G.B.McClean-Dissertation Documents

1 of 79
TITLE PAGE
NAME: GRAEME BRUCE McCLEAN
DISSERTATION TITILE:
The EU Internal Market for Banking and Financial Services - What are the
lessons to be learnt for developing regional and sub-regional economic groups,
such as the CARICOM CSME and the proposed TT-ECS Economic and Political
Union?
COURSE TITLE: LL.M in EUROPEAN UNION LAW
COHORT: 2007-2009

2 of 79
ABSTRACT
The Global Financial Crisis has spared no one. What is clear is that the existing
International Financial Architecture and the Regulatory supervisory reach of some of
the leading financial services countries, such as the US and the UK, were by-passed by
cross-border financial giants who had an unrestrained manipulation of the financial
systems of the world.
The stark reality is that, although attempts are now feverishly being made to reform the
reach of International Financial Organisations and a more concerted effort is being
made between countries to collaborate with financial information and governance
issues, there still remains a gap, due to the ineffective enforcement of international
financial obligations.
Regional Economic Integration Systems, like the EU, CARICOM CSME, and the
OECS, offer some structure to an otherwise disorganised system of international
economic relations. This is particularly true of the EU, which has managed over the last
five decades to develop a comprehensive economic integration system, with its Treaty
provisions, a new Legislative process (Lamfalussy) and a plethora of secondary
Community law (FSAP, MiFiD and CRD), which have brought a sense of collective
decision making and responsibility to the EU financial market.
The CARICOM CSME has made some strides in the formation of a single market,
together with efforts to address the harmonisation of legislative provisions in the
banking and financial services sectors, through proposed draft measures. It is however,
woefully incomplete as the lack of a proper institutional framework, even at the level of
primary Community organs (such as the lack of a Commission and Assembly) has held
back significant progress in carrying out legislative and executive functions at the
regional level.

3 of 79
The proposed Trinidad and Tobago-Eastern Caribbean Economic and Political Union
Initiative has conceptually begun to move in the right direction, with proposals for a
Commission, a Union Council of Ministers and a Union Assembly. It would bring
together the legal systems of the OECS (a sub-regional economic group) and the unitary
state of Trinidad and Tobago, to form a single economic space. Several of Trinidad and
Tobago’s regional financial and mixed conglomerates operate in the OECS, and thus it
is critical that an appropriate common regulatory system be established to supervise
effectively the sectors in banking, financial services and insurance, that these cross-
border companies operate in.
The EU model thus provides an excellent institutional comparison in determining the
future regulatory paths of these two integration systems.
[398 words]

4 of 79
TABLE OF CONTENTS
1. Introduction .......................................................................................................page 7
2. The Financial Landscape: The International Financial
Architecture............................................................................................................page 9
• Financial Regulation and International Economic Organisations [IMF, WB,
and WTO/GATS]......................................................................................page 10
• Financial Regulation and International Financial Institutions [Basel, IOSCO,
IAIS, OECD]............................................................................................page 13
• Summary of the International Financial Landscape.................................page 16
3. Regionalism and the Regulation of Banking and Financial Services..........page 19
A. Banking and Financial Regulation in the EU...........................................page 19
• Freedom of Establishment and Free Movement of Services in the EU..page 19
• The Free Movement of Capital in Europe...............................................page 21
• The EU’s Regulatory Structure for Banking and Financial Services in the
EU............................................................................................................page 23
• The Debate in Europe: A Committee of Regulators or a Single
Regulator?................................................................................................page 37

5 of 79
B. Banking and Financial Regulation in the CARICOM Region, the OECS and
the proposed TT-Eastern Caribbean Economic and Political Union.........page 41
• Freedom of Establishment and Free Movement of Services under the
CARICOM CSME...................................................................................page 41
• The Free Movement of Capital in the CARICOM CSME......................page 42
• Proposed Banking and Financial Services Regulation in the CARICOM
CSME......................................................................................................page 44
• The OECS and the Eastern Caribbean Currency Union..........................page 47
• The Proposed Economic and Political Union between the Eastern Caribbean
States and Trinidad and Tobago..............................................................page 50
• The Possibility of a Banking and Financial Regulatory Framework for the
Proposed Economic and Political Union between the Eastern Caribbean States
(including Barbados) and Trinidad and Tobago......................................page 53
4. Regionalism and the Global Financial Crisis................................................page 55
• The Global Financial Crisis, the G 20s response and the vulnerability of small
States in such a Crisis...............................................................................page 55
The EU’s response to the Global Financial Crisis...................................page 57
The Global Financial Crisis hits Home - C.L. Financial, CLICO, CMMB,
British american Insurance and CIB .......................................................page 59

6 of 79
5. Conclusion: Effectively Responding to Future Financial Crises: What Models of
Banking and Financial Regulation should the Small and Vulnerable Island States of the
Caribbean choose under their Regional Economic Single Market and Sub - regional
Economic and Political Union?..............................................................................page 62

7 of 79
1. Introduction
The Global Financial Crisis of 2008 has brought home the reality for every country in
the world the interconnectedness of each country’s financial system with each other,
and the need therefore for a seamless co-ordination of proper financial regulation and
the recognition by member states that systemic risk is no longer confined to individual
countries or groups of countries.
The question therefore arises as to what models of financial regulation are most
appropriate to enable a harmonised approach to global financial regulation within the
confines of the existing international financial architecture. Efforts by leading trade
blocs such as the European Union have demonstrated that member states in the global
community have taken the task of finding suitable forms of integrated financial
regulation seriously. In an attempt to address the deficiencies of the existing global
financial regulatory system, which to a large extent remains in the form of ‘soft’ law,
largely legally unenforceable and informal, these member states have formalised on a
regional basis a more structured approach to financial regulation, whilst at the same
time adhering to fundamental core principles of internationally acceptable financial
regulatory principles.
To this extent the models of financial regulatory integration adopted by the European
Union, which is arguably the most developed system of regional economic and political
integration in the world, will be examined in detail, as a means of assessing on a
comparative basis, the possibility of guiding regional and sub-regional attempts within
the Caribbean Region to harmonise legislation in the regulation of the banking and
financial services sectors, based on the European Union’s experience. There is currently
in existence in the Caribbean one main regional economic integration system which is
the CARICOM (Caribbean Community) Single Market and Economy, one existing sub-
regional economic integration movement which is the OECS (Organisation for Eastern
Caribbean States), and a new initiative to bring a closer Economic and Political Union
between the Member States of the Eastern Caribbean and Trinidad and Tobago. It
should be pointed out that neither the EU nor the CARICOM CSME or the OECS or

8 of 79
the proposed TT-ECS Economic and Political Union are at present federalist in their
formation.
In making this comparative analysis the Treaty provisions of the European Union,
CARICOM CSME, and the OECS concerning the free movement of capital, services
and the right of establishment, together with legislation (both actual and draft) on the
harmonisation of financial services, from the CARICOM CSME, OECS, Trinidad and
Tobago, Barbados and the European Union’s Internal Financial Market will be
examined. A case study of a recent financial crisis in Trinidad and Tobago which has
had cross border regional impact involving a major financial services group (CLICO,
CIB, CMMB, British American Insurance Company and their parent company C.L.
Financial) will be looked at. This case study will demonstrate the current shortfalls in
the lack of harmonisation of regulations at the sub-regional level in dealing with the
financial crisis as well as the efforts made by the Government of Trinidad and Tobago
to bring under control the contagion risks to the rest of the sub-region in light of the
liquidity challenges faced by C.L. Financial and its subsidiaries.
This dissertation thus begins with a contextual framework overview of the International
Financial Architecture. It then proceeds to look in-depth to the various regional legal
systems outlined above as they pertain to the regulation of financial services, followed
by an examination of the response of member states at the regional and international
levels to the Global Financial Crisis. In concluding, the various models used in
Financial regulation in the EU in the form of a single regulator or a group of regulators
will be considered in considering what maybe politically and economically appropriate
to the establishment of regional and sub-regional financial services systems for the
CARICOM CSME and the proposed Trinidad and Tobago and Eastern Caribbean
initiative.

9 of 79
2. The Financial Landscape: The Global Financial Crisis and the International
Financial Architecture.
The actors1
in the international financial architecture include ‘formal’ international
financial institutions2
, regional financial institutions3
, international fora meeting under
the auspices of a formal international organisation4
, other international fora5
, ‘informal’
international groupings6
, national central banks and ministries of finance or treasuries,
and private financial institutions acting on a global scale. Most international standards,
rules, principles, guidelines, codes of conduct, best practices, and other arrangements
governing cross-border financial relations can be characterized as ‘soft law’.7
Soft law can be defined as rules that are not legally binding, but which in practice are
adhered to by those to whom they are addressed or by those who subscribe to them.8
‘Hard’ law is characterized by formality and is binding in a coercive, externally
imposed way, whilst ‘soft’ law is characterized by informality, and is observed in a
voluntary, self-imposed manner.9
The key difference between the two is the ability to
enforce the law.10
These various actors will now be examined in more detail.
1
Lastra,R.M., ‘International Financial Architecture’ in Legal Foundations of International Monetary
Stability (Oxford University Press,2006) 450,451.
2
Which includes the IMF, World Bank Group, OECD and the WTO, ibid.
3
Which includes the European System of Central Banks and supranational institutions in other ‘regions’ of
the World, ibid.
4
Which includes the Basel Committee on Banking Supervision and the Financial Stability Forum, ibid.
5
Such as the International Organization of Securities Commissions (IOSCO),ibid.
6
Which includes the Group of Seven (G 7) and the Group of Ten (G10) ,ibid.
7
Giovanoli, M., ‘A New Architecture for the Global Financial Markets: Legal Aspects of International
Financial Standard Setting’ in Mario Giovanoli (ed), International Monetary Law, Issues for the New
Millennium (Oxford University Press,2000) 33, cited ibid.,453.
8
Goode,R., Commercial Law,2nd
ed. (London: Penguin Books,1995),20-1, cited ibid.,454.
9
Lastra,n.1 above,454.
10
Ibid.

