FSA Short-Sale Ban; CSA Revamps Exec Pay; ERM; More

British financial firms face a tougher regulatory environment after Prime Minister Gordon Brown pledged to “clean up” business practices in the City of London.

Speaking in the days after his government had to engineer a shotgun wedding between two of the country’s largest banks— Lloyds TSB and HBOS—Brown said he would introduce new laws and regulations to restore faith in the financial sector.

The first regulatory salvo was a ban on the practice of short-selling shares, whereby speculators trade in the hope that the price of a company’s shares will fall. Short selling has been blamed for a sudden collapse in the value of HBOS shares, which destroyed market confidence in the bank’s prospects and forced it into the arms of Lloyds TSB.

The Financial Services Authority slapped an immediate ban on traders taking new short positions and said that starting Sept. 23 any trader still short in a stock would have to disclose his position to the markets. The ban only lasts for 120 days and is limited to shares of financial companies only, but the FSA said it could expand it to other sectors if necessary.

Meanwhile, the regulator plans to produce a comprehensive review of its short selling rules, which it will publish in January. “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets,” FSA chief executive Hector Sants said in a statement.

Other regulations said to be in the pipeline include measures to make banks disclose their debt exposures to the FSA.

IASB Told to Put Investors First

The International Accounting Standards Board should put investor needs first when producing reporting standards, according to the Association of Investment Companies.

The U.K.-based body, which represents investment companies, recently published a statement to IASB, saying that a focus on people who actually use financial statements would make those statements “likely to contain confusing or unnecessary information.”

The AIC said IASB should make sure its standards are “targeted on identified problems, proportionate in relation to the perceived problem [and] accountable to key stakeholders.” It also wanted to see the IASB engage in more evidence-based policy-making, including “robust cost-benefit analysis.”

“One-size-fits-all international accounting standards have contributed to longer financial statements and more complex disclosures,” said Daniel Godfrey, director general of the AIC. Not all of this information is relevant, clear, or helpful, he added.

The International Accounting Standards Committee, which governs IASB, is reviewing its constitution, “but its initial proposals simply overlay existing structures with new arrangements,” Godfrey said. “Only a shift away from ‘more of the same’ will ensure that this opportunity to enhance the standing of the IASB and international accounting standards, as well as increasing investor appetite for their adoption, will not be lost.”

Apart from changing IASC’s formal objectives, the AIC wants it to ensure that a majority of its trustees come from an investment background. It also wants more investor input into the people-appointed trustees.

Canada Adds Disclosures for Board Pay

Shareholders in Canadian companies will get more information about executive pay under new rules adopted by the Canadian Securities Administrators (CSA), an umbrella group of the country’s provincial and territorial securities regulators.

The move adds Canada’s name to the list of countries introducing tougher disclosure rules on board-level pay.

Under the new rules, the summary compensation tables that companies already publish will have to include all forms of cash and non-cash remuneration received by directors, and a figure for the total amount. Companies will also have to disclose the nature and value of all termination benefits they would have to pay to top executives if the company is taken over.

The CSA said the measures, which it proposed in March last year, would improve disclosure and help investors to understand how decisions about executive compensation are made. It also said they would provide “insight into executive compensation as a key aspect of the overall stewardship and governance of a reporting issuer.”

To implement the changes the CSA is adopting Form 51-102F6 Statement of Executive Compensation and amending National Instrument 51-102 Continuous Disclosure Obligations. Both take effect for years ending on or after December 31, 2008.

The measures implement some, but not all, of the pay reforms called for by the Canadian Coalition of Good Governance, which criticized Canadian executive pay practices earlier this year.

Insurers Cry Foul on Auditor Liability Lockout

The CEA, the European insurance and reinsurance federation, has criticized the European Parliament for not letting it participate in an important hearing on plans to limit auditor liability.

The trade body complained that it was not allowed to speak when the Parliament’s Legal Affairs Committee took evidence on the European Union’s new 8th Company Law Directive, which recommends limiting auditor liability by 2010.

Representatives from auditing firms were invited to address the hearing, but the perspective of investors and the insurance industry was not heard, the CEA complained.

Koller

“It is extremely regrettable that the Legal Affairs Committee of the European Parliament chose not to hear all sides of the argument on the issue of capping auditors’ liability,” said Michaela Koller, director general of the CEA. “The exclusion of experts with different points of view has prevented the committee from hearing a balanced debate on this issue.”

Koller said it was “astonishing” that a move to cap liability—which she said only audit firms supported—was being brought forward in Parliament without a fair representation of the interests at stake.

The CEA opposes audit liability caps. Such a move would not improve the insurability of large auditing firms, it says, and would lead potential claimants to seek damages via directors and officers insurance or errors and omissions insurance. That would push up the costs of such insurance or reduce their availability, it argues.

The committee was meeting to gather views for a report on liability capping written by one of its members, Bert Doorn. Doorn said there was limited time available and “Regretfully, this time restriction did not allow us to have active contributions from all possible stakeholders.” The absence of the CEA at the hearing did not mean that views from the insurance sector would be disregarded in his report, he said.

Credit Crunch Puts New Focus on ERM

The financial services firms left standing after the current bout of market turmoil will have to rethink the ways in which they manage risk, a new report says.

Many banks have talked-up their ability to manage market and wider operational risks since the publication of the Basel II capital accord in 2004, but a study from the Economist Intelligence Unit suggests they are not walking the walk.

Only 18 percent of the international bankers that responded to its survey said their organization had managed to roll out an Enterprise Risk Management strategy. And 59 percent said the credit crunch was forcing them to think harder about their risk-management practices.

Partly, that’s at the behest of regulators: Some 72 percent of the bankers said their regulators were putting them under pressure to implement an ERM strategy. Respondents, however, were not convinced that ERM would make regulatory compliance any easier.