CENTER OF EXCELLENCE IN FINANCE · Mr. Rade Jovanovic Central Bank of Bosnia & Herzegovina [email protected] Bulgaria Mr. Milen Savov Ministry of Finance [email protected] Croatia

How to Design Better Financial Regulation – Regulatory Impact Assessment (RIA): A Key Policy Analysis Tool –

With Technical Support from:

Agenda Ljubljana

29 September – 1 October 2008

Seminar Objective: Participants will learn to execute in their working context the following:

• Application of law and economics approach to policy design; • Organization of the regulatory design process along the prevailing EU practice; • Involvement of stakeholders for qualitative/quantitative Impact Assessment; • Development of RIA/Better Regulation Units within respective regulators.

Monday September 29, 2008 Session Objective: Participants will learn several aspects of the RIA process: assessment techniques methodologies and steps, and several practical applications.

Chair: Mr. Luigi Passamonti, Founder and Head, World Bank’s Convergence Program

8:30 – 8:45 Registration of participants 8:45 – 9:00 Introduction and Context

- Welcome to Participants by the CEF Management and House-keeping information - Introduction of Participants

9:00 – 10:30 Regulatory Impact Assessment: The EU Financial Regulators ApproachMr. Stephen Dickinson, Senior Regulator, UK Financial Services Authority; Mr.Thorsten Freihube, BaFin Germany Guidelines prepared by: Committee of European Banking Supervisors, Committee of European Securities Regulators, Committee of European Insurance and Occupational Pensions Supervisors

10:30 – 11.00 Break

11:00 – 12:30 Regulatory Impact Assessment: European Commission DGMarkt Case StudiesMr. Sebastijan Hrovatin, European Commission, DG Internal Market and Services, Financial Market Infrastructure Unit

12:30 – 13.00 Discussion, feedback and interventions 13:00 – 14:00 Lunch Break 14:00 – 14.40 Regulatory Impact Assessment: A Case Study by a Market Participant Mr. Riccardo Brogi, Institutional and Regulatory Strategic Advisory, Unicredit Group Italy 14:45– 15:15 Mortgage Backed Bonds: Cooperation between banks and regulators at establishing

optimal legal framework (oral presentation) Mr. Rok Rozman, Legal Department, Unicredit Group Slovenia

15:15 – 15.45 Break 15:45 – 16.30 Market Failure Analysis: The Underpinning of Financial Regulation Design Video address by Mr. Paul Gower, Oxera Consulting, London 16:30- 17:30 How Does Economic Analysis Help Regulatory Design – The FSA Experience

Mr. Stephen Dickinson, Senior Regulator, UK Financial Services Authority 17:30– 17:45 Wrap up and end of session.

Tuesday September 30, 2008 Session Objective: Participants will be exposed to RIA case studies with a specific South-East Europe focus.

Chair: Mr. Stephen Dickinson, Senior Regulator, UK Financial Services Authority

9:00 – 10:30 Albania: How to regulate bank lending risks to un-hedged borrowers

Mrs. Ermira Curri /Mr. Gerond Ziu, Bank of Albania Romania: Restrictions on credit granted to individualsMr. Emanuel Constantin, Romanian Ministry of Finance

10:30 – 11:00 Break

11:00 – 12:00 Bulgaria: Risk Management for Investment Intermediaries

Mr. Ivo Stankov, Senior Expert, Bulgarian Stock Exchange

12:00 – 12:30 Discussion, feedback and interventions 12:30 – 14:00 Lunch break

14:00 – 15:00 Class practice session of the Bulgaria RIA case

Facilitator: Mr. Ivo Stankov, Senior Expert, Bulgarian Stock Exchange 15:00 – 15:30 Break

15:30 – 17:00 Class practice session of the Bulgaria RIA Case (cont’d)

Facilitator: Mr. Ivo Stankov, Senior Expert, Bulgarian Stock Exchange

17:00 – 17:30 Preparation for Day 3 (Classroom will be briefed on the RIA simulation of the following day based on the Albania and Romania RIA cases)

17.30 End of session.

Wednesday October 01, 2008

Session Objective: Participants will practice a live RIA exercise on specific policy initiatives really implemented

Chair: Ms. Ramona Bratu, Convergence Program, SPI Regional Operations Director

Participants will practice the Impact Assessment process, step by step, of the case studies illustrated the previous day, using the EU Guidelines illustrated by the FSA/BaFin representative in the first day. Participants will be divided into working groups (WGs), each supported by the respective case presenter. The case presenter, acting as facilitator, will provide assistance and guidance throughout the analytical exercise and will ensure that the plenary discussion takes place in a smooth manner.

9:00 – 09:30 The Institutional Context for RIA implementation:

Lessons from The World Bank’s experience in Moldova Mr. Victor Burunsus, Private Sector Development Specialist, The World Bank Chisinau Office

9:30 – 10:00 Preparation for Working Group activities of the Albania and Romania Cases General Coordinator: Mr. Stephen Dickinson, Senior Regulator, UK Financial Services Authority Working Groups Facilitators: Mr. Emanuel Constantin, Public Expert, Romanian Ministry of Finance Ms. Ermira Curri, Chief of Regulations, Bank of Albania Mr. Ivo Stankov, Senior Expert, Bulgarian Stock Exchange Mr. Gerond Ziu, Chief of Inspection Office, Bank of Albania

10:00 – 14:00 Working Group Analytical RIA work Break in between

14:00 – 15:00 Lunch break 15:00 – 16:30 Plenary discussion on RIA exercises produced by Working Groups Each WG spokesperson will present the RIA analysis using the EU IA Guidelines. Plenary

discussion will follow. WG1 RIA Exercise (Albania case) WG2 RIA Exercise (Romania case)

16:30 – 17:00 Workshop evaluation and delivery of certificates

17.00 End of session.

How to Design Better Financial RegulationHow to Design Better Financial Regulation

List of Participants

Country Title Name Last name Institution E-mailAlbania Ms. Aneta Veliu Ministry of Finance [email protected]

Albania Ms. Elona Bollano Convergence Program The World Bank

[email protected]

Bosnia & Herzegovina Mr. Rade Jovanovic Central Bank of Bosnia &

[email protected]

Bulgaria Mr. Milen Savov Ministry of Finance [email protected]

Croatia Ms. Iva Kopecki Croatian National Bank [email protected]

Croatia Mr. Ivan Lazeta Ministry of Finance [email protected]

Kosovo Ms. Mimoza Berisha Ministry of Energy and Mining [email protected]

Kosovo Mr. Burim Gashi UNMIK Custom Service [email protected]

Kosovo Mr. Dugagjin Krasniqi Ministry of Economy and Finance [email protected]

Kosovo Ms. Ajkuna Shaqiri Ministry of Energy and Mining [email protected]

Kosovo Mr. Ibrahim Xhaka UNMIK Custom Service [email protected]

Macedonia Mr. Agron Medjiti Ministry of Finance [email protected]

Macedonia Mr. Daniel Stojanovski Ministry of Finance [email protected]

Moldova Ms. Natalia Agapii Ministry of Finance [email protected]

Moldova Mr. Victor Burunsus The World Bank Group [email protected]

Moldova Mr. Eugeniu Cozmulici Ministry of Finance [email protected]

Moldova Ms. Veronica Cuhal National Commission of Financial Market

[email protected]

Moldova Mr. Sorin Hadarca Government of Moldova [email protected]

Moldova Ms. Felicia Maciac National Commission of Financial Market

[email protected]

Moldova Ms. Svetlana Popova National Bank of Moldova [email protected]

Montenegro Ms. Mirjana Ivezic Central Bank of Montenegro [email protected]

Romania Mr. Paul Maris Ministry of Economy and Finance [email protected]

Romania Ms. Laura Eliza Roman Ministry of Economy and Finance [email protected]

Slovenia Mr. Tomaz Rotovnik Bank of Slovenia [email protected]

How to Design Better Financial RegulationHow to Design Better Financial Regulation

Speaker Information (Alphabetical order)

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Ramona BRATU

SPI Regional Operations Director

Bringing to bear a long managerial experience in various Romanian banks (Unicredit Tiriac, Eximbank, Commercial Bank of Greece, Daewoo Bank and Dacia Felix Bank), Ramona has covered a variety of banking areas such as individual and corporate lending, trade finance, foreign loans and treasury. She was part of SPI Romania Secretariat for 2 years, as SPI Director for Bank Products and Services. Ramona's distinctive contribution as a member of SPI Romania Secretariat was her understanding of how laws and regulations affect the business processes and how the delivery of bank products and services could be improved through changes in regulations. Ramona is using her banking background and her experience with SPI Romania in coordinating the day-to-day activities of SPI Albania and in promoting the establishment of similar initiatives in the Adriatic Region and in other Central and East-European countries. After graduating from Academy of Economic Studies, Bucharest, Ramona got a PhD in Finance with the same institution.

Riccardo BROGI Senior Regulatory Economist, Unicredit Bank Group, Italy

Riccardo Brogi after having worked for two years with Convergence Programme moved onto a Regulatory career at Unicredit Group in Milan. His experience in designing Regulatory Impact Assessment analyses at the Italian Banking Association where he applied Law and Economics methodology to all policy interventions he worked on. His main fields were as follows: insolvency law, real estate enforcement procedures, positive information sharing and credit bureau with privacy implications, corporate governance. He taught Economics of Financial Intermediaries as assistant at LUISS University in Rome. Riccardo holds a degree in Economics from the University of Florence and attended Microeconomics Summer course at London School of Economics and Political Science.

Emanuel CONSTANTIN

Public Manager, Public Policies Unit, Ministry of Economy and Finance, Romania

Emanuel Constantin has a BA in Economics, a MA in American Studies from Babes-Bolyai University, Cluj-Napoca and a MA in International Relations from Kent University, UK.

Emanuel joined the Ministry of Economy and Finance in 2006 where he worked in the Central Finance and Contracting Unit specializing in PHARE project management.

At the end of 2006 Emanuel has joined the Public Policies Unit, a newly created team at that time whose aim has been to promote public policies, to assess and evaluate these public policies.

Ermira CURRI

Chief of Regulations, Interpretation and Standards Unit, Supervision Department, Bank of Albania

Ermira CURRI has a Bachelor’s Degree in Accounting/Finance, Economics Faculty, Finance Branch, University of Tirana, Albania (1986 – 1990) and an MBA degree, University of Nebraska, Nebraska and University of Tirana, Economics Faculty, Tirana (1998 – 2000). Ermira joined the Bank of Albania in January 1991, where she worked firstly in Accounting Department (1991-1995), International Relations Department (1995 – 1998), Public Relations Department (1998-2000), Supervision Department, Off-Site Unit (2000- 2006) and now she is dealing with Supervisory regulatory framework establishment, improvement and strengthening of the prudential regulations/guidelines governing the financial intermediaries according to the EU directives, international standards and recommendations of the Basle Committee as well as adopting the best practices in this field. Recently, she also highly contributed to the RIA process developed on the supervisory draft regulations under the SPI Albania (2008).

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Stephen DICKINSON

UK Financial Services Authority, Senior Regulator Stephen Dickinson has a BA (Hons) 1st Class in Politics, Philosophy and Economics and an MPhil in Economics both from Oxford University where he attended Pembroke College. Stephen joined the Royal Bank of Scotland in January 1992 where he worked in the Economics Office specialising in country risk analysis. In 2001 Stephen was seconded to the Regulatory Impact Unit (now called the Better Regulation Executive) of the Cabinet Office in UK central government where Stephen helped to set up a Business Regulation Team which aim was to go out to talk to businesses and identify and then help government departments address unnecessary regulatory burdens. On completion of the secondment in 2004 he left RBS to work in HM Treasury on an independent review of the actuarial profession before joining the FSA in June 2005 where Stephen works as an advisor to policy makers, ensuring that they use the disciplines of impact assessment appropriately. Latterly Stephen has also taken on a role dedicated to promoting these disciplines within financial regulators across Europe.

Dr. Thorsten FREIHUBE Senior Advisor, Risk Analysis and Financial Market Studies, BaFin Thorsten is an official expert witness (public appointed and sworn to impartiality from Chamber of Commerce in Frankfurt). He actually works as senior advisor in the BaFin department for risk analysis and financial market studies. Thorsten has a Master and Phd in Business Administration from Frankfurt University. There he worked as a research fellow at the „Chair of Corporate Finance“and conducted a project of the German Research Foundation “DFG”. Beside his studies he worked as a Banker at BHF-BANK (Bond Trading and Investment Research) and was assigned for several consulting and expert mandates (e.g. Expert in the EU Phare Project „Capital Market Legislation & Securities Commission – Legislation and Institutional Building - Czech Republic.) Since 1998 he composes expertises and approval certificates as an expert witness for financial services. Right before Thorsten joined BaFin he was the advisor of the management board and head of corporate development at Baaderbank.

Paul GOWER

Senior Adviser, Oxera Paul specialises in economics issues relating to financial regulation, company law, corporate governance and accounting reform. From 2004 until 2006, he was the Economic Adviser to the DTI’s Corporate Law and Governance Directorate. He also provided economic input into regulatory impact assessments of policy initiatives and liaised with key stakeholders in both the public and private sectors. In addition, he was involved with a number of Better Regulation initiatives and was a member of a cross-Whitehall economists’ group developing methodologies for the assessment of the cumulative impact of regulation. Between 2000 and 2003, he was an analyst for the Regulatory Strategy and Risk Division of the Financial Services Authority, assessing international developments in financial regulation and their implications for the UK. Paul has also lectured in economics, business analysis and financial regulation for the University of Brighton Business School and University of Sussex.