10 of 79
• Financial Regulation and International Economic Organisations [IMF,
WB, and WTO/GATS]
The International Economic Organisations which govern international monetary and
financial relations are the International Monetary Fund (IMF), the World Bank Group
(WBG), and the World Trade Organisation (WTO).11
The IMF’s powers and functions
are defined in Article 1 of the Articles of Agreement, which provided it with the
mandate to promote international monetary cooperation, facilitate the growth of world
trade, promote exchange rate stability, and create a multilateral system of payments.12
The IMF recognises that banking system problems can reduce the effectiveness of
monetary policy, create large fiscal costs related to rescuing troubled institutions,
trigger capital flight and deepen economic recessions as well as contaminate other
countries through financial contagion.13
The IMF’s use of conditionality has acted as a
powerful official incentive to promote the observance of soft law rules when the
country’s adherence to a particular set of standards is made a ‘condition’ for the
disbursement of IMF funds under a standby or extended arrangement.14
The World Bank’s Articles of Agreement mandate it to promote economic development
by making loans that are conditioned on members undertaking macroeconomic
adjustment programs along with institutional reforms that include promoting the rule of
law, improving public and private sector accountability, good governance, and reducing
corruption and financial crime.15
The IMF and the World Bank have developed a framework for assessing member
countries’ observance of standards and codes, working in collaboration with national
11
Alexander,K., Dhumale,R., and Eatwell,J., ‘The International Legal Framework for International
Financial Regulation’ in Global Governance of Financial Systems: The International Regulation of
Systemic Risk (Oxford University Press,2006) 79,80.
12
Ibid.,84.
13
Walker,G.A., ‘International Financial Crisis and the Financial Stability Forum’ in International Banking
Regulation: Law, Policy and Practice (Kluwer Law International, 2001),297.
14
15
Alexander,et.al.,n.11 above, 80.

11 of 79
authorities, standard-setting agencies, and other international bodies.16
These standards
relate to policy transparency, financial sector regulation and supervision, and market
integrity.17
The World Trade Organisation was formed in 1995 to serve as a forum for negotiations
for reducing barriers to international trade.18
Under the WTO treaty framework the
General Agreement on Trade in Services (GATS) covers cross-border trade in services,
including financial services as set out in the GATS Annex on Financial Services.19
The
GATS allows members to negotiate specific liberalisation commitments in all areas of
trade in services on the basis of the principles of national treatment and market access.20
The GATS applies to cross-border service flows and the supply of services abroad by
natural persons or through commercial establishment.21
Under Article II, Part II of the
GATS, the most-favoured-nation (MFN) principle provides that “with respect to any
measure covered by this Agreement, each Member shall accord immediately and
unconditionally to services and service suppliers of any other Member treatment no less
favourable than it accords to like services and service suppliers of any other country.”22
It has been argued that the GATS’s MFN principle may prohibit informal international
and bilateral agreements which are based on reciprocity and mutual recognition.23
16
Thus
the Basel Committee’s principles of consolidated supervision and home-host country
control may conflict with the MFN principle because it permits the Basel Committee
17
Ibid.
18
Alexander,et.al.,n.11 above,100.
19
Ibid.
20
Ibid.
21
Ibid.,103.
22
Article II:I, cited ibid.
23
Marchetti,J.A. 2003. “What Should Financial Regulators Know about the GATS?” Unpublished paper
prepared for the World Trade Organisation, cited ibid.

12 of 79
members to assess the adequacy of a foreign bank’s home country regulatory regime as
a condition for allowing it to operate in the host country’s markets.24
The liberalisation of financial markets under the WTO creates a potential conflict with
national financial regulators to apply standards of prudential oversight and regulation to
the activities of financial institutions operating in their markets.25
The prudential carve-
out in the Annex on Financial Services permits states to impose regulatory barriers to
trade in financial services if such measures are adopted for ‘prudential reasons’ (which
includes the protection of investors, depositors, policyholders, or persons to whom a
financial service provider owes a fiduciary duty) or “to ensure the integrity and stability
of the financial system.”26
The prudential carve-out is becoming more important in the
current state of financial turbulence, as states are confronted with the contradictory
pressures to keep domestic financial markets open to foreign capital and financial
services in accord with their international obligations while also having to decide which
regulatory measures to take for prudential objectives, even though they may result in
restrictions on trade in financial services.27
24
Ibid.,104.
25
Ibid.,108.
26
Ibid.
27
See “U.S.-China Trade Relations Growing Steadily, Some Stumbling Blocks Remain,” Business Alert
US,Issue 12 (June 28,2002) www.tdctrade.com/alert/USabout.htm cited ibid.,110.

13 of 79
• Financial Regulation and International Financial Institutions [Basel, IOSCO,
IAIS, OECD]
The Basel Committee (the Committee) on Banking Regulation and Supervisory
Practices which was founded in 1974 seeks to create common standards of banking
supervision dealing with such issues as capital adequacy and consolidated supervision
of a bank’s cross-border operations.28
The Basel Committee’s capital adequacy
standards and rules on consolidated supervision were initially intended for credit
institutions in G10 countries with international operations29
and now devise global
capital standards and other core principles of prudential regulation for countries in
which international banks operate.30
In 1998 the Committee stated its intention to amend the Capital Accord and to make it
applicable to all countries in which banks conduct cross-border operations.31
The IMF
and World Bank have also required countries to adhere to or implement the Basel
Accord in order to qualify for financial assistance and as part of IMF Financial Sector
Assessment programs and World Bank Financial Sector Adjustment programs.32
In 1996, the Basel Committee, IOSCO, and the IAIS created the Joint Forum on
Financial Conglomerates to devise standards for the effective regulation of financial
conglomerates that operate in different jurisdictions and in different financial services
sectors.33
The Joint Forum proposed that a lead regulator be appointed for each
conglomerate, determined by the conglomerate’s overall activities.34
28
Alexander,K., Dhumale,R., and Eatwell,J., ‘Global Governance and International Standard Setting’ in
Global Governance of Financial Systems: The International Regulation of Systemic Risk (Oxford
University Press,2006) 35.
It proposed that
for mixed conglomerates with financial and other activities, the financial divisions of
29
Ibid.
30
Ibid.
31
Ibid.,36.
32
Ibid.
33
Ibid.,50.
34
Ibid.

14 of 79
the group should have separate legal personality and separate management structures in
order to prevent ‘contagion’ or the spread of financial risk within the group.35
Basel II requires significant cooperation and coordination between home and host
country regulators, particularly in relation to complex financial conglomerates or
groups.36
The Basel Committee and IOSCO have agreed on the converging of capital
adequacy standards for financial institutions conducting securities activities in
derivatives.37
The International Organisation of Securities Commissions (IOSCO) states that there are
three main objectives for securities regulation. The first is protecting investors;
secondly, ensuring that markets are fair, efficient and transparent; and thirdly, reducing
systemic risk.38
The IOSCO members commit to cooperate to maintain fair and
efficient markets; to exchange information designed to further the development of
domestic markets; to establish standards and effective surveillance of international
securities transactions; and to promote mutual assistance for enforcement.39
The International Association of Insurance Supervisors (IAIS) coordinates the work of
national regulators and setting of minimum standards of supervisory practice for most
of the world’s insurance regulators.40
The IAIS is considering adopting the mutual
recognition principle to reinsurance supervision, which would require the home
supervisor to have primary responsibility for overseeing the global operations of the
reinsurance firm, whilst communicating and coordinating its activities with supervisors
of the other jurisdictions in which the reinsurance company operates.41
35
Ibid.
36
Ibid.
37
Ibid.
38
Ibid.,57.
39
Ibid.
40
Ibid.,61.
41
Ibid.,66.

15 of 79
The Organization for Economic Cooperation and Development (OECD) issued a set of
corporate governance standards and guidelines in 1997 to assist governments in
evaluating and improving legal, institutional, and regulatory frameworks for corporate
governance in their respective countries.42
42
Alexander,K., Dhumale,R., and Eatwell,J., ‘Enhancing Corporate Governance for Financial Institutions:
The Role of International Standards’ in Global Governance of Financial Systems: The International
Regulation of Systemic Risk (Oxford University Press,2006) 241.

16 of 79
• Summary of the International Financial Landscape
The International Financial Architecture has been characterized by the development of
international standards applied in an uneven manner between developed and developing
countries, in a loosely coordinated international financial regulatory regime which is ill
equipped with the threats posed by current international financial systemic risks.43
The
majority of international rules, guidelines, standards and other arrangements which
form the basis of international financial regulation are not of a legally binding nature
and are generally referred to as ‘international soft law’.44
The international financial
landscape ranges from binding ‘hard’ law (i.e. WTO treaty obligations) to various
forms of nonbinding soft law rules (Basel Accord), to arrangements that possess
characteristics of both hard and soft law but which are not legally binding (such as the
IMF Agreement).45
The advantages to soft law are its flexibility, informality, and pragmatism.46
International treaty making is a formal and time-consuming process, which lacks
flexibility for the purposes of revision or amendment, whereas international standards
provide flexibility and informality to the rule-making process.47
The disadvantages to
soft law include concerns about legitimacy; problems of legal certainty, predictability,
and consistency; the proliferation of standards leading to complexity, inconsistency,
overlaps, or gaps; and concerns about ‘country ownership’ of financial law reform
projects, where the implementation of international standards may not be well received
by emerging or transition economies owing to incompatibility with the domestic legal
culture or the complexity or level of sophistication of some standards.48
43
Alexander,K., Dhumale,R., and Eatwell,J., ‘International Soft Law and the Formation of Binding
International Financial Regulation’ in Global Governance of Financial Systems: The International
Regulation of Systemic Risk (Oxford University Press,2006) 134.
44
Ibid.
45
Ibid,135.
46
Giovanoli, n. 7 above, 39 and 55-6, citied in Lastra,n.1 above,463.
47
48
Ibid.,464.

17 of 79
The absence of any formal sanction in respect of non-compliance remains a significant
problem at international level and the absence of any adequate form of review and
enforcement at the international level remains a fundamental omission in the basic
Basel process.49
There are a number of inherent difficulties in enforcing international
obligations against sovereign countries, particularly in the absence of specific treaty
undertakings and any alternative country based voluntary dispute resolution system.50
Walker51
concludes that there is a need for a larger integrated response to deal with the
challenges of the single global market in financial services and argues that this must
include the construction of a series of more complete and coherent integrated control
rules (or options) as well as effective mechanisms for the review and enforcement of
necessary regulatory programmes at both the national and international levels.
Additionally, he argues that a more complete set of institutional arrangements or
mechanisms must be constructed to ensure that all policy can continue to be developed
in an integrated and co-ordinated manner and then fully adopted and properly
implemented in practice.52
It could thus be argued that regional integration mechanisms such as the EU can assist
in the establishment of the institutional arrangements and enforcement mechanisms
required to be a part of the international financial architecture. The CARICOM CSME
is making an attempt to move in this direction but as will be seen in Chapters 3 and 5
there is the lack of a proper institutional structure and legislative framework to fulfil
this void.
49
Walker,G.A., ‘Observations on the Continued Development of International Banking and Financial
market Supervision and Control’ in International Banking Regulation: Law, Policy and Practice (Kluwer
Law International, 2001),354,352.
50
Ibid.,352.
51
Ibid.,356.
52
Ibid.

