Euros . This resulted from the need to employ
extra staff, and the associated accommodation and
support service costs. In order for financial
regulation to be effective, benefits should
outweigh costs. The Irish Financial Regulator has
implemented a systematic review of the costs and
benefits of regulation Suggested implications for
the SAI Protecting public money is a key issue
for all SAIs. Therefore it is essential to check
how the regulators uses their funds and that
value for money is maintained. Quantifying costs,
and in particular, benefits can be problematic.
SAIs must need to take care in understanding the
models and assumptions used in such a process and
have the expertise and knowledge to validate them.
29
12. Lessons for Auditors

• Terms of Reference
• This is likely to be externally set and provides
  the scope for the SAI. Clarity over what is
  inside and outside of the ToR is vital in
  focussing the SAIs study. They also provide clear
  lines of distinction for external viewers assess
  the SAIs overall verdict and provides clear lines
  of accountability in assessing the SAIs verdict.
• Stakeholders
• Given the high profile nature of the financial
  services, the uniqueness of the studies, and the
  varied interests and opinions, there are likely
  to be many stakeholders who are interested in the
  study. Careful stakeholder management is
  important in gaining useful information and not
  being overburdened by stakeholders interests.
• Confidentiality
• The regulatory approach is a major element in
  the functioning of a financial market. This means
  the SAI has a real responsibility not to cause
  unwarranted ripples in an economic landscape
  where perceptions of the regulator and confidence
  in the market they regulate are important
  elements in terms of the overall stability and
  success of a key part of the economy. So much in
  the financial regulation world is about
  confidentiality and Chinese Walls that culture
  is one that definitely needs to be respected and
  is potentially a factor in interviewing
  stakeholders and presenting items such as case
  studies in a report.

30
References

• UK National Audit Office (July 2007) The
  Financial Services Authority A Review Under
  Section 12 of the Financial Services and Markets
  Act 2007
• Ireland Audit office (July 2007) Special Report
  57 Financial Regulator
• World Bank Institute (June 2006) The
  Institutional Structure of Financial Regulation
  key issues and international experience
• Munich Personal RePEc Archive (May 2005) The
  External Auditors Role in bank Regulation and
  Supervision Helping the Regulator Avoid
  Regulatory Capture. Ojo, Marianne
• International Monetary Fund (March 2006) Is One
  Watchdog Better Than Three? International
  Experience with Integrated Financial Sector
  supervision. Martin Cihak and Richard Podpiera
• Volcker, P.A. (2008) The structure of Financial
  Supervision Approaches and Challenges in a Global
  Marketplace, The Group of Thirty (Washington D.C)
• ASIC (2006) The integration of financial
  regulatory authorities the Australian
  experience
• G20 (November 2008) Declaration issued after
  meltdown summit, The Associated Press

31
Appendix 1- Non financial audit reports

• Australia National Audit Office
• ASICs Implementation of Financial Service
  Licences (January 2006)
• Bank Prudential Supervision (May 2001)
• Good Practice Guide Administering Regulation
  (March 2007)
• India, Office of the Comptroller and Auditor
  General
• Failure of the Insurance Regulatory and
  Development Authority to award the work of
  printing a journal without ensuring
  competitiveness of rates by inviting open tenders
  in accordance with the codal provisions, resulted
  in extra expenditure during December 2002 to
  March 2006 (2007)
• Ireland
• Special Report No. 57 The Financial Regulator
  (May 2007)
• Israel
• UK National Audit Office
• The Financial Services Authority A Review Under
  Section 12 of the Financial Services and Markets
  Act 2000 (April 2007)
• US GAO
• Securities and Exchange Commission
  Opportunities Exist to Improve Oversight of
  Self-Regulatory Organisations (November 2007)
• Financial Regulators Agencies Have Implemented
  Key Performance Management Practices, but
  Opportunities for Improvement Exist (June 2007)