Sebastijan HROVATIN

European Commission, DG Internal Market and Services, Financial Market Infrastructure Unit Sebastijan Hrovatin (Ljubljana, Slovenia 1976) holds a first degree in economics from the University of Ljubljana (1999) and an MSc in Finance and Economics from the London School of Economics and Political Science (2000). He joined the “Financial Market Infrastructure” Unit on September 1st 2005. Prior to joining the Unit he worked for four years at Fiat (Italy), first as an economist and then as chief economist.

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Luigi PASSAMONTI

Founder and Head of Convergence Program, The World Bank Luigi Passamonti launched the pioneering public-private “Convergence Program” because he realized that authorities and bankers could achieve a great deal in terms of modernizing financial systems in many emerging and transition economies by joining forces with the help of an “honest broker” with a gift for analysis and compromise. Regulatory Impact Assessment is the “working language” of public-private design of regulatory changes. With graduate studies in Economics in Brussels and Oxford, the “Convergence Program” is the fruit of a 25-year career in banking, strategy consulting, emerging market investments and public policy.

Rok ROZMAN Head of Legal Department, Unicredit Group, Slovenia

Ivo STANKOV Market Surveillance Directorate, Bulgarian Stock Exchange Mr. Ivo Stankov has a Masters Degree in International Finance from D. Tsenov Academy of Economics in Svishtov, Bulgaria and is currently a PhD student at the University of National and World Economy – Sofia. He joined the Bulgarian State Securities and Exchanges Commission in January 2003 (re-organized in the Financial Supervision Commission in March 2003), where he was an expert in the Financial Markets Department until September 2005. There he specialized in onsite inspections and remote supervision. In October 2005 Mr. Stankov joined the Bulgarian Stock Exchange - Sofia. He works in Market Surveillance Directorate and his responsibilities are implementing new surveillance rules and regulations, preventing market abuse, amending the BSE-Sofia rules in accordance with the new XETRA trading platform, conducting onsite and remote inspections. Mr. Stankov took an active part in implementing the new trading system XETRA on the BSE-Sofia and creating the new BSE Rules and Regulations according to the implementation of MiFID, MAD and Transparency Directive. His fields of interest are Market Abuse Prevention, Regulatory Impact Assessment and International Cross-listing.

Gerond ZIU

Supervision Department, Chief of Inspection Office, Bank of Albania

Gerond Ziu holds a Bachelor’s Degree in Finance Branch, Banking Profile at Faculty of Economy, University of Tirana, Albania. He holds a Master of Science degree in Finance and Accounting, at the University of Umeå, Sweden. Gerond joined Bank of Albania in December 2002 as an on-site inspector, Supervision Department. From September 2007, he holds the position of Chief of Inspection Office. His main duties in this position consist of organizing working groups for supervising licensed institutions, assess individual performance of on-site inspectors as per duties handled, filter all the documents produced by the office, participate in working groups for different supervisory issues such examination report, regulation compilation, manual of examination writing, etc. Previously he has worked for two years in credit section at National Commercial Bank and for three years as loan officer at National Bank of Greece, Tirana Branch. His contribution to RIA process in Albania, in the phase of its first implementation as a pilot project, was as the leader of the working group for implementing regulatory changes in Credit Risk Administration, specifically for unhedged borrowing.

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1

3L3 Impact AssessmentGuidelines

Part 1

Stephen Dickinson (FSA)29 September 2008

2

Content of the presentation

1. Pillars of IA and advantages of IA

2. Overview of the 3L3 IA Guidelines.

3. Questions and answers.

3

1.1. The four pillars of an IA

1. Market/regulatory failure analysis (MFA/RFA)

2. Identification and analysis of policy options

3. Public consultation

4. Post-implementation policy review (as appropriate)

4

1.2. Advantages of an IA

1. Better quality of policy making2. More transparent policy making3. Better communication with regulated firms4. Enhanced credibility5. Saves time in the long run as reduced risk of

regulatory failure6. Compliance with legal obligations (not true for all

countries)7. Practice in line with EU policy & OECD Guidelines

5

2. IA Guidelines overview

1. The Guidelines document2. IA in eight steps3. IA summary tables 4. Key features of IA5. Working methods6. IA Reporting

6

2.1. The IA Guidelines document

• The Guidelines may seem long at first,but: core of the document only ~25 pages;

• Gentle introduction: background information, IA in eight steps (p. 9 and 10), screening IA - full IA (p.14);

• Ready-to-use summary tables (p. 8 and 9);

• The rest of the document: ready-to-use list of questions, Excel tool, references.

7

2.2. IA in eight steps

1. Identifying the problem, i.e. the market orregulatory failure, and the threat it poses to one or several regulatory objectives.

2. Stating the regulatory policy objective andlinking it to the high-level regulatoryobjectives.

3. Developing several policy options to achieve theregulatory policy objective.

8

2.2. IA in eight steps

4. Analysing the positive and negative impacts of each policy option.

5. Comparing options through the net impact and identification of the preferred policy option(s).

6. Consulting on the draft policy proposal, which includes sections reporting on IA or an IA report.

9

2.2. IA in eight steps

7. Publishing the responses received and givingpublic feedback.

8. Once it is implemented and enforced, keeping the policy under review as appropriate.

10

2.3. IA Summary TablesProblem & the reg./sup. response

Table 1: MFA/RFATable 2: Regulatory/supervisory policy response

Detailed analysis of the reg./sup. responseTable 3: Benefits and costsTable 4: Overall net effectTable 5: Overall net effect when strong uncertainty

Consultation & reviewTable 6: Consultation, feedback, review date

11

2.2. IA in eight stepsTHE PROBLEMTHE PROBLEM

What is the problem? Is the issue identified likely to have an EU-wide impact on market participants/end users and on the smooth functioning of the single market?

What evidence shows that the problem is significant?

Is the problem due to market failure? What is the market failure?

[Information about market failure analysis can be found in section 1.3. of the Guidelines]

Is the problem due to regulatory/supervisory failure? What is the regulatory/supervisory failure?

[Information about regulatory failures can be found in section 1.4. of the Guidelines]

What regulatory objective is put at risk by the problem? [Information about regulatory objectives can be found in section 1.5 of the Guidelines]

Is it or is it not likely that the problem will be solved over time without a new regulatory policy? Give reasons

Is the case for regulatory/supervisory action justified?

12

REGULATORY POLICY RESPONSEREGULATORY POLICY RESPONSEPolicy option 1

Specific / Operational objective [Information about operational objectives can be found in section 1.8. of the Guidelines]

How would achieving the objective alleviate/eliminate the problem?Policy option 2Specific / Operational objectiveHow would achieving the objective alleviate/eliminate the problem?Policy option 3Specific / Operational objectiveHow would achieving the objective alleviate/eliminate the problem?

Which policy option is the preferred one? Explain briefly.

13

IMPACT ASSESSMENT OF EACH PROPOSED POLICYIMPACT ASSESSMENT OF EACH PROPOSED POLICYBENEFITS & COSTS

OPTION-1 etc.QUALITATIVE DESCRIPTION

QUANTITATIVE DESCRIPTION

MONETARY VALUE

Benefits

Direct costs

Compliance costs

Quantity of products offered

Quality of products offered

Variety of products offered

Efficiency of competition

14

IMPACT ASSESSMENT OF PROPOSED POLICIESIMPACT ASSESSMENT OF PROPOSED POLICIESPOLICY

OPTIONS SHORT TERM LONG TERM

PositiveEffects

NegativeEffects

NetEffect

PositiveEffects

NegativeEffects

NetEffect

Option-1

Option-2

Option-3

OVERALL NET EFFECT

15

IMPACT ASSESSMENT OF EACH PROPOSED POLICYIMPACT ASSESSMENT OF EACH PROPOSED POLICY

OPTION-1 etc. POLICY EFFECT LIKELIHOOD NET BENEFIT

Scenario - 1

Scenario - 2

Scenario – 3

16

CONSULTATION & REVIEWCONSULTATION & REVIEW

Consultation period Start: End:

Participation (low, medium, high)

Summary of reactions received

Feedback publication date

Did the feedback result in a policy change? Explain briefly.

Proposed review date (when appropriate)

17

2.4. Key features of IA

1. Proportionality and flexibility

2. Screening IA and Full IA

3. When to start an IA

4. Qualitative and/or quantitative IA

18

2.4.1. Proportionality & flexibility

• Time constraints• Resource constraints• Significant structural and cost implications of policy

proposals

⇒ IA should be proportionate to the problem at hand and the policy chosen

⇒ Distinction: Screening IA and Full IA

19

2.4.2. Screening IA and full IA

• Screening IA• Quick IA, i.e. steps 1-5 on a principles basis• 2 possible uses: before & after the mandate by an

L3 Committee• Tool to assess the need for a Full IA =>

assessment whether a full IA is required or not

• Full IA• After the mandate when Screening IA not enough• May extend the Screening IA modestly or in a

substantive way

20

2.4.2. Screening IA & Full IA

• IA need not be detailed, costly and time consuming

• Much of the time a Screening IA is sufficient

• Sometimes, but rarely, no IA is needed

• In some cases, a Full IA should be carried out

21

2.4.2. Process 1 - 1 consultation

22

2.4.2. Process 2 – 2 consultations

23

2.4.3. When to start

• Wrong approach: use of IA once the policy decisions have already been made, i.e. at the end of the policy making process

• Correct approach: using IA right from the start of the policy making process, when policy options are still open

=> IA is a tool to help with the final policy decision(and neither a means to justify the decision ex post nor a substitute for decision making)

24

2.4.4. Quantitative and qualitative IA

• IA is typically qualitative in nature • Sometimes it is possible and reasonable to

complement the qualitative analysis by a quantitative analysis

• Spectrum of quantitative analysis: quick & dirty to lengthy & costly

• Is a quantitative evaluation of the negative and positive impacts of regulatory / supervisory policies possible? Costs easier to evaluate than benefits. Aim: obtaining a positive net benefit. Often no precise numbers are needed, i.e. enough to over-evaluate the costs and under-evaluate the benefits

25

2.5. Working methods

• The Committee expert group chairmen could ensure that members of the policy expert group are assigned to conduct the IA

• One or more Committee’s IA experts should attend the meetings of the expert group to advice on IA work

• Advice from the IA experts also during a Screening IA

26

2.6. Reporting on IA

• Summary of the work undertaken (<30 pages, excluding appendices)

• States assumptions or uncertainties as well as knowledge gaps

• Use simple and non-technical language

• Puts technical details or supporting documentsin appendices

27

3. Questions & Answers

?

CESR - 11-13 avenue de Friedland - 75008 PARIS - FRANCE - Tel.: 33.(0).1.58.36.43.21 - Fax: 33.(0).1.58.36.43.30 Web site: www.cesr.eu

CEBS - Tower 42 (level 18) 25 Old Broad Street LONDON EC2N 1HQ – UK – Tel. 44 (0) 20 7382 1770 – Fax: +44 207 382 1771/2 Web site: http://www.c-ebs.org

CEIOPS – Westhafenplatz 1 – 60327 Frankfurt am Main – GERMANY – Tel.: 49(0) 69 95 11 19 20 – Fax : 49(0) 69 95 11 19 19 Web site: www.ceiops.org

Ref: CESR/07-089b Ref: CEBS 2007 58

Ref: CEIOPS-3L3-08/06

IMPACT ASSESSMENT GUIDELINES

FOR EU LAMFALUSSY LEVEL 3 COMMITTEES

April 2008

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TABLE OF CONTENTS

PAGE FOREWORD BY THE LAMFALUSSY LEVEL 3 COMMITTEE CHAIRMEN 4

THE IMPACT ASSESSMENT GUIDELINES IN SHORT 5

A. Background information on IA 6

B. IA in eight steps 9

C. Screening IA, Full IA, and the IA process 11

D. Presenting the IA findings 15

E. The IA Summary Tables 16

THE IA GUIDELINES 18

1. PREPARING A SCREENING IA OR A FULL IA 19

1.1. Why and when to prepare an IA? 19

1.2. What is the problem? 20

1.3. Is there a market failure? 21

1.4. Is the problem due to regulatory failure? 22 1.5. Market/regulatory failures as risks to Level 3 Committees' objectives 23

1.6. Identifying MFAs /RFAs – is intervention justified? 24

1.7. What are the regulatory objectives? 25

1.8. What are the policy options? 27

1.9. The Level 3 Committee perspective to adopt 27

1.10. When is a quantitative and when is a qualitative analysis needed? 28

1.11. Assessing the benefits, the costs and the net benefit 29

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1.11.1. Assessing the costs of policy options 30

1.11.2. Assessing the benefits of policy options 32

1.11.3. Discounting the costs, benefits and the net benefit 34

1.11.4. Risk and Uncertainty 35

1.12. Comparing policy options 35

2. WHAT TO DO FOR CONSULTATION 37

2.1. The practice of consultation by Level 3 Committees 37

2.2. The role of IA in the L3 consultation process 37

2.2.1. Pre-Consultation Paper period 37

2.2.2. Post-Consultation Paper period 38

2.2.3. Preparing a feedback statement that refers to IA 38

3. KEEPING POLICIES UNDER REVIEW 40

3.1. When to review policies 40

3.2. When to prepare an ex-post IA 40

4. HOW TO REPORT ON IA 43

APPENDIX 1 – Principles for IA in the area of financial regulation 45

APPENDIX 2 – Indicative IA questionnaire 47

APPENDIX 3 - Market failures 50

APPENDIX 4 - The different types of costs 55

APPENDIX 5 – Techniques for assessing benefits 59

APPENDIX 6 – Comparing policies with different time horizons 61

APPENDIX 7 - A quantitative CBA spreadsheet model 62

APPENDIX 8 - Selected references on IA 67

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FOREWORD

BY THE LAMFALUSSY LEVEL 3 COMMITTEE CHAIRMEN

These Guidelines have been developed to help ensure the effective use of impact assessment within

the three Lamfalussy Level 3 Committees. They are consistent with the European Commission's

approach to Better Regulation and, specifically, with the EC's own Impact Assessment Guidelines,

though adapted to reflect the more specialised nature of financial services policy and the specific

circumstances in which it is developed within the EU.