18 of 79
Although the G 20 has made a laudable attempt to strengthen the international financial
system through the establishment of the new Financial Stability Board (FSB)53
which
will work in close collaboration with the IMF and through the reshaping of national
regulatory systems to provide oversight to all systemically important financial
institutions, instruments and markets, there remains an important gap in developing a
system of enforcement of international regulatory standards. This is usually the domain
of the national regulator in the international financial arena.54
It is said that a national
financial regulator performs five main tasks: authorisation of market participants, the
provision of information to enhance market transparency; surveillance to ensure that the
regulatory code is obeyed; enforcement of the code and disciplining of transgressors;
and the development of policy that keeps the regulatory code up to date.55
The evidence
of the gross failure of national regulators of major international financial markets to
enforce such regulatory codes is very clear as seen by the current global financial crisis.
There have been several recent calls prior to the current global financial crisis for the
establishment of a World Financial Authority56
or Supervisor57
. These calls have
clearly gone unheeded even in the aftermath of the biggest world financial crisis since
the Great Depression. The next best alternative it is submitted is to strengthen existing
regional economic integration initiatives such as the EU, CARICOM CSME, OECS and
the new TT/ECS Economic and Political Union initiative. This is particularly important
when considering the vulnerability of small states which are ‘voices in the
wildernesses’ in major international financial fora. A closer examination of such
regional financial economic arrangements will be made in the following chapters.
53
The Global Plan for Recovery and Reform- G20 Declaration 2 April 2009, available at:
http://www.g20.org/Documents/final-communique.pdf Accessed 30.06.09
54
Ibid.
55
Eatwell,J., ‘New Issues in International Financial Regulation’ in Ferran and Goodhart (eds.) Regulating
Financial Services and Markets in the 21st
Century (Hart Publishing,2002),239.
56
Ibid.
57
Alexander.,K, ‘The Need for Efficient International Financial Regulation’ in Ferran and Goodhart (eds.)
cited ibid.,273.

19 of 79
3. Regionalism and the Regulation of Banking and Financial Services
A. Banking and Financial Regulation in the EU
The Treaty of Rome laid the foundations for the European internal banking and
financial services market by prescribing the freedom of establishment, the freedom to
provide services and the free movement of capital.58
• Freedom of Establishment and Free Movement of Services in the EU
The free movement of services may include a number of economic activities, such as a
person may move to another Member State to provide services; a consumer may move
to another State to receive services; both the service provider and the consumer may
move; the service itself may move, as with internet and e-commerce services.
Free Movement of Services
59
Services also cover a range of activities, and can include services of the self-employed
such as the professions, as well as enterprises, such as the banking, financial and
commercial sectors.60
Articles 49 and 50 EC provide that the freedom to provide
services maybe done on a temporary basis by a person established in one Member State
to a recipient established in another.61
Non-discriminatory measures which have the effect of hindering or preventing market
access were considered in Alpine Investments62
58
Panourgias,L., ‘Trade Liberalization and Banking Regulation: GATS and the EU’ in Banking Regulation
and World Trade Law (Hart Publishing, 2006),31.
where a Dutch law which prohibited
cold-calling to sell financial services both within and outside the Netherlands was said
59
Szyszczak, E. and Cygan,A., ‘Integration Through the Liberalisation of Markets’ in Understanding EU
Law (1st
ed.,Thompson, Sweet & Maxwell, 2005), 128.
60
Ibid.
61
Barnard,C., ‘Freedom to Provide and Receive Services’ in The Substantive Law of the EU-The Four
Freedoms,(Second Edition, Oxford University Press,2007),354.
62
Case C-384/93 Alpine Investments BV v. Mininister van Financien [1995] ECR I-1141, cited in
Barnard,C., ‘Introduction to the Free Movement of Persons’, The Substantive Law of the EU-The Four
Freedoms,(Second Edition, Oxford University Press,2007),263.

20 of 79
by the European Court of Justice [ECJ] to be ‘general and non-discriminatory and
neither its object nor its effect [was] to put the national market at an advantage over
providers of services from other Member States.’ In the ECJ’s view the Dutch law was
not analogous to the selling arrangements in Keck.63
The ECJ said that the prohibition
on cold-calling in Alpine did ‘directly affect access to the markets in services in the
other Member States and [was] thus capable of hindering intra-Community trade in
services’64
.
Freedom of Establishment
The freedom of establishment as a corollary to the free movement of services is
available to natural persons who are nationals of a Member State such as the self-
employed and also legal persons such as companies.65
In accordance with Article 48(1)
EC a company which is formed in accordance with the law of a Member State is
entitled to exercise the right of establishment, if it has its registered office, its central
administration, or its principle place of business within the European Community.66
63
Ibid, para.36, cited ibid.
64
Ibid, para.38, cited ibid.
65
Szyszczak, and Cygan, n.59 above,134.
66
Wyatt,D., ‘Corporate Establishment, Cross-Border Acquisitions, Company Law Harmonisation, and the
Impact of National Tax Rules on the Internal Market’ in Wyatt and Dashwood’s , (eds) European Union
Law (5th
ed., Thompson, Sweet & Maxwell, 2006) 839.

21 of 79
• The Free Movement of Capital in Europe
The EU Commission’s 1985 White Paper Completing the Internal Market 67
set out the
legislative programme for the creation of the single market by 1992, where the
Commission proposed many ambitious measures for the free movement of capital and
financial services.68
The slow progress of the internal market in financial services was
as a result of the lack of capital liberalisation, i.e. the abolition of restrictions and
administrative controls on cross-border financial transactions.69
Capital liberalisation would result in the deregulation of financial markets and the
abolition or easing of rules with respect to the participation in domestic financial
markets of foreign institutions.70
The original provisions of the free movement of
capital in the Treaty of Rome (Art. 63-73) were more conditional than other Treaty
freedoms, such as the right to provide services and the right of establishment.71
As a
result the ECJ held that the free movement of capital was not directly effective.72
The
ECJ subsequently in Sanz de Lera73
held that the free movement of capital was directly
effective, and ruled that the Treaty provisions had to be read in the context of secondary
Community legislation giving effect to the freedom, in particular the Directive
abolishing the Member States’ right to restrict capital movements.74
Thus the free movement of capital has been transformed from a position of reluctance
on the part of Member States to liberalise their domestic rules to being a key economic
67
COM (85) 310 final, cited in Andenas,M. , ‘Who is Going to Supervise Europe’s Financial Markets’ in
Andenas,M. and Avgerinos,Y. (eds.), Financial Markets in Europe: Towards a Single Regulator , (Kluwer
Law International,2003) xvi.
68
Ibid.
69
Ibid.
70
Ibid.
71
Ibid.,xix.
72
Ibid.
73
Sanz de Lera [1995] ECR I-4821 cited ibid.
74
Ibid.,xix,xx.

22 of 79
freedom, which has been developed by the establishment of the economic and monetary
union (EMU).
The Treaty of Maastricht (TEU) 1993 established both the European Central Bank
(ECB) and the European System of Central Banks (ESCB).75
The TEU established a
single monetary policy for countries within the eurozone and gave the ECB authority to
regulate the institutional and operational aspects of payment systems throughout the
ESCB.76
The ESCB regulatory framework is an important system for the regulation of
systemic risk in both the Eurosystem and across the EU.77
75
Alexander et.al., n.11 above,120.
76
Ibid.
77
Ibid.

23 of 79
• The EU’s Regulatory Structure for Banking and Financial Services in the EU
The EU Supervisory Framework: Home Country Control, Mutual Recognition and
Minimum Harmonisation
The supervisory framework for banking and financial services within the European
Union’s internal market has been based on the principles of home country control,
mutual recognition and minimum harmonization.78
The Home country control principle
was introduced by the European Commission’s White Paper on the Internal Market.79
This approach was seen as the most appropriate after the failure of complete
harmonization efforts by the European Community [EC].80
Under the principle of home country control, the regulatory authority over banks
which conduct their business through subsidiaries in other member states lies with the
regulatory authorities of the state in which the bank’s head office is located.81
The
principle of minimum harmonization requires member states to harmonise what are
considered to be the essential areas of banking regulation whilst exceeding these
minimum standards of equivalence and maintaining domestic regulation in areas not
harmonised.82
EC regulation does not prescribe the type of banks or banking structure a
member state must have, as EC Banking Directives do not require member states to
adopt a particular institutional structure of banking supervision.83
78
Ibid,119.
Thus some states may
have a single regulator for prudential supervision or dividing such responsibilities
79
European Commission, Completing the Internal Market: White Paper to the Council (COM (98) 625
final, 28 June 1985), Paras.102-103, cited by Avgerinos,Y., ‘The Home Country Control Principle’ in
Regulating and Supervising Investment Services in the European Union (Palgrave Macmillian, 2003),3,53.
80
Ibid.,3.
81
82
Ibid.
83
Ibid.

24 of 79
between two or more bodies.84
EC Banking Directives perform a functionalist
approach to financial regulation by requiring the same kind of activity to be subject to
the same regulatory rules, even if performed by different types of institutions such as
investment banks and universal banks.85
Mutual recognition or the ‘European
passport’ generates a competitive system of regulation that leads to a convergence of
regulatory standards.86
Mutual recognition based on home country rules also reaches a
common standard more quickly than one based on host country rules.87
The home state supervision principle emerged in the case law of the European Court of
Justice [ECJ] in the Cassis de Dijon doctrine of the Rewe-Zentral case.88
The home
country principle was considered by the ECJ in Germany v. Parliament and Council.89
The principle formed part of the grounds of action brought by Germany for the
annulment of Directive 94/19/EC on deposit guarantee schemes in banking.90
In this
case the ECJ made clear that since home country control supervision is not a principle
laid down by the EC Treaty, the Community legislature is entitled to depart from it,
provided that it did not infringe the legitimate expectations of the individuals
concerned.91
This ruling is especially important when considering alternative forms of
regulation to the home country rule, which is widely used under existing regulatory
measures in the Internal Financial Market.
The Second Banking Directive92
(SBD) (which was incorporated into the Banking
Consolidation Directive93
84
Ibid.
) established the single banking license eliminating barriers,
85
Ibid.
86
Ibid.
87
Ibid.
88
Case 120/78 REWE-Zentrale AG v Bundesmonopolverwaltung fur Branntwein [1979] ECR 649, cited in
Avgerinos, n.79 above, 56.
89
C-233/94 Germany v. Parliament and Council [1997] ECR I-2405 cited ibid., 61.
90
Ibid.
91
Ibid.
92
Second Council Directive of 15 December 1989 on the coordination of laws, regulations and
administrative provisions relating to the taking up and pursuit of the business of credit institutions and
amending Directive 77/780/EEC (89/646/EEC).

