On Tuesday, March 18, 2014, Chris Brummer, C. Boyden Gray fellow with the Council’s Global Business; Economics Program, will testify in front of the European Parliament’s Committee on Economic and Monetary Affairs. As an expert on international financial regulation, Chris will provide his thoughts on the extent to which financial services should be included in TTIP. For agenda of the hearing click here. And to view a live streaming of the meeting click here. See Chris’s full written testimony below.

“Before starting, I would like to thank members of the Committee on Economic and Monetary Affairs for the extraordinary opportunity and honor to share my thoughts with you today.

The topic of this hearing is the TTIP and financial services regulation. It is a complicated subject, in no small part because the appeal of any agreement depends on its terms. I have frequently acknowledged the potential value of such an agreement for creating a robust framework for EU-US regulatory cooperation. Indeed, for all of the remarkable success in reforming the global regulatory system since the crisis, both regulatory superpowers have occasionally clashed—in displays of less than overwhelming diplomacy—in areas as diverse as derivatives regulation, banking oversight and supervision, accounting and insurance. An upgraded font for transatlantic cooperation holds, as a result, considerable appeal.

As TTIP negotiations advance, however, I believe it is worth touching upon the pitfalls that could upend talks as they relate to financial services, and perhaps doom transatlantic trade talks more generally. Most of us here today know all too well that the securing of a new transatlantic partnership remains far from assured. So it is incumbent upon both sides to maximize the likelihood of success by ensuring that the terms of any proposal are consonant with the prudential and political demands of both jurisdictions. Thus as policymakers here in Brussels consider what next steps they should take in their talks, I would like to make three brief suggestions as to what the European Union should not do in its negotiations with the United States.

First, the framing and focus of any TTIP negotiations, at least with respect to financial services, should not be on the traditional terms of “market access.” The text and preamble of any prospective financial services chapter should avoid this as well.  There are already a variety of instruments available for the regulation of market access for financial services.  Moreover, market access is already available in both jurisdictions.  Instead, the terms of any negotiations should focus on the needs of the regulatory relationship between the European Union and the United States.  Emphasis should be on the core objectives and concerns of the transatlantic regulatory community:  information sharing, enforcement cooperation, investor protection, and, perhaps most important, financial stability.  This would help reduce fears of watering down the hard-fought reforms in Dodd-Frank and in various European legislative instruments.  It would also, critically, keep the focus of the talks on the issue at hand—increasing the interoperability, efficiency and effectiveness of financial reforms.

Second, the TTIP should not be used to introduce any substantive reforms or change existing domestic laws via new international obligations.  As of this writing, the vast bulk of international financial law has been articulated as explicitly informal nonbinding standards. As a result, there has been some interest, especially in light of recent transatlantic disputes, in converting the “soft law” character of international rules into binding international legal obligations via an instrument like the TTIP.  I fear that the reasoning behind such proposals is, however, shortsighted.  Markets do not change in a matter of days, minutes or seconds, but instead in milliseconds and picoseconds.  The framework for supervising such markets must necessarily retain considerable flexibility in order to deal with ever-changing market circumstances.  Creating formal legal obligations for countries supervising cross-border banks and financial institutions would only hamper regulators’ supervisory efforts—especially as market actors devise new products and market strategies.  It would also ignite fears that countries would have to unwind a half decade of work and renegotiate both national and international reforms—from Dodd-Frank in the United States to the EU’s single rulebook for banks.

Finally, the TTIP should be extremely cautious, and even hesitant, about introducing any formalized dispute resolution regime.  Dispute resolution, at least as it is envisaged by some advocates, pursues the logic of a classic trade agreement, and would allow adjudicatory panels to deliver binding decisions as to the appropriateness of either EU or U.S. regulatory policy.  The problem is that in making their decisions, a panel would need to either rule according to an existing body of international law (leading to the hazards outlined above) or to make decisions that have the effect of converting existing informal operations, that were negotiated as such, into binding obligations. Either route poses serious legal and political challenges, and would heighten concerns that a dispute resolution process insulated from political and regulatory oversight would end up undermining confidence in financial markets, or would unjustifiably elevate financial market liberalization over prudential regulation.  Cross-border trade talks would likely unravel.

Instead, emphasis should be placed on enhancing the framework for transatlantic cooperation and moving to a more effective system of cross-border cooperation. Here, TTIP could play a significant part. For example, virtually everyone agrees that traditional substituted compliance and mutual recognition programs have not typically spoken to a regulatory context in which not one but two or more, or indeed nearly all authorities are seeking to upgrade their financial systems.  This presents a number of novel challenges, particularly where countries have a range of different goals or even varying intensities of policy preferences.  For instance, one jurisdiction can be looking to tackle banker compensation while the other may focus more on derivatives; yet, due to their different policy goals and intensities they may accuse the other of being “soft.”

It would thus be wise for the evolving tools and mechanisms of cross-border diplomacy, like the TTIP, to acknowledge this challenge and begin to establish priorities and benchmarks to support a synchronized approach towards tackling different issues—to quite literally keep regulators and firms on the same page at the same time as they tackle joint concerns.  From this perspective, administrative processes and priorities could be better coordinated and integrated into substituted compliance mechanisms via TTIP.  It could also embrace the values of consistency and regulatory interoperability by establishing a dynamic process of information sharing in times of normalcy and crisis.  Clearly, declaring that U.S. and EU regulatory systems are equivalent vis-à-vis each other is just one step on the long road of cooperation.  Regulators must now build on current reforms and international best practices to develop new approaches for efficiently navigating conflicts of laws and operationalizing as efficiently as possible the joint supervision of cross-border financial activities. 

Meanwhile, beyond TTIP, though along similar lines, the Financial Markets Regulatory Dialogue, the main meeting of EU and U.S. regulators, should be revived alongside G-20 meetings of treasury officials and central bankers.  Regulators should be at the table when big market-supervisory decisions are made so that they can understand their role and the expectations of other parts of the U.S. government.  This would also help with international consistency insofar as EU and U.S. regulators could be encouraged to present joint solutions and reforms for wider international consideration at the Financial Stability Board, instead of litigating them there after conflicts arise.

These are of course very modest suggestions.  And longtime observers of financial regulation will likely say that process can only do so much.  It does not remove the need for diplomacy—especially where national interests diverge sharply.  But process matters.  To the extent to which it can grease the wheels of international economic cooperation, it should be embraced.  Furthermore, economic integration and cooperation, as the European Union in particular should well understand, is something that can only be achieved patiently, and over the long-term.  A big-bang approach to transatlantic financial regulation is neither politically feasible, nor a necessarily wise objective, as many of the most important and influential countries are still devising their own positions on regulatory policy.  The priority of the TTIP should instead be to set the stage for the future and create the conditions for trust building and ever deeper, more sustainable transatlantic cooperation in the new century.”

Related Experts: Chris Brummer