As recognised in one of the principles of the EC's Impact Assessment Guidelines, the Committees'

Guidelines recognise that Impact Assessment needs to be proportionate to the significance,

complexity and uncertainties of the problems to be solved.

The effective use of these Guidelines should enhance credibility and accountability in policy making.

Although these Guidelines describe many practices that are already embedded in the Lamfalussy

Level 3 Committees' policy making processes, the Guidelines bring additional structure to policy

making and reinforce the Committees' commitment to transparent, evidence-based policymaking.

One key feature through which this is achieved, is the role given in the Guidelines to market and

regulatory failure analysis as tools for ensuring that the case for regulatory intervention is

considered properly.

The Guidelines highlight the important role that the Committees' stakeholders will play, both in

terms of the contribution that they can make to the conduct of impact assessments, and in providing

the requisite level of challenge during informal and formal consultation phases. It was therefore

pleasing to the Committees that they received so much positive and helpful feedback from those

stakeholders who commented on the draft Guidelines during what was the first joint 3L3

consultation. The Committees are grateful for this input and look forward to working together with

its stakeholders to make the use of impact assessments a success within the three Committees.

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THE IMPACT ASSESSMENT

GUIDELINES IN SHORT

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A. BACKGROUND INFORMATION ON IA

Introduction

Decisions about regulatory policy and practice should be based on sound analysis. Impact

assessment (IA hereafter) is a key tool in this regard. IA draws on economics and other social

sciences to provide an analytical framework that ensures that policy proposals are justified in terms

of a proper understanding of the nature of perceived problems.

As a disciplined approach it helps to identify the past or likely future effects of regulation and

supervision on markets and, ensuring engagement with all affected parties, helps policy makers and

stakeholders alike develop an appreciation of the respective (dis)advantages of previous policy

responses and proposed policy options. In this way, it provides new information that can help policy

makers to describe and explain the decision making process and thereby improves the way in which

the most effective policies are identified, chosen and implemented. Moreover, through its formal and

informal consultation procedures, IA makes regulatory policy more transparent and thus can help to

make the EU's Lamfalussy Level 3 Committees - CESR, CEBS, and CEIOPS1 - (L3 Committees

hereafter) more accountable. It is also a means of communication between the Committees, the

different national regulators involved, the regulated firms and other affected or interested parties.

There is increasing recognition of the value of IA at EU level. For example, in an inter-institutional

agreement of December 2003, the European institutions adopted the principle of better regulation

for their legislative practice. In addition, the White Paper on financial services published at the

beginning of 2006 mentions explicitly that IA will accompany any new Commission proposal2.

Therefore, preparing an IA corresponds to good EU policy practice and is in line with the wider

efforts made to develop better regulation.

It is against this background that the L3 Committees adopted Principles on Impact Assessment in late

20063. It was decided to develop more guidance for policymakers on this basis. The present IA

Guidelines are the outcome of this project. They involved co-ordination of the EU Level 3

Committees and their content is designed for application to all financial regulatory and supervisory

policy and practice.

Limits of IA

1 The acronyms CESR, CEBS and CEIOPS respectively stand for Committee of European Securities Regulators, Committee of European Banking Supervisors, and Committee of European Insurance and Occupational Pensions Supervisors. 2 COM(2005) 629 final, WHITE PAPER, Financial Services Policy 2005-2010, Brussels, 1.12.2005, {SEC(2005) 1574, p.5 3 See appendix 1.

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Within the EU policy making process, the main advantage of IA to the work which falls within the

remit of the L3 Committees is to submit policymaking to a systematic and structured approach,

provide a credible evidential basis for the advice and proposals of these committees and therefore

give to this work much more weight.

An outcome of an IA is, however, not a substitute for decision making; it is merely a tool to assist

decision makers. Therefore, the L3 Committees will give the results of IA exercises due

consideration, but they will not be bound in their decisions by the outcome of an IA. In other words,

IA - as a disciplined approach to policy making - will help inform the policy making process, but not

become a substitute for it. Nevertheless, there is an understanding that any decision that deviates

markedly from the findings of an IA exercise would require an explanation.

Use of IA by L3 Committees

Future work by the L3 Committees will mainly concern Level 3. For example it will have an

important role to play in helping to clarify policy positions relating to supervisory convergence.

However, IA will also be used at Level 2 in at least two cases: when there is a review of Level 2

policies - this would correspond to an ex-post IA; and when the EU Commission seeks further or

additional Level 2 advice by a L3 Committee– the volume of this type of work would increase again

should the Commission introduce another FSAP, for example.

The IA could also be used at Level 1 or high level policy mandates given by the Commission to one of

the Committees.

Proportionality and flexibility: Screening IAs and Full IAs

An IA needs to be proportionate to the significance, complexity and uncertainties of the problem or

problems to be solved. Otherwise, it risks consuming scarce resources inefficiently or being

insufficiently robust. Both would be counter-productive. The principle of proportionality will allow

the L3 Committees to keep the detail of IAs within reasonable limits. The principle of proportionality

is also central to the European Commission’s guidelines on IA.

For example, the measures analysed through an IA at level 3 are likely to have significant structural

and cost implications to consumers/investors and/or market participants. This can be considered a

precondition for the need to carry out an IA. But when there is a reasonable presumption that the

impact will be insignificant, then there is no need for an IA.

The time available for policy work by L3 Committees is usually very tight both for Level 2 and Level

3 work. Given these time constraints, the L3 Committees should commit to the use of Screening IAs,

i.e. “light versions” of IA. These primarily qualitative exercises could be carried out before a

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mandate for a particular problem is formulated by the Committee Chairs in order to help ascertain

the appropriate scale of the analysis to be pursued after the mandate is issued. In any event, the use

of Screening IAs is intended to simplify matters and avoid procedural over-complication so their role

and use must be clearly circumscribed.

What the reader can expect from these Guidelines

The reader who is inexperienced in IA matters should be able to grasp all its essential aspects by

reading through the “IA Guidelines in short” section (pages 7 to 19) which follows. There, each of

the steps in the IA process is explained with references to the corresponding sections in the main

text. This should make it easier to obtain more detailed information on each step as and when it is

required.

Some care is taken to stress the distinction between Screening IAs and Full IAs and the way they are

embedded in the L3 Committees' wider policy making procedures. Then the main steps to be

followed when preparing an IA report are set out. Those who have to produce IA reports may find

the “IA Summary Tables” at the end of these shorter IA Guidelines helpful (pages 20 to 21).

The main text explains each step in the IA framework in more detail. However, an effort has been

made to strike a balance between, on the one hand, not overloading the reader with information (for

the curious there is an annotated reference list at the very end of the Guidelines), and, on the other

hand, providing sufficient practical detail and advice in order to make it easier to overcome some of

the possible obstacles on the way to producing an IA report and pursuing the IA work successfully to

its conclusion.

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B. IA IN EIGHT STEPS

An IA has three key ingredients: firstly, an analysis of the reasons why a market (or existing

regulation) does not work well and of the possibility of improving the situation by some carefully

chosen regulatory or supervisory action (this corresponds to steps 1 to 5 below); secondly, public

consultation about the regulatory policy proposed (steps 6 to 7); and, thirdly, as appropriate, a

review of the effectiveness of the policy implemented (step 8).

The first four steps of IA should be carried out from an early stage of policy making. Their value is

greatest when policy options are still open.

The IA process can be summarised using the following steps (the sections indicated in brackets give

more details on each of the different points under consideration):

1. Identify the problem (Section 1.2) and the threat it poses to regulatory objectives. Market

and regulatory failure analysis provides a coherent framework for analysing problems

(Section 1.3 and 1.4) and the risk they pose to regulatory objectives (Section 1.5). Decide

whether or not intervention in the market is justified (Section 1.6).

2. Define broad policy objectives - linking a proposed policy and its specific and

operational objectives to regulatory objectives helps justify regulatory interventions

(Section 1.7).

3. Develop main policy options (Section 1.8) – it is important to identify a range of policy

proposals, including the “do nothing” (or “status quo”) option and “market solutions”,

i.e. solutions without any regulation.

4. Assess the likely positive and negative effects as well as the net effect of each policy

option (Section 1.11). It is important to consider possible side effects and unintended

consequences of the policy options. The consistency and cumulative impact of

implementing several policies simultaneously should also be considered because of the

possibility of links between policies which might at first seem unrelated – for instance

because they concern different policy areas.4

5. Compare options (Section 1.12), i.e. the balance between positive and negative effects,

and identify a preferred policy option (this is not a choice of policy option because the IA

process is an aid to the decision-making process, not a substitute for it).

4 Informal consultation with relevant stakeholders may be helpful at this stage to gather information and /or data that may be needed to make a proper assessment of policy options.

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6. Consult on the draft policy proposal (Section 2) which also reports on the IA (Section E

of the “IA Guidelines in short” section and Section 4) by communicating the way in

which steps (1) to (5) have been considered in a clear and effective way to all

stakeholders. The stakeholders are given an appropriate response period.

7. Publish the responses received and give public feedback that explains what the final

policy decision is and why it was made given the results of the consultation (Section

2.2.3).

8. Once it is implemented and enforced, keep the policy under review as appropriate

(Section 3).

This IA process, which is in line with the EU Commission’s own IA guidelines, involves effective

engagement with stakeholders throughout. This engagement could, in addition to the formal

consultation process set out in step 6, also take the form of informal consultations designed both to

gather evidence and present the results of analysis conducted at different stages of the IA process,

including of course the problem identification phase.

Should the L3 Committees not follow all the steps of an IA, the reasons for this should be explained

in the consultation documents and/or the final outcome.

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C. SCREENING IA, FULL IA, AND IA PROCESS

IA should be proportionate to the problem at hand. This means that it need not necessarily be a

detailed, costly and time consuming process. It is possible to carry out the steps identified above at a

relatively high level and, by restricting the process of consultation, relatively quickly. Indeed, there

is no benefit in conducting costly, lengthy IA exercises where it is apparent that anticipated market

impacts will not be significant. A Screening IA, instead of a Full IA, will in some circumstances be

sufficient to analyse the problem under consideration.

Screening IA

The purpose of a Screening IA is to consider relatively quickly and on a principles basis the

justification for a policy initiative at conception and to assess whether or not a Full IA is required. Its

use is most relevant to the discretionary work of the L3 Committees. Such work originates from a

number of sources, including the Market Participants Consultative Panel, issues raised by expert

groups, internal consideration of current market trends or by the full plenary of the Committees. The

objective here may, for example, be an efficiency enhancement, or a change to current supervisory

practices to promote convergence.

In such cases, it may be most appropriate to conduct a Screening IA prior to the drafting of the

discretionary mandate given by a L3 Committee to an expert group. It could assess in high-level

terms the nature of the problem, its likely significance in terms of structural impact and cost, its

relevance to the Committee’s objectives, as well as obvious policy remedies (including whether it is

likely that the problem can be solved without the need for new regulatory policy). The likely positive

and negative impacts of proposals could also be considered, as well as their overall or net impact. In

other words, the Screening IA ideally should consider steps 1-5 of the previous section, though this

would typically be done relatively quickly and at a high-level (or on a principles basis). Also, at this

stage, and subject to the materiality of timing constraints, it may well be useful to conduct an

informal consultation of interested parties, such as the Consultative Panel, to deepen the Committee’s

understanding of the issues (or the scale of any limitations in understanding) at this initial stage.

Once the Screening IA is completed, a brief report (using, for instance, the relevant IA Summary

Tables of section E below) could be sent to the L3 Committee which will consider issuing a final

mandate (i.e. the Commission’s mandate, or an own-initiative mandate). The report could contain a

recommendation on whether or not the Screening IA already carried out is sufficient to assess the

problem and the policy remedies, or whether a further IA (a Full IA) is needed. The recommendation

should also refer to resource and timing issues associated with a Full IA, regardless of whether or not

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a Full IA is recommended. This will clarify for the chairs the implications of any decision they have

to take in relation to the particular problem under consideration.

The final mandate of the L3 Committee to be sent to the relevant expert group should include a

statement about whether or not an IA should accompany the Committee’s final advice to the

Commission or its Level 3 measures, with a presumption that completion of a Full IA will be the

norm.

Screening IAs are less relevant when the European Commission mandates the L3 Committees to

work on an issue. No further justification of the policy initiative will normally be required, assuming

the Committees accept their mandates. When a Commission initiative is already accompanied by an

IA there will usually be no need to duplicate the work, although it will often be necessary to do

supplementary, potentially more detailed IA work.