25 of 79
such as host country authorization and ‘endowment capital’ requirements, to cross-
border bank branching and the provision of financial services.94
The SBD has permitted
‘credit institutions’ authorized in a Member State to open branches (or provide cross-
border financial services) in another Member State by complying with a notification
requirement whilst being subject to home country prudential supervision.95
Under the Investment Services Directive96
(ISD) the home Member State was given the
main role of authorizing and regulating its own investment firms and supervising its
own regulated markets.97
Investment undertakings, however, that wished to establish a
branch or offer cross-border services in another Member State, had to comply with the
marketing and everyday conduct rules of that host Member State.98
Financial services offered via the internet raised problems with the notification
requirement.99
Under the Articles 17 and 18 ISD investment firms were required to
notify the supervisors of the home member State of the activities on the annexed list,
which they intended to conduct.100
The European Commission in its 1997 Banking
Communication101
did not consider that the provision of financial services via the
Internet should require prior notification, since the supplier cannot be deemed to be
pursuing its activities in the customer’s territory.102
93
(2000/12/EC).
However, if a financial firm does
not notify its intentions, then host competent authorities cannot be informed of the
nature of the financial firm, its programme of operation and the financial services that it
94
Panourgias,n.58 above,35.
95
Ibid., 36.
96
Council Directive 93/22/EEC of May 10 1993 on investment services in the securities field.
97
Avgerinos, Y, ‘The Home Country Control Principle’ in Regulating and Supervising Investment Services
in the European Union (Palgrave Macmillian, 2003), 63.
98
Ibid.
99
Avgerinos,Y., ‘Assessing Home Country Control and Mutual Recognition’ in Regulating and Supervising
Investment Services in the European Union (Palgrave Macmillian, 2003) 132.
100
Avgerinos,n.97 above, 71.
101
1997 Banking Communication,7, cited in Avgerinos,n.99 above.,132.
102
Ibid.

26 of 79
intends to provide.103
This challenged the effectiveness of the home and host country
control principles, since the host competent authorities were clearly by-passed and were
unable to carry out their part of the supervision in the interest of consumer protection.
This had the effect of investment firms establishing themselves in home States with
lower regulatory standards than the host State, and concealing from home State
authorities, their activities over the internet. There was thus no effective supervision
from either home or host State authorities.
The host country may have thus taken retaliatory action under the ‘general-good
concept’ whereby a financial firm operating in the context of home country control and
mutual recognition could be forced to bring its services in line with the rules of the host
country only if the measures relied on against it were in the interest of the general
good.104
The concept of the ‘general-good’ is not defined in the financial services
directives105
, since according to the Commission the level of general good depends on
the assessment of the Member States and varies substantially from one country to
another according to national traditions and the objectives of each Member State.106
This would result in irreparable harm to the home country and mutual recognition
principles since host member States may no longer accept with trust the actions of home
State regulators.
If the Commission’s view on prior notification is accepted, then the provision of
investment services through electronic networks from an institution’s home State,
which can be used by Community investors based in different Member States, falls
outside the ambit of the financial services’ directives European passport.107
Article 14
ISD and Article 20 SBD both state that financial services be offered ‘within’ the host
Member State. 108
103
Ibid.
If the locus of the provision of financial services cannot be
104
ISD, Recital 33 cited ibid.,119.
105
Ibid.,120.
106
1997 Banking Communication,17, cited ibid.,120.
107
Avgouleas,E., ‘The Harmonisation of Rules of Conduct in EU Financial Market: Economic Analysis,
Subsidiarity and Investor Protection’ (2000) 1 ELJ 72, 79 cited in Avgerinos, n.99 above,135.
108
Ibid.

27 of 79
ascertained then firms conducting electronic trading will not have to comply with the
prudential and CBR of the directives.109
This may result in such firms being subject to
the CBR of the home country as well as of the host countries that constitute the
destination of services, which will uphold their rules on the general-good principle.110
Regulatory competition was seen as the best alternative to the failed policies of
complete harmonization in the 1960s and 1970s. 111
Advocates for regulatory
competition argue that firms and consumers could benefit from a wide choice of
national regulations; that it may be more difficult for firms to hide or to provide false
information to decentralized authorities than to a pan European authority; and that the
home country and mutual recognition principles allow diversities between Member
States’ rules which permits better regulatory competition among them.112
However,
regulatory competition can also promote a general lowering of standards, especially in
the consumer protection area113
, due to a ‘race to the bottom’ which results in
regulatory arbitrage.
The overlapping of competence between home and host Member States, with the
resulting confusion as to the exact parameters of each Member State’s regulatory role,
particularly in the regulation of electronic financial services provided over the internet,
significantly hinders the cross-border provision of financial services, and makes it
difficult for the national regulator to respond to a financial crisis, such as the current
Global Financial Crisis. These criticisms have prompted a renewed call for seeking as a
regulatory alternative to the home country control principle, a pan European Securities
Regulator, which will have broad supervisory powers in a more harmonized
environment of regulations.
109
Ibid.,136.
110
Ibid.
111
Ibid.,105.
112
Ibid.
113
Ibid.,106.

28 of 79
The New Institutional Structure, The FSAP and Dynamic Harmonisation
The Financial Services Action Plan (FSAP) forms an important plank in establishing a
harmonised legislative and regulatory framework for establishing a common market in
financial services in Europe.114
The FSAP has proposed targets and time frames for
legislative and other regulatory measures to achieve three strategic objectives of a
single market for wholesale financial services; open and secure retail markets; and
modernised prudential rules and supervision of intermediaries and securities firms.115
The FSAP is coupled with the new institutional structure known as the Lamfalussy
process, which attempts to expedite the adoption and implementation of EU regulatory
rules in light of the rapid changing nature of Europe’s financial markets.116
The FSAP addresses prudential supervision by incorporating the latest regulatory
practices of international bodies (e.g. Basel , IOSCO) by adopting proposed directives
on winding up and liquidation of banks and insurance companies, on electronic money,
proposals amending the capital adequacy standards of banks and investment companies
and amending the solvency margins for insurance companies.117
It also seeks to create a
united framework for assessing the prudential supervision of financial
conglomerates.118
The FSAP sees a relationship between the degree of liberalization
and regulatory harmonisation in financial markets and the degree of integration in those
markets.119
114
115
Ibid.
116
Ibid.
117
Ibid.
118
Ibid.
119
Ibid.,124.

29 of 79
The FSAP’s investment services and securities-related proposals include revising the
Investment Services Directive to ensure that its mutual-recognition principles worked
more effectively, clarifying the conduct-of-business regime which was unsatisfactory
and resulted in duplications of regulation, and updating its securities trading market
provisions to take into account market developments such as the growth of competition
between markets and the arrival of the ATSs; revising the disclosure regime so that a
single prospectus could be used in cross-border capital raising; adopting a market-abuse
regime; revising the collective-investment scheme in order to update the investment-
restrictions rules; adopting a takeover regime; adopting a common set of international
accounting standards; addressing investor protection in the cross-border provision of
investment services via measures covering, inter alia, the distance selling of financial
services; and enhancing co-operation between supervisors.120
The FSAP resulted in a dramatic change in the EUs financial market legislative
measures with many new and significant Directives being introduced such as its
cornerstone121
Markets in Financial Instruments Directive (MiFID)122
and the Capital
Requirements Directive (CRD),123
which incorporates the Basel II reforms to capital
adequacy124
. The MiFID replaces the ISD and fundamentally reforms and regulates
almost all aspects of the investment-services industry125
which includes order
execution, market regulation and investment services.126
The CRD is based on the
Basel Accord and is designed to deliver greater flexibility and a more efficient
allocation of capital.127
It supersedes the 1993 Capital Adequacy Directive.128
120
Moloney,N., ‘Introduction’ in EC Securities Regulation (Second edition, Oxford University Press,
2008), 19.
121
Ibid.,5.
122
Directive 2004/39/EC [2004] OJ L145/1.
123
Directive 2006/49/EC [2006] OJ L177/201.
124
Moloney,N., ‘The Prudential Regulation of Investment-services Providers and Conflict-of-Interest
Regulation’ in EC Securities Regulation (Second edition, Oxford University Press, 2008), 465.
125
Moloney,N., ‘The Regulation of Investment-services Providers: The EC Regime’ in EC Securities
Regulation (Second edition, Oxford University Press, 2008), 356.
126
Ibid. and Moloney, n.120 above,5.
127
Moloney,n. 124 above,530.
128
Moloney,N., ‘The Investment-services Passport’ in EC Securities Regulation (Second edition, Oxford
University Press, 2008), 414.

30 of 79
The MiFID replaces the ISD and is designed to support the move to full home country
control.129
Marketing130
and conduct-of business131
rules were not harmonised and were
subject to host state control. 132
MiFID grants a regulatory and supervisory ‘passport’ to
investment firms authorised in one member state (the home state) to provide investment
services in any other member state (the host state) either by providing services on a
cross-border basis or by establishing a branch in the host state, without the need for re-
authorisation.133
Conduct-of-business regulation remains with the home member state,
except where activities are carried through a branch where the branch member state
governs same.134
Authorisation conditions and procedure are at the heart of MiFID’s market stability and
investor-protection objectives.135
The authorisation requirement supports home state
control and market integration by allowing member states to permit investment firms
from other member states to operate in their territories confident that the firms have
been through an agreed vetting process.136
The authorisation responsibility imposed on
the member state applies only to investment firms for which it is the ‘home state’.137
There are three indicators as to whether a member state is an investment firm’s home
state138
129
Ibid.,379.
: where the investment firm is a natural person, the member state in which the
registered office is situated is the home member state; where the investment firm is a
legal person, the home member state is the state in which the registered office is
130
Article 13.
131
Article 11.
132
Moloney,n.128 above, 380.
133
Ibid.,392.
134
Ibid.
135
Ibid.,410.
136
Ibid.
137
Atricle 5(1), cited ibid.,412.
138
Article 4(1)(20), cited ibid.

