The global powers have issued a study about regulatory approaches to financial supervision… the Group of 30 is comprised of “very senior” representatives of public and private sectors and academia…
The Four Approaches to Supervision
The G30 report assesses the four approaches to financial supervision currently employed across the globe (institutional, functional, integrated, and twin peaks). It describes the key design issues of each supervisory model, illustrates how each has been implemented in practice, and assesses the strengths and weaknesses of each approach.
Institutional >>> The institutional approach is one in which a firm’s legal status (for example, a bank, broker-dealer, or insurance company) determines which regulator is tasked with overseeing its activity from both a safety and soundness and a business conduct perspective. The jurisdictions reviewed that use the institutional approach are China, Hong Kong, and Mexico.
Functional >>> The functional approach is one in which supervisory oversight is determined by the business that is being transacted by the entity, without regard to its legal status. Each type of business may have its own functional regulator. The countries reviewed that use the Functional Approach are Brazil, France, Italy, and Spain.
Integrated >>> The integrated approach is one in which a single universal regulator conducts both safety and soundness oversight as well as conduct-of-business regulation for all the sectors of financial services business. The countries reviewed that use this approach are: Canada, Germany, Japan, Qatar, Singapore, Switzerland, and the United Kingdom.
Twin Peaks >>> The twin peaks approach, a form of regulation by objective, is one in which there is a separation of regulatory functions between two regulators: one that performs the safety and soundness supervision function and the other that focuses on conduct-of-business regulation. The two countries that use the Twin Peaks Approach are Australia and the Netherlands. A number of other jurisdictions are engaged in debates over the adopting this type of approach, including Spain, Italy, and France.
An Exception
The U.S. structure is functional with institutional aspects, with the added complexity of a number of state level agencies and actors. The recent U.S. Treasury Blueprint recognizes the current weaknesses and advocates a modified Twin Peaks Approach as a long-term goal.
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