Full IA

In these Guidelines an IA carried out after the issuing of a discretionary mandate by a L3 Committee

is referred to as a Full IA. Such IAs can range widely in scope, from exercises that extend the

Screening IA only modestly to substantial pieces of work that go considerably further than the

Screening IA. What matters is that the IA should provide a sufficient basis upon which to reach clear

conclusions that will inform the decision-making process. A Full IA at a larger scale is appropriate in

particular circumstances only, e.g. when the problem identified is unclear or difficult to analyse (but

potentially important), or likely to be important in terms of its impact.

When a mandate by a L3 Committee states that an IA will accompany the expert group’s final advice

to the Committee, IA work should start at the same time as the policy discussions. This helps to

ensure that IA promotes discipline in identifying the problem at hand and in subsequent policy

discussions, and encourages experts to put forward only well argued policy proposals. However it

will only be feasible to start assessing the impact of policy options once these have been formulated

by the expert group which can occur at a later stage of the discussions.

In the L3 Committees’ policy making processes, all policy proposals will need to be assessed. The

expert group must consider the consequences of a proposed policy and consider alternative policy

options, also taking into consideration the feedback received by external experts (e.g. those experts

nominated by a Consultative Panel or Consultative Working group) This should also take into

account comments received in response to a call for evidence/call for advice.

Again, within the L3 Committees’ policy making processes, assessment and justification of policy

proposals must be an integral part of any published Consultation Paper. The IA should normally

have a qualitative part, and may often have a quantitative part. These should be built into the

consultation processes of the Committees.

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The timing of some of the IA work differs slightly depending on whether there are one or two public

consultations:

o where there is only one round of public consultation, the qualitative (and quantitative, if

there is to be one) parts of the IA should be prepared for inclusion in this consultation paper;

o where there are two rounds of public consultation, the qualitative IA should be published

with the first consultation paper. The quantitative part of the IA (if there is to be one) should

be conducted in the interval between the two public consultations and published in the

second consultation paper. The whole IA will have to be published in any public

consultation on one single policy proposal.

Proceeding through two consultations is a way to deal with situations where the policy problem is

complex, where it is difficult to get clear about the impact of different policy options or where the

final decision about the preferred option is not straightforward.

Working methods:

The L3 Committees recognise the importance of having effective internal governance and quality

controls in place in order to ensure that IA exercises make a genuine contribution to the policy

making process. To this extent, the L3 Committees consider that the soundness and independence of

an IA study will be safeguarded by (a) the involvement of IA experts from within the L3 Committees

but who are independent of the committees’ relevant policy making expert groups, (b) the various

panels of stakeholder groups that assist the L3 Committees, and which are always invited to

comment during the policy-making process, and finally (c) the public consultation.

The relevant policy making expert group chairman should ensure that members of the group are

assigned to draft the IA.

Where possible and appropriate, one or more Committee’s IA experts should attend the meetings of

the expert group to advise on the use of IA during their work. Such advice should proceed from the

inception of any new work stream. It may also be necessary for members of the expert group to

receive training of some sort in order to improve their understanding of the application of the IA

process.

Advice from the L3 Committee’s IA experts will also be provided during the Screening IA process.

The following diagrams attempt to describe how IA fits into the existing working practices of the L3

Committees. They differ only in reflecting the distinction between the use of a single consultation

and of a two-part consultation process.

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ONE CONSULTATION

TWO CONSULTATIONS

- 15 -

D. PRESENTING THE IA FINDINGS In brief:

- summarise the work undertaken for the IA;

- state any assumptions or uncertainties and knowledge gaps;

- use simple and non-technical language ;

- use the Summary Tables in section E where helpful;

- put technical details or supporting documents in an appendix.

Section 4 in the main text gives more detailed information about how to report on the IA work that

has been carried out.

The following tables might help policymakers to present the outcome of their (Screening and/or

Full) IA, particularly for internal purposes. They should be used and adapted as needed.

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E. THE IA SUMMARY TABLES

PROBLEM & REGULATORY / SUPERVISORY RESPONSE

Table-1 MARKET / REGULATORY FAILURE ANALYSIS

What is the problem? Is the issue identified likely to have an EU-wide impact on market participants/end users and on the smooth functioning of the single market?

What evidence shows that the problem is significant?

Is the problem due to market failure? What is the market failure?

[Information about market failure analysis can be found in section 1.3. of these Guidelines]

Is the problem due to regulatory/supervisory failure? What is the regulatory/supervisory failure?

[Information about regulatory failures can be found in section 1.4. of these Guidelines]

What regulatory objective is put at risk by the problem?

[Information about regulatory objectives can be found in section 1.5 of these Guidelines]

Is it or is it not likely that the problem will be solved over time without a new regulatory policy? Give reasons.

Is the case for regulatory/supervisory action justified?

Table-2

REGULATORY POLICY RESPONSE Policy option 1 [Information about specific and operational objectives can be

found in section 1.8. of these Guidelines] Specific/Operational objective [Information about specific and operational objectives can be

found in section 1.7. of these Guidelines] How would achieving the objective alleviate/eliminate the problem?

Policy option 2 Specific/Operational objective How would achieving the objective alleviate/eliminate the problem?

Policy option 3 Specific/Operational objective How would achieving the objective alleviate/eliminate the problem?

Which policy option is the preferred one? Explain briefly.

Is the policy chosen within the sole responsibility of the L3 Committee? If not, what other body is concerned / needs to be informed or consulted?

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IMPACTS OF THE PROPOSED POLICIES

Table-3

BENEFITS & COSTS OPTION-1 etc.

QUALITATIVE DESCRIPTION

QUANTITATIVE DESCRIPTION

MONETARY VALUE*

Benefits Regulator’s costs Compliance costs Quantity of products offered Quality of products offered Variety of products offered Efficiency of competition * The monetary value should be discounted. If the monetary value cannot be given, this should be explained.

Table-4** POLICY

OPTIONS SHORT TERM LONG TERM

NEGATIVE

EFFECTS

POSITIVE

EFFECTS

NET EFFECT NEGATIVE

EFFECTS

POSITIVE

EFFECTS

NET EFFECT

OVERALL NET EFFECT

Option-1

Option-2

Option-3

** Table 4 should be filled in with monetary values only when this is possible. Distinguishing short and long term effects will be helpful in the absence of precise information on the time period/discount rates.

Table-5*** OPTION 1 etc. EFFECT / IMPACT LIKELIHOOD NET BENEFIT

Scenario-1

Scenario-2

Scenario-3 *** This table can be prepared for policy options whose costs or benefits cannot be determined with precision. Likelihood and impact can be indicated by the categories high, medium, and low.

CONSULTATION & REVIEW

Table-6

Consultation period Start: End:

Participation (low, medium, high)

Summary of reactions received

Feedback publication date

Did the feedback result in a policy change? Explain briefly.

Proposed review date (when appropriate)

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THE IA GUIDELINES

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1. PREPARING A SCREENING IA OR A FULL IA

1.1. WHY AND WHEN TO PREPARE AN IA?

IA is a way of identifying whether or not there is a problem in the market, how serious it is, and

whether or not the situation can be left to the market to resolve or can be improved upon through

some form of regulatory response. It implies assessing the likely effects of proposed regulatory

changes or the past effects of previous regulatory interventions. It involves a structured analysis that

helps clarify the potential advantages and disadvantages of proposed policy options and whether or

not they would have the desired impact in practice. IA helps to identify unforeseen side effects and

hidden costs associated with regulation. It also provides for consultation with stakeholders to make

regulatory policy more transparent and to ensure that their views and interests are understood and

taken into account as appropriate. Thus, IA provides information that can help policy makers to

rationalise the policy making process and thereby improve the efficiency with which the most

effective policies are identified, chosen and implemented.

The preparation of an IA enhances the policy making process in a number of ways:

• it provides a coherent framework within which to conduct evidence-based policy making,

one that spans the regulatory policy making process from beginning to end;

• the use of market and regulatory failure analysis ensures accurate identification of problems

and the threats they pose to regulatory objectives, which in turn leads to the choice of

effective and efficient policy solutions amongst a wider range of possible policies;

• it saves time in the long run as there is a reduced risk of regulatory failure;

• formal and informal consultation with stakeholders takes place at various stages of an IA

and by enhancing the transparency of the policy making process and keeping all affected

parties informed, in turn affords the policy making process enhanced credibility and greater

accountability; and

• IA preparation enhances organisational credibility because it is fully in line with the

European Commission’s own approach to evidence-based policy making (and with OECD

better regulation guidelines).

An IA should be prepared as a matter of course whenever a new policy initiative with structural and

cost implications is proposed and, also, in the case of the L3 Committees, when a call for advice is

received from the L2 Committees. For this to happen effectively, the use of IA should be firmly

embedded into the organisation’s policy making procedures and carried out from an early stage of

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policy making. If IA is not integrated into existing institutional structures then its use risks being

haphazard, incomplete and ineffective in generating the benefits described above.

1.2. WHAT IS THE PROBLEM?

The first key analytical step in the proposed IA methodology is to establish whether or not there is an

economic case at all for regulatory intervention by conducting a Market and/or Regulatory Failure

Analysis (MFA/RFA). At first the understanding of the perceived problem will be intuitive. However,

it is essential for good policy making that such intuitions are confirmed or corrected by a thorough

analysis.

In essence, this exercise consists in answering the following questions:

• Is there a significant market failure and/or regulatory failure and what is its nature?

• If no intervention or further interventions take place, will the market correct the failure by

itself in the short term?

At a later stage (see section 1.11), this will be complemented by an answer to the following question:

• Can regulatory intervention improve the situation in a way such that the benefits obtained

are larger than the costs generated?

If significant market and/or regulatory failures are identified, the market is not able to correct the

failure by itself, and there is a policy which generates a benefit which is larger than its costs,

regulatory intervention is justified. If no such policy option could be identified then it would be best

to leave the market or regulatory failure unaddressed – even though the market may not work very

well.

In what follows, the concepts of market and regulatory failure are explained further. The need to

link such “failures” to regulatory objectives is discussed more fully in one of the next sections

(section 1.8) as is the identification of a policy with a significant net benefit to be chosen from a

range of alternative policy options (section 1.12).

1.3. IS THERE A MARKET FAILURE?

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Market failures are a feature of markets which are inefficient, where inefficiency refers to a market

in which it is possible to generate an overall welfare gain. By identifying the different causes of

market failure it is possible to consider what types of policy response might generate such an

improvement in welfare.

In an efficient market:

1. prices reflect all costs, including costs to third parties, i.e. the market failure "externality" is

absent. This type of market failure can occur where financial services firms fail to take

account of the effect that their actions might have on the wider market place (like the failure

of a key player in the market);

2. consumers and financial services companies take decisions that reflect all possible, relevant

information, i.e. the market failure "information asymmetry" is absent. This is often not the

case, for example, because of consumers’ limited knowledge about product quality. It is

important to note that information asymmetries generally only lead to market failure in

circumstances in which an informational advantage is exploited. This can happen when two

parties' incentives are misaligned;

3. firms cannot make excess profits by charging prices in excess of "marginal" cost (which is

the increase in a firm’s total cost when output is increased by a very small unit, and in the

long run includes the cost of capital), i.e. the market failure "market power or lack of

competition" is absent; and

4. when there is rivalry between the consumption of a product and market participants can be

excluded from the consumption of this product. In other words, the market failure “public

good” is absent (financial stability is an example of a public good as it benefits many market

participants each of whom is likely to contribute little privately to maintain and enhance it).

A more detailed explanation and examples of these four market failures are included in Appendix 3.

There are other market failures, but focussing on these four will capture the relevant substance of

market failure in the area of financial markets and avoid undue complexity.

Why does the presence and extent of these market failures matter? In an efficient market firms

produce at the lowest possible cost, in terms of resources used, and consumers buy the products they

want at the minimum possible price for a given quality. Moreover, at this price, supply and demand

are in balance. To the extent that transactions lack these characteristics, there is a "welfare loss" - a

waste of resources - which regulation may be able to address. But regulation can only be justified by

a market failure when it can improve on the market solution to that market failure. There may be

various circumstances in which regulation and supervision are able to achieve this, but there are

also other situations in which they are not of any help or even might make things worse.

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1.4. IS THE PROBLEM DUE TO REGULATORY FAILURE?

Regulatory failure, like market failure, is an economic justification for further regulatory

intervention (including deregulation). It refers to an intervention whose economic costs were higher

or economic benefits lower than was originally expected such that the net effect is harmful or more

harmful than it need have been.

This typically happens where regulation has unforeseen and unintended effects arising from

interaction with a specific characteristic of the market affected, or when a supervisory practice is no

longer adapted to the realities of a rapidly evolving market (which can be referred to as a

supervisory failure, a specific sub-set of regulatory failure). For example, an intervention may have

been intended to increase welfare but in fact reduced it by distorting rather than facilitating

competition or by not being correctly targeted on the relevant market failure. Equally, it may have

been expected that an intervention would reduce welfare but the reduction may in practice have

been much greater than expected. This might happen because of unforeseen effects of the

intervention on other economic markets or because demand in the targeted market was much more

sensitive to price increases than was believed to be the case.

On the latter point, it is important to keep in mind that regulatory interventions generally do

increase the cost of producing financial services. In addition to the direct increase in prices or

reduction in sales that this might lead to, prices can also be affected by competition and market

parameters, like interest rates. What then needs to be analysed is the effect of the cost increases and

how these effects balance with other effects: (i) will the costs be reflected in prices? i.e. will costs be

passed to consumers?, (ii) if costs are reflected in prices, by how much will sales fall? and (iii) will

the efficiency of competition be negatively affected and what might this imply for the consumer in

terms of prices and supply? These are often difficult but always important questions to answer. More

generally speaking, when assessing a policy, it will be important to consider the direct costs as well

as indirect costs of regulation (this issue will be dealt with in more detail in section 1.11 on the

assessment of costs).