31 of 79
located; where the investment firm has under its national law, no registered office, the
home state is the state where the head office is situated.139
The possibility of regulatory arbitrage is weaker under MiFID than the ISD due to the
high level at which it harmonises, the weight of harmonisation at Level 2 and the
prohibition on gold-plating which applies under Article 4 of the MiFID level 2
Directive, although arbitrage is still possible with respect to supervisory intensity.140
Article 10(1) MiFID requires that where ‘close links’ exist between the investment firm
and other natural or legal persons, the competent authority can grant authorisation only
where those links do not prevent the effective exercise of the supervisory functions of
the competent authority.141
This is so provided to ensure that the group structure within
which the investment firm operates is sufficiently transparent such that the firm can be
effectively supervised.142
‘Close links’ are links by ‘participation’ or ‘control’ between
two or more natural or legal persons, and are also said to exist where two or more
natural or legal persons are permanently linked to one and the same person by a control
relationship.143
The European Parliament on November 20, 2002 adopted the Supplementary
Supervision Directive144
which introduced supplementary supervision of financial
conglomerates in the EU due to the accelerating pace of consolidation in the financial
industry and the intensification of links in between financial markets.145
139
Ibid.
For some time
financial group supervision in the EU was still based on the basic dual principles of
140
Ibid.
141
Ibid.,419.
142
Ibid.,420.
143
Ibid.
144
Directive 2002/87/EC
145
Gruson,M., ‘Supervision of Financial Conglomerates in the European Union’
(http://imf.org/external/np/leg/sem/2004/cdmfl/eng/gruson.pdf)

32 of 79
consolidated supervision and home country control.146
The Supplementary Supervision
Directive does not replace the existing consolidated or supplementary supervision of
groups that operate in one sector of the financial industry, but introduced an additional
supplementary supervision of the regulated entities in groups that straddle more than
one financial sector.147
The Supplementary Supervision Directive is based on the need
for a coordinated approach to a group–wide prudential assessment by various
supervisory authorities of different sectors of the financial industry and the supervisory
authorities of different sectors of the financial industry and the supervisory authorities
of the different Member States.148
In February 2001 the Lamfalussy Report was delivered.149
It found that the existing
harmonized structure was inadequate; it was unable to cope with market developments
and support greater integration, whilst the EC legislative procedures failed to deliver
regulation quickly and effectively.150
Under the Lamfalussy process, the Commission
adopts ‘level 2’ rules, which are usually detailed and technical, based on mandates in
the related ‘level1’ measure (either a directive or a regulation) which is adopted under
normal inter-institutional procedures.151
The Commission is advised by the Committee
of European Securities Regulators (CESR, composed of national regulators) and
supervised by the European Securities Committee (ESC, composed of Member State
representatives).152
Level 3 of the Lamfalussy process concerns convergence and
consistency in the application of level 1 and level 2 rules, whilst level 4 concerns
enforcement.153
146
Walker,G.A., ‘Lead Regulation and International Financial Market Supervision’ in International
Banking Regulation: Law, Policy and Practice (Kluwer Law International, 2001),250.
147
Gruson,n.145 above,2.
148
Ibid.
149
Moloney, n.120 above,21.
150
Ibid.
151
Ibid.,5.
152
Ibid.
153
Ibid.

33 of 79
Level 1 is the regular EU legislative process with a ‘fast track’ procedure and involves
the EU Commission, Council and Parliament.154
The Stockholm Resolution of the
European Council on More Effective Securities Markets Regulation155
invited the
Commission to use regulations instead of directives, whenever this was ‘legally
possible’.156
Differences in national transposition of secondary EU law has made this
ideal suggestion difficult to implement due to the status quo where directives have been
used in the banking and insurance fields.157
Directives are consistent with the concepts
of minimum harmonisation and mutual recognition, whereas Regulations are consistent
with the concept of full or detailed harmonisation, and leave no freedom to member
states as to their national transposition.158
Under Level 2 the CESR is responsible for making proposals to the Commission on
technical implementing matters, which the Commission then adjusts and transmits to
the ESC, which will vote on the proposal.159
The European Parliament would then
examine the final draft and within one month have to consider whether or not the draft
measures exceed the scope of the implementing measures (Level 2).160
The role of the
European Parliament is thus limited at Level 2 as it is unable to exercise influence over
the compromises struck between the Commission and the national authorities
represented in the ESC and the CESR.161
Level 2 thus creates a situation where having
two committees may result in a slowing down rather than a speeding up of financial
regulation due to the back and forth decision-making process.162
154
Lastra,R., ‘Regulating European Securities Markets: Beyond the Lamfalussy Report’ in Andenas and
Avgerinos (eds.) Financial Markets in Europe : Towards a Single Regulator? (Kluwer Law International,
2003),213.
155
23 March 2001.
156
Lastra,n.154,213.
157
Ibid.
158
Ibid.
159
Ibid.,214.
160
Ibid.
161
Ibid.
162
Ibid.,216.

34 of 79
Level 3 concerns national implementation and co-operation and involves the CESR and
member states so as to ensure a more consistent implementation of community law.163
Level 4 concerns enforcement and involves the Commission and the Member States, in
so far as the Commission checks Member State compliance with EU legislation, and
may bring legal proceedings against a Member State if a breach of Community law is
suspected.164
It can be argued that the Lamfalussy process adds nothing new to the methodology165
of
the previous regulatory structure with the same problems associated with having several
national regulators, even if in a Committee forum. There can be significant delays under
the Lamfalussy process as each Member State negotiates both with its counterparts and
with domestic law makers and interest groups.166
The process for promulgating and
amending directives is a lengthy and delayed one, which is inadequate to deal with fast-
moving financial markets.167
Regulations similarly would require compromises by
national governments, which would be slow to draft and difficult to amend in light of
changing circumstances.168
The Lamfulassy process also relies on the political will of
the European Parliament and the Council in determining what is ‘essential legislation’
at Level 1 and what are ‘technical issues’ at Level 2, at the comitology stage.169
Technical issues may be regarded as political issues with a resulting overlap and ‘legal
battlefield’ and struggle between EU institutions and national regulators.170
163
Ibid.,217.
164
Ibid.
165
Thieffry,G., ‘The Case for a European Securities Commission’ in Ferran and Goodhart (eds.) Regulating
Financial Services and Markets in the 21st
Century (Hart Publishing,2002), 233.
166
Avgerinos, Y., ‘The Case for a European Securities Regulator’ in Regulating and Supervising Investment
Services in the European Union (Palgrave Macmillan, 2003), 167.
167
Ibid.
168
Ibid.,168.
169
Ibid.,167.
170
Ibid,167,168.

35 of 79
Summary:
A large number of EU directives and regulations constitute the body of EU Banking
regulation which is binding upon Member States.171
Rules on prudential supervision are
substantially harmonized and rules on payment are centralised as the European Central
Bank (ECB) has an extensive regulatory role in this area through legal acts of the ECB
comprising ECB regulations, decisions, recommendations and opinions.172
Common
financial rules in the EU have been made mainly via directives under minimum
harmonisation, although the Lamfalussy framework suggests that maximum
harmonisation should be used in the regulation of capital markets.173
Under the MiFID
harmonisation trumps regulatory competition as market integration is based on home
country control subject to extensive harmonisation at levels 1 and 2.174
The MiFID level
2 process leaves very little room for Member State discretion and produces rules which
amount to de facto maximum harmonisation.175
The European Court of Justice has decided a limited number of cases in the financial
services area which have confirmed the application of the principles developed with
regard to establishment and services in this sector.176
Harmonisation is to be limited to
what is essential, necessary and sufficient to secure the mutual recognition of national
authorisation and continuing supervision and make possible the grant of a single licence
recognised throughout the Community177
171
Lastra, R., ‘Banking Supervision and Lender of Last Resort in the EU’ in Legal Foundations of
International Monetary Stability (Oxford University Press,2006) 301.
, and this will include imposing minimum
172
Art. 110 EC Treaty and Art. 34 of the ESCB Statute cited ibid.
173
Lastra, R., ‘European Financial Architecture’ in Legal Foundations of International Monetary Stability
(Oxford University Press,2006) 320.
174
Moloney, n.125 above, 365.
175
Ibid.,366.
176
Walker,G.A., ‘Banking and Financial Services-Judicial Policy Development and Correction’ in
European Banking Law: Policy and Programme Construction (The British Institute of International and
Comparative Law,2007) 225.
177
Case C-222/02 Peter Paul, Cornelia Sonnen-Lűtte and Christel Morkins v. Bundensrepublik
Deutschland ,para. 2, cited ibid.,227.

36 of 79
common provisions on depositor compensation but exclude national rules governing the
liability of supervisory agencies in the event of defective supervision.178
Harmonisation has therefore been by regulations, directives and to a limited extent
decisions by the ECJ. Directives have played a greater role in light of the decentralised
framework of cooperation between Member States.
178
Ibid.

37 of 79
• The Debate in Europe: A Committee of Regulators or a Single Regulator?
Given the inadequacy of the home country control system in supporting the integration
process of financial services, with large areas of regulation remaining unharmonized179
and where the implementation of directives was inconsistent and often badly delayed,180
there have been calls for regulatory alternatives to the home country control system,
whereby there is a move towards greater harmonization whether by a single European
Securities Regulator or a Committee of Regulators. The regime was ill equipped to deal
with the tremendous demands made of it with the arrival of the monetary union, the
Internet explosion, and increase in cross-border activity given these developments and
technological developments in the securities-trading environment.181
The main obstacle
to the internal market in securities and investment services is the regulatory barrier to
market access represented by obstructive and divergent national securities-regulation
regimes.182
It has been advocated by some authors, notably Avgerinos183
and Thieffry184
, that there
should be a single European Regulator instead of 27 different EU regulatory regimes,
each requiring different levels of disclosure requirements.185
With a single currency and
single market base it would be absurd to have more than regulator186
, particularly since
the present fragmented regulation is ‘impeding progress towards the aim of a unified
financial services market in Europe.’187
179
Moloney, n. 120 above, 14.
180
Ibid.
181
Ibid.
182
Ibid.,7.
183
Avgerinos, n. 166 above, 157.
184
Thieffry,n.165 above, 212.
185
Ibid.
186
Avgerinos, n.166 above, 157.
187
Thieffry, n.165 above, 212.