For example, one reason for the new regulatory frameworks in banking (Basel II) and insurance

(Solvency II) is that the previous regimes (respectively Basel I and Solvency I) imposed a major

economic burden on the industry and society.

To summarise, in the identification of regulatory/supervisory failure, there are at least five

possibilities to keep in mind.

• First, the market may not have been subject to a significant market failure and the

observed problem may be due to the effects of existing regulation/supervision. This

could be regulation/supervision that was wrongly prescribed for this market or

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regulation/supervision that was intended to affect another market but unexpectedly

impacted on this one too.

• Secondly, the market may have been subject to a significant market failure and

regulation was introduced that was successful in correcting it: the problem we

observe may be due to a different market failure and have another cause. It may, for

example, be a side effect of the successful regulation or of other regulation.

• Thirdly, the relevant market may have been subject to a significant market failure and

regulation was introduced that actually made it worse.

• Fourthly, the relevant market may have been subject to a significant market failure

and regulation was introduced that has so far failed to work but may do so in due

course.

• Fifthly, the case when national regulators do not have the authority to act on a matter

or when bureaucratic issues block the function of the single market.

1.5. MARKET/REGULATORY FAILURES AS RISKS TO L3

COMMITTEES’ OBJECTIVES

The identification of a significant market or regulatory failure that is not expected to be resolved in

the short to medium run by the market is not on its own sufficient to justify the consideration of

regulatory intervention. This also requires that the market or regulatory failure be identified as

carrying some particular threat or risk to regulatory objectives. These may cover, depending on the

L3 Committee concerned:

• market confidence and/or financial stability (typically by addressing negative externalities,

market power and public goods);

• market integrity and proper functioning of the financial system (typically by addressing

asymmetries of information and market power)

• consumer/investor protection and /or public awareness (typically by addressing information

asymmetries and market power);

• reduction of financial crime (typically by addressing information asymmetries and market

power);

• facilitating innovation (typically by addressing information asymmetries and market power);

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• keeping adverse effects on competition to a minimum.

The regulatory objectives of the L3 Committees can be found on their respective websites.5

1.6. IDENTIFYING MARKET AND REGULATORY FAILURES – IS INTERVENTION JUSTIFIED?

The task of identifying market failures is made much easier by the fact that particular market

failures are principally, though not exclusively, associated with typical L3 Committee objectives.

The following four-step procedure should help in identifying market and regulatory failures:

• determine whether the problem at hand is due to a significant market failure by

assuming the complete absence of all financial regulation (to do this, it is usually helpful

to consider what the relevant market is);

• determine which objective – e.g. market integration, market confidence, or consumer

protection - is threatened by the failure and thus makes it an object for policy making;

• determine whether any relevant market failure identified has been targeted by

regulatory intervention (including rights or obligations created by primary legislation or

the common law);

• determine whether there is a regulatory failure; a regulatory failure may exist in

addition to a market failure which may have been already identified; note that when no

market failure has been identified and regulation is in place, there is likely to be a

regulatory failure given that the intervention will almost certainly have imposed costs

whilst at the same time deriving no benefits.

Filling in table 1 of the IA Summary Tables will be helpful when answering these questions. Once

the above steps have been carried out, it should be clear whether there is a significant market

and/or regulatory failure in the market(s). If there is not, then net economic benefits cannot be

achieved. This would mean that there would be no economic basis for regulatory intervention, and

that is what the MFA/RFA in the IA should say.

Both in the MFA and the RFA, stakeholder analysis is important. A stakeholder analysis consists

firstly in identifying groupings of relevant stakeholders, such as consumers, market players, trade

bodies, etc. Secondly, to every group a short description of key features and incentives should be

added (including reference to market power when appropriate). The IA questionnaire in Appendix 1

might be helpful in this respect.

5 CESR: http://www.cesr.eu Ref: CESR/06-289c; CEBS: http://www.c-ebs.org/documents/CEBS.pdf ; CEIOPS: http://www.ceiops.org/content/view/2/2/

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One key outcome of MFA/RFA is a rigorous analysis of whether or not there is an economic case for

considering regulatory intervention. In summary, this section of an IA needs to say one of two

things. These are:

• We examined markets XYZ. We found no uncorrected market or regulatory failures relevant

to regulatory objectives and significant to the problem that we are addressing. Therefore, no

case for intervention is supported on economic grounds.

• We examined markets XYZ. We found the following uncorrected market and/or regulatory

failures: ABC. These are relevant to the regulatory objectives and significant to the problem

that we are addressing because they cause LMN. The evidence is RST. These failures

therefore provide an economic case for considering regulatory intervention.

Importantly, where the analysis does not come to a conclusion about whether there is definitely an

economic case for considering intervention, it must make clear what further questions will have to

be answered and gaps in knowledge filled in order for a conclusion to be reached. It must also set

out what further work will be done in order to address these shortcomings. (One of the reasons for

conducting a Screening IA is to assist in this process.)

Wherever possible, the analysis should be based on objective evidence. Inevitably, parts of IAs will

have to be based on judgement rather than evidence – and economic evidence is often

circumstantial and typically based on a probabilistic notion of causation. But the analysis should

always make clear which parts are based on evidence and which on judgements.

Only market and regulatory failures which present a risk to regulatory objectives can justify

regulatory intervention. However, a further condition also needs to be met: the regulatory action

addressing the failure will have to generate positive effects which significantly outweigh its negative

effects. It is absolutely essential that this issue is addressed as part of any IA (see section 1.11).

1.7. WHAT ARE THE REGULATORY OBJECTIVES?

The aim of regulatory policy should be to bring the market closer in line with organisational

regulatory objective(s). To identify the effects of policies it will be useful to make this link explicit.

Experience has shown that distinguishing between different kinds of policy objectives makes it easier

to establish the link between policies and regulatory objectives which are high level in nature. The

following types of objectives can be distinguished (three examples of each are presented):

• General objectives: examples include (i) financial stability, (ii) the proper

functioning of markets, and (iii) consumer protection;

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• Specific objectives: examples (which link respectively to the general objective

examples above) include (i) capital adequacy provisions, (ii) disclosure regimes, and

(iii) conduct of business rules; and

• Operational objectives: examples (which link respectively to the specific objective

examples above) include (i) specific rules relating to the use of market or credit risk

evaluation models, (ii) rules on the publication of prospectuses, and (iii) rules setting

out specific terms of business requirements.

Typically, the general objectives correspond to each Committee’s regulatory objectives which will

already have been considered during the problem identification phase of an IA exercise. To make

regulatory policy practical, identifying related specific and operational objectives may make it easier

to think about the causal steps through which regulatory proposals are supposed to generate benefits

or ameliorate risks that are relevant to a Committee’s regulatory objectives.

Specific objectives represent a subset of general objectives and consist of broad types of policy

solution (e.g. making sure banks or insurance companies hold enough capital, stopping mis-selling,

providing market participants with appropriate information).

Operational objectives are the outcome of the process of implementing new regulations designed to

put specific objectives into practice (i.e. through specific rules and guidance). It should be kept in

mind that unless and until the operational objectives are realised, it is not possible to comment on

the realisation of specific and general objectives.

One reason for the distinction between specific and operational objectives is the time gap which

often exists between the realisations of these two objectives. Typically, the latter is immediately

observed whereas the former is realised only over time and may depend on more than one

operational objective being met.

However, the distinction between specific and operational objectives is sometimes difficult to make

and when this is the case it should not be insisted upon. Specific and operational objectives usually

become clear in the process of thinking about the problem and possible solutions to it. It will not

always be possible to clarify them from the outset.

1.8. WHAT ARE THE POLICY OPTIONS?

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Once it is clear that regulatory measures have to be considered seriously, there might be several

policy options – and policymakers are advised to consider a reasonable number of alternative

policies in order to ensure that they are proposing the most appropriate policy.

Within the range of options to analyse, the status quo should always be considered as a possible

policy. Note that the option to “do nothing”, i.e. the status quo which might include regulation, is

not necessarily the same as the “market solution” which consists in not intervening at all in the

market (no regulation) and to rely on market forces alone to solve the problem. The “market

solution” should also always be considered as a serious policy option. This is perhaps obvious when

the reason for the problem is regulatory failure, but it is also true in the case of a market failure

which can be expected to self-correct over a relatively short period of time and because

policymakers will need to ensure that their proposed policy will not introduce a regulatory failure.

Policy options should be sensible. It is in general not enough to consider, for example, besides the

preferred option, the status quo (the ‘do nothing’ option) and some other policy when these two

latter options are both clearly unreasonable. To be credible, the discussion of options should convey

insights into the difficulties of policy choices as they are experienced in the process of policymaking.

1.9. THE L3 COMMITTEE PERSPECTIVE TO ADOPT

The large number of EU member states means that it is unrealistic to expect L3 Committees, in their

policy deliberations, to prepare IAs for every member state and then to consider the aggregate effect

on the single market in financial services. In any event the focus of L3 Committees, and any policy

initiatives emanating from them, is on the single market. Therefore it is appropriate that they

concentrate principally on the single market when conducting IA.

Whilst it is acknowledged that an evaluation of the impact of a proposal may be based on

information obtained at the national level, the L3 Committees typically will not perform individual

national analyses. Notwithstanding this, the committees will seek to be cognisant of significant

national specificities, and expects that such specificities will be brought to the attention of them by,

inter alia, member regulatory authorities and/or by national lobby groups.

In the course of conducting an IA it may become apparent that there are two or more distinctly

different experiences observed within the single market. Without prejudice to its policy of not

conducting national IAs, L3 Committees will seek to fully reflect these different experiences in its

approach to IA. In particular, the L3 Committees will have to be alive to the risk that focussing

exclusively on the single market may mask the degree to which for example, negative effects in some

jurisdictions are offset by positive effects in others or that for whatever reasons certain markets

across the EU are local in nature.

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1.10. WHEN IS A QUANTITATIVE AND WHEN IS A QUALITATIVE ANALYSIS NEEDED?

An IA should always be qualitative. Whether or not it also needs to include some quantitative

analysis depends on the extent to which it is required in order to establish whether or not the overall

effect of a policy proposal will be significantly positive 6.

For example, it will not make much sense to quantify one aspect of a policy (assuming that this

aspect is relatively easy to quantify), when other aspects of the same policy are expected to generate

much larger impacts which cannot be quantified.

Thus, not every aspect of a policy proposal needs to be quantified, only those that are expected to

carry significant impacts or about which there is uncertainty in relation to the extent of their likely

impact. Moreover, when the benefits of different policies are similar, it can indeed be enough to

evaluate the costs of these policies in order to compare them.

There is sometimes a misperception that a quantitative analysis means that benefits and costs should

be quantified as precisely as possible. This exposes a quantitative analysis to unnecessary criticism

because it is frequently very difficult, if not impossible, to fulfil such a requirement. For practical

policy purposes a much lighter requirement will often be sufficient. As regulators are interested in

knowing whether the net benefit of a policy proposal is significantly positive, it will be enough to

quantify an underestimation of the benefits and an overestimation of the costs. When the resulting

net benefit is significantly positive, the policymaker can be reasonably sure that the proposal has

passed an important IA test. In this case, there is no need to quantify benefits and costs in a very

precise way.

In both qualitative and quantitative IAs it is important to carry out a stakeholder analysis (see also

the IA questionnaire in Appendix 1).

1.11. ASSESSING THE BENEFITS, THE COSTS AND THE NET BENEFIT

Where regulatory policy proposals are expected to have significant effects upon market participants

and consumers, an assessment of the associated costs and benefits of those proposals is required.

6 On occasions a Level 2 Committee might make an expilicit request to a Level 3 Committee for quantitative assessment.

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From the outset it will be important to recognise that an evaluation of the costs and benefits will be

comprised of at least five elements, namely:

1. the costs to regulated firms,

2. the costs to consumers,

3. the benefits to regulated firms,

4. the benefits to consumers, and

5. the costs to regulators and the impacts on firm/consumer behaviour.

Though it may be easier to ascribe monetary values to some of these elements than to others, a

systematic analysis will require that at a minimum all costs and benefits are identified.

It may be helpful to think of the evaluation of costs and benefits in two steps. The first step consists

in assessing the incremental costs and benefits, whereby the term incremental refers to the changes

in costs and the changes in benefits which are triggered solely by the policy proposal and not by

simultaneous changes in business practice that would have occurred anyway. This first step is key

for the IA as it is sufficient to identify the most efficient policy among a range of alternative policy

options. In the second step, the result obtained at step one may be compared to the status quo (in

other words the "no change" scenario) in terms of net benefit to see whether the policy proposal

would lead to a significant positive net benefit or whether, overall, inefficiency would still remain. It

will often be helpful to evaluate the current level of compliance in order to get insight into the

additional costs of a regulatory proposal with respect to current market practice.

Example: assume that a new European directive requires financial institutions to send financial

statements for unexecuted orders to consumers. In an economy with 100 customer contacts each year,

and a price of €1 per statement, the costs are not simply 100 x €1 = €100. To arrive at a realistic

evaluation of the costs of this new regulation, it is important to establish how many companies already

issue a statement and are therefore ‘compliant’. If 98% of the firms already send a statement about the

execution of an order, the cost of this directive is €2. Note that, if, for example for reasons of simplicity,

‘zero compliance’ (instead of 98%) were assumed, the costs of the rule would be considerably

overestimated, and there would be the risk that a rule that is useful will not be introduced because its

costs are considered too high.

Evaluating the net impact of a proposed policy is probably easiest when a monetary value can be

attached to the main costs and benefits generated. But much of the time, a quantitative assessment of

the costs and the benefits of a policy will not be possible. Nevertheless, in such cases, a qualitative

assessment will often allow policymakers to say something meaningful about the net benefit.

Sometimes, though a quantitative (but non-monetary) assessment may be possible, it may not

provide materially more information than a qualitative assessment. This is for example the case

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when it is difficult to aggregate the qualitative and (non monetary) quantitative assessments

available. We have already explained in a previous section that one often does not need to be very

precise in quantitative evaluations of costs and benefits, though this is by no means always going to

be the case.

The need for discounting is explained in section 1.11.3.

Sometimes the term Cost-Benefit Analysis (CBA) is used to refer to the quantitative evaluation of the

impact of a regulatory policy, and this is the meaning the present IA Guidelines give to CBA. But it

might be worthwhile to stress that this is a semantic choice, and that others use the term CBA

interchangeably with the term IA. However, this latter approach risks ignoring the critical "problem

identification" step in the IA process.

An Excel spreadsheet has been made available to help policymakers to evaluate their policy proposal

when costs and benefits can be expressed in monetary terms, (see also the overview given in the

appendix). The spreadsheet illustrates how different CBA indicators can be used to evaluate a policy

proposal or to compare different policies. As a general rule, policymakers will be well advised to use

the net present value (NPV) for their quantitative analyses (as alternatives often lead to wrong policy

conclusions).

Furthermore, it should be noted that a good IA will not be restricted to the assessment of the positive

and negative effects of a policy proposal when there are strong distributional effects. This is

particularly important when, as a result of a policy, one group of market participants would, for

example, make a loss which is roughly equal to the benefits made by another group. Although the

net impact would be overall broadly zero from a cost-benefit point of view, the regulator could face

justified criticism about the policy in a public consultation, particularly should the disadvantaged

group consist of consumers, whose protection regulators are typically charged with. It is therefore

important that the IA includes an analysis of distributional issues when they are significant. The

assessment of distributional issues is, however, often a very difficult matter and it is unlikely to be

carried out on a systematic basis.

1.11.1. Assessing the costs of policy options

For the purpose of IA, it is useful to introduce distinctions between different types of costs.

Different implementation costs

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A first distinction concerns costs which result from the implementation of a policy. These can be

divided into three subcategories – two types of direct costs, and indirect costs - according to their

effects.7 These categories are:

• regulator’s costs, i.e. the costs that arise to the regulator when it designs, monitors or

enforces a regulatory policy (for example, the costs that a supervisor incurs in order to carry

out its task);

• compliance costs, i.e. the costs incurred by regulated entities and persons in order to comply

with regulatory policy (for example, the costs of setting up a new organisational structure or

internal controls, new computer programs or systems, or training courses). Note that it is

only the change in costs that firms incur due to proposed regulatory requirements that

should be taken into account. That means excluding costs that firms incur as part of doing

"business as usual". The latter costs would therefore not fall away in the event that the

regulatory requirement was subsequently removed. It is important to establish a clear

baseline against which to consider changes in firms' compliance costs. Ordinarily, this

would be established with reference to the conduct of the typical or average firm in the

relevant market (though this may not be possible in many markets). If existing regulatory

requirements are being revised, it would be reasonable to measure cost changes relative to

the minimum costs of complying with the original requirements (though taking account of

the fact that such minimum requirements might differ for firms of different size, for

example).

• indirect costs, which are the negative effects that a regulatory policy can have as a result of

impacts it has on the behaviour of market participants. Indirect costs are usually divided

further into the costs resulting from a change in the quantity, the quality and the variety of

products sold, as well as a change in the effectiveness of competition (further details on

indirect costs are given in the Appendix 3).

For the evaluation of the costs it is important to note that, when the regulator is financed by the

regulated firms, the costs to the regulator are in fact borne by firms. Firms will normally – although

this process can take time - pass on an increase in costs to consumers in the form of higher prices

(this is, however, an assumption that should be tested). This means that, in general, all costs will

ultimately be borne by consumers or investors.

Fixed vs. variable costs and set-up costs vs. on-going costs

7 The comments here refer to the costs (and benefits) associated with individual policy proposals. It is not the purpose of L3 Committee IA exercises to consider the broader question of the cumulative costs that a whole series of regulatory initiatives might have. Nevertheless, it may sometimes be appropriate for policymakers to consider issues such as the impact that simultaneous implementation of several initiatives might have (for example on the availability and therefore cost of IT consultants). The broader regulatory environment facing firms and other stakeholders should therefore be given due consideration.

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Two other distinctions are useful for IA. The first is between fixed and variable costs.

• Fixed costs are costs which do not vary with output. In the long run, all costs can be

considered variable.

• Variable costs are costs which vary directly with the output. Variable costs are associated

with productive work, and naturally rise and fall with business activity.

This distinction is different from another one: set-up costs vs. on-going costs.

• Set-up (or one-off) costs are costs which are incurred at the beginning of a project only.

• On-going costs are costs which are incurred again and again during a project or an

investment. Usually set-up costs are very large in comparison to ongoing-costs each time

the latter occur.

It is often important to make a distinction between fixed vs. variable costs and between set-up costs

vs. ongoing costs when assessing regulators' costs, firms' compliance costs and/or the indirect costs

of regulatory policies.

Opportunity costs

When it is not possible to evaluate the costs of a certain policy option, it might, however, be feasible

to evaluate its “opportunity costs” (i.e. the costs of the next best alternative policy option foregone or

the profits foregone due to the adoption of new regulation). For example, it might be possible to

evaluate the costs of an alternative policy with similar benefits which has been rejected. The costs of

this alternative policy would then give a ceiling for the costs of the policy chosen. Compliance costs

that are difficult to assess can sometimes be evaluated through their opportunity costs, i.e. the costs

the firm would have incurred had it proceeded with its own alternative investment projects instead

of complying with the regulatory policy.

1.11.2. Assessing the benefits of policy options

When assessing the impact of a policy proposal it will usually be easier to assess costs than benefits –

particularly as far as their monetary value is concerned. However, accurate identification of policy

benefits, which requires accurate identification of the problem being addressed, can markedly

enhance the credibility of the policymaking process. A number of techniques exist – to be applied on

a case-by-case basis - which can help policymakers to evaluate benefits even when it seems

impossible at first. Appendix 4 provides concrete, numerical examples for the following techniques:

• Comparison to a relevant historical case

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In many cases, an incident or a series of incidents over time will be part of the reason to

regulate. In order to make an estimate of the expected benefits, the losses in a number of

historical cases can be used as an indicator for how much of the loss could have been

prevented through the proposed regulation.

• Evaluation by a proxy

This approach uses observable variables which are linked to the unobservable variable - e.g.

when there exists a known dependence structure - or focuses on simulations of the

unobservable variable.

• Use of a break-even approach

The third possible approach is what can be called the break-even approach. This approach

consists of calculating the amount of benefit needed - for example a reduction in loss needed

- to cover the costs incurred, which are quantifiable. With this approach, the loss prevention

is separated into the risk of loss and the extent of loss which allows one to capture the

impact on the market. The potential loss for each market participant and the risk that a

market participant will actually suffer loss are then estimated. It will then be possible to

determine by how much the loss, risk of loss or a combination of these elements needs to be

reduced in order to cover the costs of regulations and supervision. For this break-even

assumption, one can examine whether this would be a realistic expectation. The impact of

incidents can often be estimated with the help of event studies. The significance of the

impact of incidents can be calculated and an estimate of the extent can be given. To

summarise, in the break-even approach, one calculates by how much the risk and/or the

impact of an incident must be reduced in order to cover the costs.

• Evaluating “opportunity benefits”

When the benefits of a certain regulatory policy cannot be evaluated it may be possible to

evaluate the benefits of an alternative policy with the same or similar costs which has been

rejected and thus would give a lower bound to the benefits to evaluate.

• Preparing a survey

The ‘beneficiaries’ of the regulation may be asked what they are prepared to pay for the

supervision. One could think, for example, of market research among investors, asking them

what value (in euros) they attach to an information leaflet, or the extra supervision on

individual parties as agents and intermediaries. Indirectly, it is the end user who pays, as the

costs are passed on. It is these end users who benefit from the regulation and supervision.

The value that rules generate for the end user is an estimate of whether the costs are

justified. It must however be kept in mind that the declarations in surveys may over- or

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understate the real preferences and that care must be taken to ensure that survey questions

are properly framed.

1.11.3. Discounting the costs, the benefits and the net benefit

Costs and benefits that arise at different times should be treated differently since € 100.000 received

today does not have the same value as € 100.000 received in ten years time, for example8. To make

the IA sensitive to time value, discounting is used.

The discounted impact of a policy option can be evaluated by calculating what is called its present

value (PV)9. Discounting allows one to quantify the fact that a given amount of cost (benefit) that

arises later (sooner) is preferable to the same amount of cost (benefits) that arises sooner (later).

The net present value (NPV) of a policy proposal is calculated as

(Discounted value of benefits) – (Discounted value of costs).

In practice, the discount rates used will, in the absence of realistic alternatives, correspond to a long-

run average of the real or nominal yield on long-term government debt. Real or nominal discount

rates should be used when the costs and benefits are measured in real or nominal terms respectively.

The real discount rate can be obtained by subtracting expected inflation from the nominal rate.

In a qualitative assessment, discounting may be considered unsuitable, since costs are not expressed

in monetary terms. But even in a qualitative impact assessment, the influence of time should be

taken into account. One way to do this is to make a rough distinction between two or three broad

time periods where the costs or the benefits occur (see the IA Summary Tables in section E for an

example).

Neglecting the issue of discounting can lead to serious anomalies. For example, failing to discount

the minimal annual benefit (cost) of a policy which only necessitates a huge set-up cost (generates a

benefit at only one point in time, but a substantial one) gives rise to an infinite discounted present

benefit (cost). Another anomaly is that by not discounting, it would always be preferable to defer a

policy if the same policy will be available in the future. Indeed, when the money which would have

to be spent for the policy is used for an investment with a positive return, this investment would be

preferable to the policy as more money would be available for the same policy in the future.

8 The appendix shows a graph of the value today of € 100.000 received in x years for a range of discount rates. 9 For example, to calculate the present value of a cost C that occurs t years in the future with r as discount rate, the

following formula can be used: [ ]

( )t

r

CCPV+

=1

. For a benefit B, the calculation is the same (C must be replaced by B).

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One needs to be careful when policies with different time horizons are compared as a comparison

between NPVs might be misleading. In such a situation, it is often useful to calculate the annualised

value for each of the alternative policies (see appendix 5).

1.11.4. Risk and uncertainty

The outcome of an IA often will depend on predictions which by nature will have a degree of

uncertainty attached to them. IA should, whenever this is reasonably possible, take the uncertainty

explicitly into account. Two basic techniques will help policymakers to do this:

• Simulations

Sensitivity analysis involves considering a range of possible values of one key variable or

factor which is likely to affect the outcome of the regulations; obviously this technique can

also be applied to several (but, in practice, because of increasing complexity, not many)

factors at the same time;

• Boundary analysis

This technique consists of placing upper/lower bounds on the costs and/or benefits.

Examples of these techniques are given in the spreadsheet CBA model in Appendix 6.

1.12. COMPARING POLICY OPTIONS

Ideally, a consideration of alternative policy options should involve a comparison of the benefits, the

costs, and the net benefit (i.e. benefits minus costs) they generate. However, in many cases a precise

quantitative evaluation will not be possible. When this is so, policymakers might want to consider

the feasibility of a lighter version (which has already been mentioned in the sub-section on

qualitative and quantitative IAs). Indeed, often alternative policy options can be compared by

evaluating their costs only. Obviously, identifying the best option in this way works is appropriate

only when the benefits of the policies under consideration are identical or very similar.

For example, if policy A would reduce insider trading by much more than policy B, and policy A would

also cost more than policy B, information about the costs and the benefits would be needed for a

comparison of the two policies. However, when both policies would reduce insider trading in roughly

the same way, and only the costs would be different, a comparison of the costs alone would allow one to

choose the more efficient policy.

In many - perhaps even most - cases, it will, however, only be possible to compare options in a

qualitative manner. Experience has shown that this is often enough not only to dismiss some options

but to identify the most appropriate policy option.

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The process of comparing policy options may lead to the identification of a single, preferred option.

However, it might also lead to the proposal of several policy options, whose comparative advantages

and disadvantages would need to be described clearly. It should be borne in mind that the purpose

of IA is to identify sensible policy proposals for decision makers and to help them making decisions,

not to substitute for the decision-making process.

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2. WHAT TO DO FOR CONSULTATION

Consultation is a key part of policy-making as well as of impact assessment. It refers to every direct

and indirect attempt to collect input from relevant and interested parties during the policy-making

process. It may therefore cover the department-to-department consultation within a Competent

Authority, meetings between policy-makers and market participants and consumer representatives,

scientific advice from experts, or written formal consultation with other public or private

authorities, market participants and/or their representatives, consumer representatives, and

individuals.

2.1. THE PRACTICE OF CONSULTATION BY L3 COMMITTEES

Each L3 Committee operates its consultation procedures in line with their Public Statement of

Consultation Practices10.