38 of 79
Centralisation of investment services supervisory responsibilities would exploit
economies of scale and scope for financial intermediaries to provide cross-border
services in more than one Member State, and to consumers.188
Multinationals and other
cross border investment firms prefer European to national supervision not only to avoid
the costs of meeting different and often inconsistent national standards, but also to
avoid more stringent requirements in other Member States.189
Issuers and investors are
also keen for the harmonisation of Member States’ laws with regard to accounting
standards, disclosure, company law and consumer protection issues.190
The risk of regulatory capture is also greater with a national regulator than a
supranational regulator, which keeps at a distance from the investment firms it
regulates.191
Transparency and accountability is also considered to be improved with a
single regulator which has a clear set of responsibilities as opposed to multiple
regulators who lack clarity in their objectives under the home country control system.192
Ferran argues that although a supranational authority may be less vulnerable to
regulatory capture to national interest groups than national regulators, it may in any
event be susceptible to ‘similar temptations to take advantage of blandishments
proffered by supranationally-active lobbyists.’ 193
The remoteness of the single
regulator from the investment firms it regulates could also make it make it less market
sensitive and less able to engage constructively with market participants in mutual
problem-solving.194
Another argument against the creation of a single regulator is that there are serious legal
and practical obstacles in the path towards the establishment of an EU securities
188
Avgerinos, n.166 above,157,158.
189
Ibid.,158.
190
Ibid.,163.
191
Ibid.,164.
192
Ibid.,164,165.
193
Ferran,E., ‘The regulatory process for securities law-making in the EU’ in Building an EU Securities
Market (Cambridge University Press,2004),119,120.
194
Ibid.,120.

39 of 79
regulatory agency which would require a Treaty amendment.195
This would lead to a
long-running heated political debate and negotiations.196
Thieffry however is of the
view that the formation of such a body can be legitimately based on Article 308 EC,
which in essence grants power to the European Council to take any steps to take
whatever measures are necessary to obtain the objectives of the Community.197
A European Super-Regulator?
The home country control model has been successful in so far as systemic stability is
concerned.198
It has however failed to provide the full free movement of financial
services.199
It is doubtful that the current regulatory regime as proposed by the
Commission and the Lamfalussy Committee will speed up securities markets and
investment services integration.200
Home supervisors will find their task more difficult
to extend their supervisory power to financial services abroad, and host supervisors are
likely to become less informed about firms and the market as a whole, affecting their
ability to take ex ante action and resolving crises.201
A pan-European supervisor will be able to act promptly, decisively, and away from
national political and socio-economic interests in crises.202
Regulatory economies of
scale can be better achieved whilst a flexible law making process will facilitate the
resolution of national conflicts and provide an adequate forum for exchange of
expertise and information.203
195
Ibid.,121.
Additionally, a pan-European Regulator will be a
196
Ibid.
197
Thieffry, n.165 above, 222.
198
Avgerinos,Y., ‘The Need and Rationale for a European Securities Regulator’ in Andenas and Avgerinos
(eds.), Financial Markets in Europe: Towards a Single Regulator? (Kluwer Law International,2003) 146.
199
Ibid.
200
Ibid,181.
201
Ibid.
202
Ibid.
203
Ibid.

40 of 79
powerful international agent which can better negotiate and develop Europe’s global
financial position in the international arena and in the WTO.204
204
Ibid.

41 of 79
B. Banking and Financial Regulation in the CARICOM Region, the OECS and the
proposed TT-Eastern Caribbean Economic and Political Union
This section explores the current and proposed regional legislative measures with respect
to free movement of capital, services and establishment, banking and financial services
regulation in the CARICOM Region, the OECS sub-region and the proposed TT-Eastern
Caribbean Economic and Political Union, with the purpose of considering whether a
similar type of regulatory framework as exists in the EU may be appropriate to the
development of these regional integration mechanisms in light of the legislative proposals
examined here.
• Freedom of Establishment and Free Movement of Services under the
CARICOM CSME
Chapter 3 of the Revised Treaty of Chaguaramas205
deals with provisions relating to
establishment, services, capital and movement of community nationals. Member states
must not introduce any new restrictions relating to the right of establishment of other
member states except as otherwise stated in the Treaty.206
Member States must remove
restrictions on the right of establishment of nationals of a Member State in the territory
of another Member State.207
This includes restrictions on the setting up of agencies,
branches and subsidiaries.208
Member States are prohibited from imposing new
restrictions on the provision of services in the Community by nationals of other
Member States.209
Member States must also abolish restrictions on the provision of
services within the Community with respect of Community nationals.210
205
Articles 30-50 of The Revised Treaty of Chaguarmas Establishing the Caribbean Community Including
the CARICOM Single Market and Economy.
Available at: http:www.caricom.org/jsp/community/revised_treaty-text.pdf
206
Article 32(1).
207
Article 33(1).
208
Article 33(2)
209
Article 36(1).
210
Article 37(1).

42 of 79
• The Free Movement of Capital in the CARICOM CSME
The Revised Treaty provides that Member States shall not introduce any new measures
which restrict the movement of capital and payments and on current payments and
transfers, nor render more restrictive existing regulations except as otherwise provided
for in Articles 43 and 46 of the Revised Treaty.211
Member States must also remove
restrictions on the movement of capital payments and restrictions on all current
payments including payments for goods and services and other current transfers, in
order to ensure the proper functioning of the CSME.212
Member States are also required
to grant authorisation for the movement of capital on a non-discriminatory basis.213
Two Caribbean Community Organs, the Council for Finance and Planning (COFAP)
and the Council for Trade and Economic Development (COTED), are responsible for
adopting appropriate measures in order to facilitate the exercise of the rights under
Chapter 3.214
Amongst these measures are the establishment of market intelligence and
information systems in the Community,215
harmonised legal and administrative systems
for the operation of partnerships, companies, or other entities, 216
abolition of exchange
controls in the Community, and free convertibility of currencies of the Member
States,217
the establishment of an integrated capital market,218
and the convergence of
macro-economic performance and policies through the co-ordination or harmonisation
of monetary and fiscal policies, including, in particular, policies in relation to interest
rates, exchange rates, tax structures, and national budgetary deficits.219
211
Article 39
212
Article 40(1)
213
Article 41(1)
214
Article 44 (1)
215
Article 44(1)(a)
216
Article 44 (1)(b)
217
Article 44(1)(c)
218
Article 44(1) (d)
219
Article 44 (1) (e)

43 of 79
Member States are mandated to remove discriminatory restrictions on banking,
insurance and other financial services220
, with the proviso that COFAP in consultation
with other competent Organs of the Community may exclude certain financial services
from the operation of the provisions of Article 38.221
220
Article 38(1)
221
Article 38(2)

44 of 79
• Proposed Banking and Financial Services Regulation in the CARICOM
CSME
Two Draft pieces of CARICOM CSME secondary legislation have been drawn up by
the CARICOM Secretariat with respect to giving effect to Chapter 3 of the Revised
Treaty of Chaguaramas222
by seeking to promote the enactment of harmonised
provisions in the law to govern the financial services sectors in the Community223
and
in developing a harmonised law for financial service providers in the member states and
to enhance the regulatory and supervisory framework of the CARICOM member states
by providing greater independence to the respective Central Banks or the Eastern
Caribbean Central Bank (ECCB) as the principal regulatory and supervisory authority
of the financial services sector. 224
The momentum for this direction came from the
movement for the development of the single market and economy and the creation of a
single financial space in the ECCB member states and an economic union in the OECS
member states.225
The Draft CARICOM Banks and Financial Institutions Bill is based on the Financial
Institutions Act of Guyana and the revised uniform Banking Act of the ECCB member
states.226
The Bill also seeks to provide best practices in the banking and financial
services sector of member states.227
The Bill seeks to give the CARICOM Secretariat
the authority to provide for the reform and harmonisation of the financial services in the
member states in order to promote the development of the CSME.228
222
CARICOM Financial Services Agreement-Seventh Draft-May 2007, obtained from the CARICOM
Secretariat.
With the
development of the economic union of the OECS it is necessary for member states to
ensure that an appropriate legal framework is in place to facilitate collaboration
amongst the supervisory authorities and promote their effective monitoring of the
223
Explanatory notes, ibid.
224
“Explanatory Memorandum: Introduction”, CARICOM Draft Banks and Financial Institutions Bill-Draft
Rev III- February 2005. Obtained from the CARICOM Secretariat.
225
Ibid.
226
Ibid.
227
Ibid.
228
Ibid.

45 of 79
operations of financial institutions in the member states.229
This demonstrates the clear
recognition by the Secretariat of the need for harmonisation of the CSME legislative
framework in banking and financial services regulation with that of the OECS
framework. Member States of the OECS sub-regional group are also members of
CARICOM.
The Bill also “seeks to address certain deficiencies in the law particularly in the
provisions regarding the procedure leading to the revocation of a licence, applications
by prospective significant shareholders, the conduct of audits, mergers and acquisitions,
the regulation of bank holding companies, affiliates and other related persons,
qualification of persons who control or are responsible for the management of financial
institutions, temporary control of a financial institution by the Bank, reorganisation,
and the liquidation of financial institutions.”230
Article 3(2) of the Draft CARICOM Financial Service Agreement231
authorises a
member state to limit the number of financial institutions that are operating in its
jurisdiction or persons providing such financial services. Member States are also urged
to give recognition to credit rating agencies232
and to harmonise minimum standards for
education and training of banking, insurance and securities industry practitioners.233
Member States are required to adopt prudential measures for the protection of investors,
depositors, policy holders and other market participants and for maintaining the
integrity of the financial system of the member states.234
Member states are also
required to adopt measures to protect depositors’ funds.235
229
Ibid.
230
Ibid.
231
CARICOM Financial Services Agreement,n.222 above.
232
Article 7,ibid.
233
Article 9,ibid.
234
Article 16,ibid.
235
Article 19,ibid.