The Committees use appropriate processes to consult - both ex-ante and ex-post - market

participants, consumers and end-users which may include amongst others: concept releases, calls

for evidence, publication of consultation papers, public hearings and roundtables, written and

internet consultations, public disclosure and summary of comments, feedback statements, national-

and/or European-focused consultations.

In particular, the tools used by the L3 Committees' Expert Groups in managing the consultation

process include: calls for evidence/advice, the use of consultative working groups/panels and other

ad hoc groups, publication of consultation paper, open hearings, bilateral meetings with EU

representative groups which have specific sectoral interests in aspects of the Expert Group’s work,

national consultations and, upon finalisation of their mandated work, the feedback statement.

2.2. THE ROLE OF IA IN THE L3 CONSULTATION PROCESS

2.2.1. Pre-Consultation Paper period

During the period that precedes the release of the first Consultation Paper, assuming there is only

one consultation round (or the second Consultation Paper if there are two consultation rounds),

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informal consultation with stakeholders in order to collect information and/or data on the problem

at hand can be a helpful tool. It will, for example, contribute to a better assessment of whether the

problem is significant and, if it is and there is no prospect of a market-based solution, the proposed

solutions would actually be appropriate. It may be important to involve market participants at an

early stage of the IA. Concerning the collection of data, a key role may be played by trade

associations. It is important to handle sensitive information appropriately and to report data in ways

that preserve confidentiality.

2.2.2. Post-Consultation Paper period

The Consultation Paper released to the public should report on the IA work of the proposed policy

options. The paper should be evaluated as a single piece of work, although technical issues

concerning IA aspects may require relevant experts to evaluate the responses.

During the post-CP period, the standard L3 Committees’ consultation procedures apply, as these are

defined in their public statements of consultation practices. In particular, the feedback statement to

the comments received will refer to IA when this is appropriate.

2.2.3. Preparing a Feedback Statement that refers to IA

The aim of a Feedback Statement is to give an overview of the main substantive points arising from

the consultation and to explain the rationale for selection of particular policy options11.

A Feedback Statement that refers to an IA could be organised along the following lines:

• The Feedback Statement could start with a brief outline of the reasons for consulting and

the methods used, remind the reader of the main issues involved, and usually restate the

questions of the Consultation Report.

• It could contain a summary of responses, which should properly represent all the main

comments received. It does not have to contain every individual response, a summary of

the responses received is sufficient. However, disclosing individual responses might be

considered when appropriate.

• In case the draft policy proposal is reviewed and modified in light of the responses

received, the reasons for the changes should be given. Similarly, when the draft policy

proposal is not modified as a result of the comments received, this should be explained.

In other words, the rationale for rejecting or accepting received suggestions should

always be made clear.

10 CESR/01-007c, December 2001, CEBS/05/18 March 2005, CEIOPS-Doc-01/05, February 2005. 11 CESR/03-149c – “Revised guidelines for Expert Groups”.

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• The Feedback Statement should conclude with a summary of the policy decision and a

description of the way the policy will be taken forward.

• The report should contain an appendix with the list of respondents.

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3. KEEPING POLICIES UNDER REVIEW

3.1. WHEN TO REVIEW POLICIES?

It is important to ensure that a policy proposal that has been adopted is properly implemented to

achieve its objectives. To make sure this happens, it is appropriate to keep the policy under review.

Here again it is important to be proportionate. Some policies might not need any review because

their effects are obvious and certain. In other cases, the likely impact of the policy may be uncertain

but potentially significant, and in such circumstances a date for a review, i.e. an ex-post IA, ought to

be included in the policy proposal. During the ex-post review process, consultation with all

interested parties is essential and should be used in the same way as during the ex-ante IA process.

3.2. WHEN TO PREPARE AN EX-POST IA?

An ex post IA aims to review existing policies and to evaluate their effectiveness. It can be conducted

whether or not a review date has explicitly been set. The preparation of ex-post IAs provides

legitimacy vis-à-vis the public and internal discipline and therefore serves to underpin the

credibility and accountability of the work of the L3 committees. Moreover, where it is known that

there will be an ex-post IA, the discipline of policy-making is likely to be enhanced.

As mentioned above, an ex-post IA should be carried out when there is uncertainty about the likely

effects of a policy and where those effects are expected to be significant. In such cases, the ex-ante

IA will probably have included a pre-commitment to conduct ex-post IA. However, such analysis

can also be conducted with policy-maker discretion where, for example, there is a reasonable

presumption that a particular policy has not achieved the desired objective or when it does so but at

an unexpectedly high cost, so that the net benefit of the policy might not be significantly positive

(regulatory failure).

In an ex-post IA, the IA methodology should be applied in just the same way, even if the focus of the

exercise is somewhat different. For example, in the case of an ex-post evaluation, policy makers

would not need to devote much attention to conducting MFA/RFA if it had been done in the first

place. Where a regulatory intervention proceeded in the absence of MFA/RFA, then any ex-post

evaluation would need to address this shortcoming and the IA exercise would more closely resemble

the established ex-ante approach.

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Assessment of the impacts of past regulation is also important because it must bear heavily on the

design and implementation of a regulatory response to a present problem:

• One may wish simply to remove pieces of regulation that are the cause of problems (unless

doing so would result in a still bigger risk/detriment);

• One would presumably wish to steer clear of measures similar to ones that have definitely

failed in the past, and to be clear about the reasons why they failed (did they or did they not

correctly target the relevant market failure?);

• One would need to decide whether existing regulation that seemed to be correctly targeted

on a market failure should be given more time to work.

Care must however be taken about some extra difficulties when assessing a policy ex-post instead of

ex-ante.

The first difficulty is the proof of the causality between the policy measure and the change in

behaviour. To prove causality, ideally, a comparison should be made between the market with and

the market without regulation/supervision. This can involve the use of complicated analytical tools,

requiring input from technical specialists, and is not always feasible. Moreover, in some fields of

regulation and supervision the problem of dark figures or dark numbers is prevalent, i.e. neither the

scale nor the exact form of the illegal conduct is known (e.g. insider trading).

In the absence of a proof of causation between a policy measure and market outcomes, it may still be

possible to identify indications of the effectiveness of regulation and supervision. To this end the

following three instruments have proved useful:

• Anecdotal evidence:

Gathering anecdotal evidence by interviewing stakeholders can indicate whether or not a

particular policy has addressed a market failure. Obviously the larger the volume of relevant

evidence collected the more credible the results. However, one has to be aware that this

method is vulnerable to strategic answering and diffusion between perception and facts.

• Outcome indicators:

To improve the effectiveness of policies, and of regulation in general, it is useful to develop a

structure of performance indicators. Outcome indicators show to what extent a certain

policy has helped to achieve the aims that have been identified ex-ante. Such outcome

indicators have to be measurable and achievable, which is not easy, especially when they are

developed for less tangible objectives such as market confidence. The structure of such

indicators should be developed before the implementation of the policy and used in the

monitoring process and in any ex-post analysis.

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• Statistical studies:

Once a regulation has been implemented and data is available that spans the period before

and after implementation, statistical techniques, such as regression analysis, can be used to

test hypotheses about the nature and extent of the impact of the regulation. Such exercises

face technical difficulties, such as how to isolate the effects of regulation from the effects of

other explanatory factors. Nevertheless, they can prove of considerable value in clarifying

the significance or materiality of regulatory impacts post-implementation.

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4. HOW TO REPORT ON IA

Various documents will be produced in the course of the IA. It is on the basis of this information and

evidence that the problem will be assessed, the options identified, and their impacts analysed. At the

end of the process, all these findings will need to be summarised in the Consultation Paper either in

the appropriate sections of this document or as a separate single document, the IA report.

Ideally any non-specialist should be able to follow the argumentation and understand the rationale

and the positive and negative impacts of each of the options considered in the IA. In order to

enhance the clarity and readability of what is said about IA exercises, tables and diagrams should be

used to summarise certain key points.

Any stand-alone reporting on the outcome of an IA exercise should contain a clear 'waiver' on its

cover and an introduction indicating that the text is prepared as a basis for comment and does not

prejudge the final form of any decision to be taken by a L3 Committee.

All uncertainties or assumptions should be flagged. The reporting will also need to specify which

analytical method was used to assess and compare the impacts of the proposed policies.

In line with the EU guidelines, the presentation of the IA work should normally not exceed 30 pages

(excluding annexes). When it takes the form of an IA report, it should use the following format

(unless there is good reason not to):

Executive summary

Section 1: Procedural issues and consultation of interested parties

Section 2: Problem identification

Section 3: Objectives

Section 4: Policy options

Section 5: Analysis of impacts

Section 6: Comparing the options

Section 7: Outcome of comparisons and conclusion/recommendations

Any supporting documents, such as expert reports or summaries of stakeholder views, should be put

into the appendix of the Consultation Paper or the IA report, either physically or by html link.

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Where the limit on the number of pages precludes going into detail on an important point set out in

an accompanying document, a cross-reference to that document could be inserted. There is, of

course, no limit to the size of the appendices.

Reporting on IA work is needed even when the draft proposal is abandoned as a result of the IA

process. In this way it will be documented why careful consideration of potential impacts led to the

decision that no action should be taken.

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APPENDIX 1 – Principles for Impact Assessment in the area of financial regulation

Introduction

Having looked at the principles that inform regulatory impact assessment as a discipline generally

and also having regard to the principles that guide impact assessment within the membership of the

Lamfalussy Committees and the European Commission, it is agreed that the four guiding principles

that would serve as an appropriate basis for a framework for impact assessment for the L3

Committees’ work are:

I. Clarity;

II. Effectiveness and Focus;

III. Proportionality; and

IV. Transparency.

These impact assessment principles will enhance the accountability of the Lamfalussy Committees

and do not conflict with, or require a revisiting of, the Charters of the Committees.

The Lamfalussy Committees agree these principles for impact assessment and have elaborated on

them as follows:

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Principles Practical Implications for Impact Assessment in the work of the Lamfalussy Committees

Clarity The impact assessment process will need to describe the policy context, the objectives and what the various options are. Options must be shown to be relevant to the Committee’s Charters.

Effectiveness and Focus The impact assessment process will seek to ensure that policy initiatives are focused on the problem identified, and that anticipated side effects, and the risk of unintended consequences, are both taken into account.

The impact assessment process will also consider, as appropriate, the compliance and enforcement dimensions of initiatives.

Proportionality The impact assessment process will ensure that policy initiatives are appropriate for the perceived problem or risk. The impact assessment process will, in particular, consider the positive and negative impacts of all proposed initiatives. It will also give reasons for choosing a particular initiative and rejecting the alternatives considered.

Transparency The impact assessment process will seek to ensure that each Committee’s policy initiatives are open, user friendly and are communicated effectively to all stakeholders. The existing consultation processes, which comprises of:

1. the publication of a draft policy initiative; 2. a consultation period; 3. the publication of the responses received; and 4. a feedback statement

will, at the point at which a draft policy initiative is published, include an impact assessment

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APPENDIX 2 – INDICATIVE IA QUESTIONNAIRE The intention of this section is to provide policy-makers with a series of questions the answers to

which will help them to frame the scope and nature of the policy issue under investigation. The

questions are not exhaustive, they could be grouped together differently, and not all of them will be

relevant to the problem at hand. The questions are only examples of the kind of issues policy-makers

may want to investigate. It is anticipated that IA experts will help policy-makers to identify the

questions most pertinent to the policy issue under investigation from an IA point of view.

1. Preliminary General Questions Market participant and stakeholder identification

• Which stakeholder groups / market participants are within the scope of the policy issue under consideration? In addition to retail and wholesale consumers and product / service providers, other interested parties will include industry and consumer interest groups, trades unions, other governmental institutions, and elements of the media

Scope and nature of considered regulatory measure(s)

• What is the nature of the problem and what type of regulatory solution is envisaged?

• What is the nature of the regulatory solution envisaged? (eg is it EU or internationally-driven regulation? Will it be implemented into national law with broad discretion? Is it industry-led best practice?)

• Has there been a previous regulatory intervention (and how recently was it introduced) and what evidence is there to indicate its effectiveness?

• Would self-regulation be effective? Or would it fail to address the problem and stifle competition?

IA scope • Are the costs and/or benefits of the regulatory solution expected to be significant? What does this imply for the scope of IA work required to examine the problem and potential solutions in more detail? Ultimately the IA must yield information that is sufficient to inform the decision-making process

2. Stakeholder impacts (covering the various types of market participants and stakeholders) 2.1. Consumers and their representatives (investor groups and associations) –with a clear distinction between retail and wholesale consumers

Consumer benefits • How will consumers benefit from the policy proposal? • What assumptions about consumer behaviour underpin your

considerations? (for example, for consumers to benefit from disclosures concerning commission rates you have to assume that disclosures are read, understood and behaviour modified in a way that leads to a better outcome (i.e. lower mis-selling))

Consumer costs • What is the impact of policy proposals on the costs borne by consumers? Will industry costs be passed on to consumers?

• Do you expect product prices to change? Will product choice or quality be affected?

Financial literacy / capability

• Consider the financial capabilities of consumers and the role that market participants do and can play in affecting capability or in addressing any shortcomings

2.2. Product / service providers Benefits to firms • Market and regulatory failure analysis will help identify the nature of

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potential benefits, which can be linked to regulatory objectives eg financial stability, market confidence. Will benefits arise in terms of greater product sales? Or will firms financial strength improve? Or their cost of capital fall?