46 of 79
Part V of the Draft CARICOM Financial Service Agreement236
states that any dispute
under the Agreement must be settled in accordance with the procedure set out in
Chapter Nine of the Revised Treaty of Chaguaramas.237
Additionally a member state
must report the results of any dispute settlement under this Part to COFAP.238
Article 187 of the Revised Treaty239
provides that the provisions of Chapter Nine apply
to the settlement of disputes concerning the interpretation and application of the
Revised Treaty. Such disputes shall be settled by good offices, mediation, consultations,
conciliation, arbitration and adjudication.240
The Caribbean Court of Justice (CCJ) has
compulsory and exclusive jurisdiction to hear and determine disputes concerning the
interpretation and application of the treaty including disputes between the Member
States, between Member States and the Community, referrals from the national courts
of Member States, and applications by persons in accordance with Article 222 of the
Treaty.241
‘National courts’ includes the Eastern Caribbean Supreme Court.242
Article
222 deals with the locus standi of private parties where parties, natural or juridical, of
contracting member states, may with the special leave of the CCJ apply to appear as
parties in proceedings before the Court under express conditions as stated in Article
222. 243
The judgments of the CCJ shall have the effect of stare decisis, unless revised
in accordance with Article 219.244
The CCJ shall also be entitled to apply such rules of
international law, in the exercise of its Original jurisdiction.245
236
Articles 28-29,ibid.
237
Article 28(1),ibid.
238
Article 28(2),ibid.
239
Chapter Nine, of The Revised Treaty of Chaguarmas, n.205 above.
240
Article 188(1), ibid.
241
Article 211(1) ,ibid.
242
Article 211(2), ibid.
243
Ibid.
244
Article 221,ibid.
245
Article 217 (1),ibid.

47 of 79
• The OECS and the Eastern Caribbean Currency Union
The Organisation of Eastern Caribbean States (OECS) was established by the Treaty of
Basseterre in 1981.246
Amongst the major purposes of the OECS is the promotion of
economic integration among member states through the provisions of the Agreement
establishing the East Caribbean Common Market.247
To this end member states
endeavoured to co-ordinate, harmonise and pursue joint policies in economic
integration, currency and central-banking, amongst other areas.248
The Eastern Caribbean Central Bank (ECCB) which was established in 1983, has the
sole right to issue the common currency, the Eastern Caribbean dollar (EC$), with
Member States having surrendered their foreign exchange to the common reserves pool
administered by the ECCB.249
Each country has unrestricted access to the common
reserve pool as long as it has the domestic currency to make it effective.250
The ECCB’s regulatory and supervisory jurisdiction over commercial banks and other
financial institutions is established under the 1983 ECCB Agreement Act251
, as well as
the Uniform Banking Act in 1991.252
An amendment to the 1983 ECCB Act was made
in 1993253
246
The Treaty Establishing the Organisation of Eastern Caribbean States (the Treaty of Basseterre).
Available at:
, which gave the central bank emergency powers to intervene in failing
http://www.oecs.org/search/Treaty%20of%20Basseterre/?ordering=&searchphrase=all.
OECS Member States include: Antigua, Dominica, Grenada, Montserrat, St. Kitts/Nevis, St. Lucia, and St.
Vincent and the Grenadines.
247
Article 1(e) of the Treaty of Basseterre 1981.
248
Article 2 (f), (i), ibid.
249
IMF Occasional Paper No. 195, ‘The Eastern Caribbean Currency Union: Institutions, Performance, and
Policy Issues’ (International Monetary Fund, Washington DC, July 2000) 4.
250
Ibid.
251
Articles 43, 35,cited ibid.,18.
252
Ibid.
253
ECCB’s Amendment Order No.48 of 1993,cited ibid.,21.

48 of 79
financial institutions that are of systemic importance.254
The ECCB now has the power
to investigate and to take whatever steps necessary to protect depositors, including the
confiscation and sale of assets.255
The ECCB does not have direct supervisory
jurisdiction over nonbank financial institutions not licensed under the Banking Act,
such as credit unions, insurance companies, and other financial institutions that are
regulated by different acts and authorities under domestic law.256
All licensed financial institutions are required to observe and comply with a minimum
paid-up capital amount, the maintenance of a statutory reserve fund, restrictions on
lending to related parties, restrictions on large credit exposures, restrictions governing
the nature of bank investments, and satisfaction of a reserve requirement.257
The ECCB introduced prudential guidelines conforming to Basel international best
practices in 1994.258
The prudential guidelines now govern large credit exposures and
compliance with capital adequacy standards adapted by the CARICOM Bank
Supervisors from the Basel Committee guidelines, amongst other things.259
The
ECCB’s Bank Supervision Department conducts monitoring compliance whilst
providing technical assistance in capacity building to national entities supervising credit
unions and insurance companies.260
The Draft of the New OECS Treaty261
seeks to complete the process of integration, as
initiated by the original treaty, by addressing the new circumstances which confront
member states.262
The overriding objective263
254
Ibid.
of the New Treaty is “the establishment
255
Ibid.
256
Ibid.
257
Ibid.
258
Ibid.,19.
259
Ibid.
260
Ibid.,20.
261
Organisation of Eastern Caribbean States: Draft of New Treaty. Available at
http://www.oecs.org/search/New%20Draft%20Treaty/?ordering=&searchphrase=all
262
‘Introduction’,ibid.,5.

49 of 79
of an Economic Union of the Organisation of Eastern Caribbean States as a single
financial and economic space”. Article 1.1 of the Protocol of the Eastern Caribbean
Economic Union creates an Economic Union which shall operate across the territorial
jurisdictions of the Protocol Member States.264
Article 30 of the Protocol provides for
the Right of Establishment and the Freedom of Trade in Services.265
Article 14 of the
Protocol states that the Monetary Council through the Eastern Caribbean Central Bank,
will execute the monetary policy of the Economic Union under the terms and conditions
of the Eastern Caribbean Central Bank Agreement.266
Protocol member states also
agree to setting fiscal and debt benchmarks which are reported to and published on an
annual basis by the Monetary Council.267
Protocol member states also agree to the
progressive harmonisation of their fiscal policies and their fiscal incentives regime.268
Article 32 of the Protocol creates the new OECS Commission which shall be the
principal administrative organ of the Economic Union.269
263
Article 4, ibid.
264
Ibid.
265
Ibid.
266
Ibid.
267
Article 15.1, ibid.
268
Article 15.2, ibid.
269
Ibid.

50 of 79
• The Proposed Economic and Political Union between the Eastern Caribbean
States and Trinidad and Tobago
On the 14th
August 2008, the Heads of Government of Grenada, St. Lucia, St. Vincent
and the Grenadines and Trinidad and Tobago signed a Joint Declaration on
Collaboration Towards the Achievement of the Single Economy and Political
Integration announcing their “intention to establish a framework for closer
collaboration towards the achievement of the Single Economy by 2011 and appropriate
Political Integration by 2013.”270
In 1992 the West Indian Commission (WIC) recommended a form of governance
structure for the CARICOM Single Market and Economy (CSME) not similar to but
approximate to that of the EU.271
The WIC in its report to governments entitled “Time
for Action” indicated that the CSME did not have to specifically follow the institutional
orientation of the EU, but could draw on certain of its designs to find a form of
governance machinery that could effectively deal with what was widely accepted as an
“implementation deficit” in the Community’s existing machinery that seemed to inhibit
the effective implementation of a CSME.272
Governments however held reservations to
the WIC’s recommendations.273
In 2003 the Rose Hall Declaration defined the CARICOM integration system as a
“Community of Sovereign States” which seemed to set certain limitations on the extent
to which the Community could accommodate supranationality.274
270
Chapter 1, Trinidad and Tobago - Eastern Caribbean States Integration Initiative Task Force Report,
Volume 1, p. 1. Available at:
This reluctance by
regional governments continued with the response to the 2007 report “Managing
Mature Regionalism” of the CARICOM Technical Working Group on Governance,
http://foreign.gov.tt/media/introduction/Binder1.pdf?ttmfa_session_id=18c0f225fc8a8354cf2ae1b9067e9d5
e
271
Chapter 6, Ibid., 100.
272
Ibid.
273
Ibid.
274
Ibid.

51 of 79
whose institutional recommendations were deemed to closely resemble the decision-
making and implementation structure of the European Communities/Union.275
These
reservations appear to lie in the belief that that orientation would, de facto, diminish the
decision-making and decision implementation authority of governments, and lead to a
subordination of the sovereignty of participating states to a regional system, thus
negating the notion of a community of sovereign states.276
There is also the fear that the
establishment of a Commission would match or usurp the “executive authority” of
governments.277
The intergovernmental nature of CARICOM’s integration system has however resulted
in there being a lack of competent formal institutional machinery, legal authority and
legal instruments for ensuring the enforceability of decisions, which the EU integration
system possesses.278
These hurdles present the opportunity to the member states of the
proposed Trinidad and Tobago-Eastern Caribbean Economic Union to cross this
sovereignty/supranationality divide.279
Such a Union would involve a movement from
voluntary national enforcement to a permanent legal system applicable across national
borders, whilst permitting the simultaneous application of agreements across these
borders.280
In this proposed Union a Commission will be granted responsibility for exercising
regional competence without having to seek the renewal of the implementation mandate
for every policy decision as is currently the position in the CARICOM CSME in its
economic relations.281
275
Ibid.,101.
The Commission will also be granted powers to implement
decisions in relation to the specific integration spaces, possess the competence to
276
Ibid.
277
Ibid.
278
Ibid.,102,103.
279
Ibid.,103.
280
Ibid.
281
Ibid.,103,104.

52 of 79
facilitate the intergovernmental negotiating process, and operate within a law-based,
institutional support system. 282
The Executive of the proposed Union, comprising the Council of States, will be
responsible for the formulation and execution of policy of the Union, and shall be
assisted by the Union Council of Ministers and the Commission.283
The Legislative
process of the Union will also involve the Commission which will make legislative
proposals after securing advice and inputs from relevant inter-state committees and the
line Ministers of Member States.284
The Judicial organs of the Union will be the
national and sub-regional courts of the Member States, whose jurisdiction will be
subject to referral to the CCJ “for determination” of any disputes concerning the
interpretation and application of the Treaty of Union, in all cases where such courts
consider that the decision of the CCJ is necessary to enable them to give a judgment.285
282
Ibid.,104.
283
Ibid.,106.
284
Ibid.,107.
285
Ibid.,112.

53 of 79
• The Possibility of a Banking and Financial Regulatory Framework for the
Proposed Economic and Political Union between the Eastern Caribbean States
(including Barbados) and Trinidad and Tobago
The creation of a single financial space in the ECCB member states and an economic
union in the OECS in the new Draft OECS Treaty have clearly influenced the Draft
Financial Services Regulatory provisions of the CARICOM CSME as examined above.
The proposed Economic and Political Union between the Eastern Caribbean States and
Trinidad and Tobago also embraces such key institutional bodies as a Commission
which plays an integral part in the New OECS Draft Treaty, particularly in the area of
economic governance. In light of the C.L. Financial crisis (see Chapter 4) Trinidad and
Tobago has enacted a new Financial Institutions Act286
and an amendment to the
Central Bank Act287
which updated existing legislation with respect to banking and
financial institutions, including insurance company and co-operative societies’
regulation. Barbados (which is geographically located in the Eastern Caribbean,
although not a member of the OECS) as a member of the CARICOM CSME is a
significant jurisdiction in respect of the banking and financial services industry in the
Eastern Caribbean and the CARICOM region, has enacted legislation288
with respect to
the regulation of commercial banks, merchant banks, trust and finance companies. Both
the Trinidad and Tobago and Barbados governments played a key role in the meeting of
the statutory deficits in the British American Insurance Company Limited (BAICO)
subsidiaries in the OECS.289
286
Trinidad and Tobago Financial Institutions Act 2008, Act No.26 of 2008, found at
http://www.ttparliament.org/legislations/a2008-26.pdf
287
Trinidad and Tobago Central Bank (Amendment) Act, No.4 of 2009, found at
http://www.ttparliament.org/legislations/b2009h07.pdf
288
Barbados Financial Institutions Act, Chapter 324A Financial Institutions, found at
http://www.centralbank.org.bb/WEBCBB.nsf/web_documents/C03B815750FE1F3E042572FC0012E992/$
File/financial_institutions_act.pdf
289
“The Global Financial Crisis: Institutional Management and Regional Opportunities” Remarks at the
Caribbean Law Institute Inaugural Symposium on Current Developments on Caribbean Community Law by
Mr. Ewart Williams, Governor of the Central Bank of Trinidad and Tobago, November 10,2009. Available
at: http://www.central-bank.org.tt/news/speeches/2009/sp091110.pdf

54 of 79
Given the significance of these events and their potential to cause systemic risks to the
financial stability of the sub-region of the Eastern Caribbean, member states of the
OECS, Trinidad and Tobago, and Barbados, all have much at stake, and should
therefore embrace these new sub-regional financial challenges in a new sub-regional
Institutional Framework for the Regulation of Banking and Financial Services. The type
of model for such a framework will be considered in Chapter 5.

55 of 79
4. Regionalism and the Global Financial Crisis
• The Global Financial Crisis, the G 20s response and the vulnerability of small
States in such a Crisis
At the Fifth Summit of The Americas held in Port of Spain United States President
Barack Obama at the Opening Ceremony 290
confirmed the G-20s commitment to set
aside over a trillion dollars to assist those countries which are most vulnerable. To this
end the G 20 is working with the Inter American Development Bank to increase its
current level of lending and to carefully study the needs for recapitalisation for the
future.291
The US president also announced the establishment of a new Micro Finance
Growth Fund for the Hemisphere.292
The G 20 in its final communiqué entitled ‘The Global Plan for Recovery and
Reform’293
held in London pledged to fund and reform the International Financial
Institutions to overcome this present global financial crisis and to prevent future ones.
The G 20 issued a Declaration entitled ‘Strengthening the Financial System’294
in
which the G 20 agreed to establish a new Financial Stability Board (FSB) the successor
to the Financial Stability Forum (FSF) which will collaborate with the IMF to provide
an early warning system of macroeconomic and financial risks and the actions needed
to address them.295
290
Remarks by President Barack Obama at the Opening Ceremony Summit of the Americas, Trinidad and
Tobago, 17th
April 2009, available at:
In order to prevent regulatory arbitrage the IMF and FSB will
http://foreign.gov.tt/media/summit/Microsoft%20Word%20-
%20Official%20Remarks%20of%20US%20President%20Barack%20Obama%20at%20the%20Opening%2
0of%20the%20Fifth%20Summit%20of%20the%20Americas.pdf Accessed 24.06.09.
291
Ibid.
292
Ibid.
293
The Global Plan for Recovery and Reform- G20 Declaration 2 April 2009, available at:
http://www.g20.org/Documents/final-communique.pdf Accessed 30.06.09
294
Declaration on strengthening the financial system, London 2 April 2009, available at:
http://www.g20.org/Documents/Fin_Deps_Fin_Reg_Annex_020409_-_1615_final.pdf Accessed 30.06.09.
295
G 20 Final communiqué n.293 above.

56 of 79
produce guidelines for national authorities to assess whether a financial institution,
market, or an instrument is systemically important.296
The G 20 also stated in its final communiqué that its members will reshape their
regulatory systems so that their authorities are able to identify and take account of
macro-prudential risks and to extend regulation and oversight to all systemically
important financial institutions, instruments and markets, which will include for the first
time systemically important hedge funds.297
The G 20 also considered that large and complex financial institutions will require
particularly careful oversight given their systemic importance and that their national
regulators will have the powers for gathering relevant information on all relevant
financial institutions, markets and instruments in order to access their potential for
failure or severe stress to contribute to systemic risk, which will be done with close
collaboration at the international level in order to achieve as much consistency as
possible across jurisdictions.298
296
Declaration, n.294 above.
297
G 20 Final communiqué n.293 above.
298
Declaration, n.294 above.

57 of 79
• The EU’s response to the Global Financial Crisis
The Global Financial Crisis is said to have been caused by global macro-economic
imbalances and financial innovation together with failures in regulation, supervision
and corporate governance.299
The US subprime mortgage crisis triggered the global financial crisis as it became clear
that many borrowers were unable to meet their debt obligations.300
The lack of
transparency in securitized products led to confusion over the size and location of credit
losses, damaging market confidence.301
The recognition that markets had
underestimated risk caused many financial institutions to sell off their assets and
concerns about liquidity caused banks to hoard cash.302
In the US and the EU the lack of trust and market confidence in financial products and
institutions led to the collapse of large financial entities such as Northern Rock and
Lehmann Brothers.303
The result was that banks stopped lending to each other, with
panic withdrawals by some customers.304
This caused a reduction in market liquidity
resulting in financial institutions trying to source additional funding, with liquidity
problems becoming insolvency problems, which triggered governmental intervention in
providing guarantees and recapitalising financial institutions.305
Initially individual EU member states’ regulators took immediate steps on their own in
an attempt ‘to prop up their own banks and financial institutions’306
299
The Future of EU Financial Regulation and Supervision. House of Lords European Union Committee -
14th
Report of Session 2008-2009. Available at:
which tested the
http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/106/106i.pdf
300
Ibid.
301
Ibid.
302
Ibid.
303
Ibid.
304
Ibid.
305
Ibid.
306
BBC News, ‘Bank crisis strains EU unity’. Available at: http://news.bbc.co.uk/go/pr/fr/-
/2/business/7655086.stm. Accessed Monday 6 October 2008.

58 of 79
ability of the EU Member States to act collectively through their institutional structure
in response to the deepening financial crisis which put the Eurozone into a recession.
The EU Commission took several steps to correct the financial crisis, going so far as to
take disciplinary steps against member states that allowed their budget deficits to
exceed 3 % of their GDP.307
In November 2008 the Commission mandated the de
Larosière Group to study the reform of the European financial system.308
The Group
reported309
on February 25, 2009, recommending 31 measures for regulatory,
supervisory and global repair action. The Commission has since taken initiatives in
areas such as credit rating agencies; insurance; revision of capital requirements under
Basel II; and securitized products.310
The Group also recommended that a harmonized
set of standards be developed to be applied throughout the EU.311
307
BBC News, EU acts as budget deficits bulge: http://news.bbc.co.uk/2/hi/business/7896758.stm, accessed
10/2/2009.
308
EU Commission: Communication for the Spring European Council:
http://ec.europa.eu/commission_barroso/president/pdf/press_20090304_en.pdf accessed 25/9/09.
309
The De Larosiere Report:
http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf accessed 25/9/09.
310
EU Communication, n.308 above.
311
Ibid.

59 of 79
• The Global Financial Crisis hits Home - C.L. Financial, CLICO, CMMB,
British American Insurance and CIB
On the 30th
January 2009 the Central Bank of Trinidad and Tobago (CBTT)312
and the
Ministry of Finance313
issued press releases over the near collapse of the country’s
insurance giant CLICO314
which posed a systemic risk to the entire financial sector of
the country and also regional member states. There were increasing liquidity pressures
within the C.L. Financial Group (the Group), of which CLICO is the flagship insurance
company, including CLICO Investment Bank (CIB), British American Insurance
Company Limited (BAICO) and Caribbean Money Market Brokers Limited
(CMMB).315
The Group controlled over $100 billion TT dollars (US $1 = TT $6.33
approx.) in assets in over 28 companies throughout the Caribbean region and the World,
covering several industry sectors including banking and financial services, energy, real
estate and manufacturing and distribution.316
The four largest financial institutions in
the Group manage assets of over $38 billion TT dollars or 25% of the country’s GDP,
whilst BAICO is one of the main insurance companies in the Eastern Caribbean.317
As a result of this crisis, the Government of Trinidad and Tobago (GOTT) and the
Chairman of C.L. Financial signed an agreement for the provision of a package of
financial support for the troubled financial institutions within the Group, comprising
312
‘The Government of Trinidad and Tobago and the Central Bank of Trinidad and Tobago Move to
Protect Investors’ dated 30th
January 2009 available at http://www.central-
bank.org.tt/news/releases/2009/mr090130-2.pdf, accessed 1st February 2009; and ‘Remarks for the
CIB/CLICO Media Conference by Mr. Ewart Williams, Governor of the Central Bank of Trinidad and
Tobago, dated 30th
January 2009, http://www.central-bank.org.tt/news/speeches/2009/sp090130-2.pdf
accessed 1st February 2009.
313
‘Statements at the CIB/CLICO Media Conference by Mrs. Karen Nunez-Tesheria, Minister of Finance
of Trinidad and Tobago, dated 30th
January 2009, available at http://www.central-
bank.org.tt/news/speeches/2009/sp090130-2.pdf accessed 1st February 2009.
314
Budget Statement 2010 by Mrs. Karen Nunez-Tesheria, Minister of Finance of Trinidad and Tobago,
dated 7th
September 2009,available at http://www.finance.gov.tt/documents/publications/pub985D6E.pdf,
accessed 8th
September 2009.
315
Williams, n. 312 above.
316
bid.
317
Ibid.

G.B.McClean-Dissertation Documents

G.B.McClean-Dissertation Documents

Recommended

Recommended

More Related Content

What's hot

What's hot (7)

Viewers also liked

Viewers also liked (8)

Similar to G.B.McClean-Dissertation Documents

Similar to G.B.McClean-Dissertation Documents (20)

G.B.McClean-Dissertation Documents