• Will firms' incentives be better aligned with those of their customers? Costs to firms • What sort of compliance costs (one-off and ongoing) will be incurred

by firms? • How will the policy initiative affect their behaviour? Will it affect

product price, choice, quantity or quality? What sort of administrative costs might be involved? How will the policy be enforced? Will it require constant and therefore potentially costly monitoring, or not?

Organisation and governance

• Will there be organisational and corporate governance changes (new requirements, etc.) as a result of the policy?

2.3. Macroeconomic consequences Industry • What will the industry-wide impacts be?

• Will businesses relocate? What might the employment consequences be?

Economic growth • What are the likely economy-wide and/or global impacts on economic activity? For example, will there be single market harmonisation benefits or will national or EU-wide competitiveness be compromised?

Transfers of resources • Will there be impacts on potential transfers of capital and human resources across sectors and borders?

3. Market failures and market impacts (see Appendix 2 for definitions and examples of market failures) Market failure analysis Key questions:

• Is there a significant market failure that relates to a regulatory objective?

• Is there a significant regulatory failure that relates to a regulatory objective?

• In the absence of intervention will the market (regulatory) failure be corrected in the short term?

Market definition and structure

• What is the relevant economic market? • How is it structured? • Is the market pan-European, or a series of local or national markets? • If the market is not or is only partially integrated, what might be the

barriers to further integration and can they be removed through regulation?

Identifying and addressing market failures – imperfect and asymmetric information

• What types of information flow are important in the market? • How well informed are consumers relative to providers? • If they are less well informed, what might be the cause and implications

of this? • Is there evidence of significant mis-buying or mis-selling? • Is there a significant problem of imperfect or asymmetric information? • If a policy initiative is designed to address an informational asymmetry

what assumptions have to hold for benefits to be realised? • How will these assumptions be tested? • If an initiative has already been implemented, what evidence is there to

suggest that it is working and that benefits are being realised? • Or is there evidence of a regulatory failure • What other impacts will the initiative have on firm and consumer

behaviour? Identifying and addressing market failures - externalities

• How well do individual firm incentives align with regulatory objectives? • How do firms' incentives change over the economic cycle? • Is there evidence of a significant externality? • If a policy initiative is designed to address an externality what

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assumptions have to hold for benefits to be realised? • How will these assumptions be tested? • If an initiative has already been implemented, what evidence is there to

suggest that it is working and that benefits are being realised? • Or is there evidence of a regulatory failure? • What other impacts will the initiative have on firm and consumer

behaviour? Identifying and addressing market failures – market power

• Is there evidence to indicate the existence of market power? • Is there evidence to suggest that there is an abuse of market power? • If a policy initiative is designed to address an abuse of market power

what assumptions have to hold for benefits to be realised? • How will these assumptions be tested? • If an initiative has already been implemented, what evidence is there to

suggest that it is working and that benefits are being realised? Or is there evidence of a regulatory failure?

• What other impacts will the initiative have on firm and consumer behaviour?

Regulatory failures • Has an existing regulatory intervention resulted in higher costs or lower benefits than anticipated such that the net effect has been harmful or less beneficial than it could have been?

• Is the intervention responsible for misleading consumers and further mis-buying?

• Is the intervention responsible for reducing competition and pushing up prices?

• Has a proportion of the firms in the market be forced to exit as a result of the intervention? Is the number of firms left in the market insufficient for competition to be effective?

• Has the initiative reduced the competitive position of small enterprises relative to large ones?

4. Impacts on Regulators (incl. all governmental units involved in the regulatory process) 4.1. Impact on the financing of regulators Operating costs • Will the proposal affect operating costs for regulators? (consider

possible impacts on staff, training and infrastructure requirements) Are costs one-off or recurring?

Funding and budget • Will the proposal affect regulator’s funding level, sources and composition?

• Will there be any implications for regulators' budgets? 4.2. Impact on regulatory responsibilities Regulatory roles and responsibilities

• Does the policy initiative address problems relating to overlapping or uncertain regulatory responsibilities?

• Will the proposal clarify the role of regulators with regard to a specific person, activity or operation?

• Will it grant new regulatory powers to regulators or any other party? • What about the legitimacy of new powers, or power transfer

(considering also the role of the media)? 4.3. Procedures Operational impact • Will the policy initiative simplify internal processes and paperwork?

• Will it affect customer service standards (e.g. licensing or authorisation procedures)?

Organisational impact • What are the impacts: - on discretionary powers granted to regulators. - on regulatory processes (notably regarding administrative complexity? - in terms of a shift from ex-ante/rules-based to ex-post/principle-based regulation? - on specialisation and capacity of staff to address complex issues and

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deal with innovation (both from an operational point of view and with regard to research and analytical capacities)?

Regulatory simplification • Will it avoid/reduce duplication in legislation and the regulatory framework?

APPENDIX 3 – MARKET FAILURES

This appendix will explain in more detail the concept of market failure and the different market

failures which typically arise in the area of financial regulation.

If markets for all goods and services produced in positive quantities work well, each good or service

will be priced at a level that matches (i) marginal benefit, measured in money, and (ii) marginal

cost. Market failure arises when marginal benefit is unequal to marginal cost – too little or too much

is bought and overall welfare is not at a level where it could be.

In broad terms, the four market failures that matter most in this guide arise when:

• externality/third party effects make social marginal benefit (or cost) differ from the

“private” marginal benefit for buyer (cost to seller);

• some buyers (or sellers) are imperfectly informed, so that their mistaken estimates of actual

marginal benefit (marginal cost) lead them to take incorrect decisions;

• market power or lack of competition, on the part of seller(s) or buyer(s), leads them to

exploit their influence over the price, which they no longer take as given – leading,

typically, to under-provision of the good in question;

• “public goods” from which everybody profits and which can be difficult to provide when

the market is left on its own.

More detail on each of these is supplied in turn below.

Externalities. A good or service generates externalities if its production or consumption affects the

welfare of economic agents (people or firms!) other than its original producers or consumers

without prices reflecting such effects. Externalities may be negative and/or positive. They are

"negative" for those on whom they impose costs and "positive" for those who gain from them.

Negative externalities occur in production when decisions adopted do not take account of all the

costs which result from the firm’s actions but which are not borne by the firm.

The classic example of this in financial services is systemic risk in the banking sector, where the failure

of one bank may lead to runs on other banks and hence to problems for those other banks and their

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customers. A similar reasoning might apply in the case of the failure of a large reinsurance company

with negative effects on property and casualty insurance companies for example.

Another example is the failure of the derivatives dealer Enron Corporation in December of 2001 which

exposed the practice of using OTC derivatives to hide debts or losses, and artificially boost income. It

revealed that collateralizing OTC derivatives might be inadequate as a rısk mitigation device. Enron’s

failure showed how a bankruptcy can have a sever impact beyond the immediate creditors and cause

sharp declines in the market capitalization not only in the energy sector, but the overall U.S. equity

market. One reason was that investors were – in the face of intransparent trading markets – compelled

to presume that almost any firm had a potentially large exposure to Enron. In response, many firms

voluntarily announced their losses to Enron because they feared that the market’s expectation would by

far overestimate the true losses.

Consumer fraud may be regarded as a negative externality in consumption. Financial crime also

bears negative externalities in terms of the costs people incur in defending themselves against it and

in being involuntarily associated with it.

Imperfect and asymmetric information. Individual decisions are affected by imperfect information

about quality (that can be unobservable ex-ante), price (information on which can be very costly to

obtain) and the future (data on which can be unavailable!).12 Information asymmetries exist when

one party to a financial transaction has more or better information than the other party and exploits

its informational advantage. Excessive costs of accessing information, for example, may give rise to

this market failure.

Some financial products (or the firms supplying them) may be so complex that disclosure, by itself,

cannot enable customers to make informed choices. In financial services, the outcome of a contract may

depend on the provider’s financial soundness and competence for decades into the future (like for

example in the case of life insurance contracts). This information cannot be known at the point of

purchase.

Information asymmetry can work both ways. A product provider may be selective about the

information that it gives the consumer: it prefers not to reveal information that puts the product in a

bad light. Equally, a purchaser of life insurance may not disclose that he or she has health problems.

An important area in which information asymmetry may explain the market outcomes that we

observe is where one party to a transaction (the principal) uses an agent to act on his/her behalf.

The principal aims to sign a contract that aligns the agent's interests to his/her own. But it can be

hard for the principal to monitor the agent (an information problem) and the agent may have

incentives to take specific decisions that are not aligned with principal's interests.

12 It is a "fact of life" that markets fail to provide information that cannot be known. This type of market imperfection is not a market failure – there is no asymmetry and nothing that can be done – and so does not provide a rationale for regulatory intervention (beyond warning those who may not be aware of the information gap that it cannot be filled).

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An important example is when a consumer (principal) uses a financial advisor (agent) who is

remunerated through commission paid by the product provider. Another example is when the

consumer (principal) uses a fund manager (agent) to invest his or her funds.

It is sometimes useful to classify products according to the nature of the informational problem

linked to them13:

o “search goods”, where the products are typically homogeneous, their the quality is

known ex ante and consumers/investors are “searching” for the lowest price;

o “experience goods”, where the products are typically heterogeneous (i.e. the price

depends on the quantity and the quality), and their quality becomes known ex post, i.e.

after the product has been purchased;

o “credence goods”, where the quality may never be discovered, even after the product

has been purchased. The consumer/investor has to have faith into the judgement and

competence of the product provider.

Financial products are often, but not always, similar to credence goods. This may be obvious in the

case of a life insurance contract for example, but it may also be true for other apparently

standardised products like company shares, financial futures or vanilla-type options. Indeed, the

value of the share may depend critically on the corporate governance structure, the possibility to

enforce voting rights and the quality of the management. Similarly, the value of the future or the

option depends on the quality of money management.

Two forms of asymmetric information can be distinguished depending on the exact timing at which

the information asymmetry occurs, i.e. before the transactions’ contract is signed (so-called “adverse

selection”) or afterwards (so-called “moral hazard”).

An example of the first situation, adverse selection, is when the seller of a financial product may have

private information about the quality of a product at the time of contract. In banking, an example

would be a depositor putting funds with a bank offering high saving rates without being aware, for

example because of misleading information, that the bank is also high-risk. An example in insurance is

that customers who apply for an insurance policy are more likely to be those most in need for

insurance.

An example of the second situation, moral hazard, is when the buyer of a financial service may not be

able to assess the quality of the service after conclusion of the contract. Another example would be

when bank, insurance or investment firm managers are inadequately monitored by shareholders,

because the business strategies chosen by the managers may be more risky than the shareholders would

accept. This problem is likely to be particularly relevant when the managers can profit from the upside

13 In line with standard terminology in what follows the term “good” is used instead of “product”. The classification can easeliy be transposed to finanical products.

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of the business strategy, but it is mainly the shareholders who are affected from a downside movement.

In other words, as a result of moral hazard, the business strategies may be more focussed on the private

benefits of the managers (like prestige, empire building, etc.) than on maximising profits and dividends.

In the context of financial market regulation, the distinction between the two forms of asymmetric

information may be needed since the means of regulation to address these problems may differ, as

well. While in the former situation it may be appropriate to stipulate certain disclosure

requirements, in the latter situation, a regulatory measure could define the liability of the service

provider.

Market power is exercised when prices are changed solely by the decision of one or a few market

players: prices are set by these firms with limited regard to customers or competitors, such that

revenues above the marginal cost of all production inputs (including the market cost of capital) can

persist rather than be eroded by competitive pressures. In other words, there are, in contrast to a

situation of perfect competition, excess profits. Market power can arise if firms collude and agree on

a price strategy or if there is de facto collusion – which may be tacit in nature. Market power is also

exercised through the use of brands, when prices and costs are not really interlinked (the brand

premium may far exceed the cost of creating the brand). It can also result from consumer inability

to discipline producers, probably due to information asymmetries, so that a false competitive focal

point may drive transactions.

For example, one effect of "fit and proper" requirements, conduct of business requirements or

prudential requirements is to create an entry barrier that reduces the strength of competitive pressures.

There is also the case of natural monopoly. This arises where sunk costs are very large relative to

unit production costs, so that average costs are decreasing for any volume of production for which

there is demand. If there are these economies of scale in production or there are network economies

in distribution, a single producer or distributor seems the most efficient means of satisfying all

demand. Aside from huge sunk costs acting as a barrier to entry giving rise to natural monopoly,

non-natural monopoly may be created by other barriers such as regulation.

Market power is often, but not always, reigned back in contestable markets by the threat of potential

entrants.

“Public goods”14 as opposed to “private goods” have two particular characteristics: First, no

additional cost has to be incurred in order for an individual to benefit from consumption of the

product, i.e. there is no rivalry between market participants for its consumption. Secondly, it is

impossible or at least very difficult to exclude individuals to benefit from such products.

14 “Good” is here used as a generic word for product. The term good is used here because it is commonly used in the context of this type of market failure.

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An example of a public good in the context of financial markets is financial stability. Every market

participant benefits from financial stability and the “provision” of this “good" for an additional market

participant is basically costless. In other words, if the financial market is stable, every market

participant can benefit from this situation without affecting the ability of others to benefit from

stability. In this context, the monitoring of the solvency of banks, (re)insurance companies and other

financial firms who are systemic in nature can be considered to be a public good as the financial health

of these firms is a precondition of financial stability.

Regarding the provision of public goods, the market mechanism in general fails to generate an

efficient outcome and produces too little of the public good. Because the market will not supply or

will supply too little of it, public goods may provide a rationale for government activity.

In the example of financial stability, this would correspond to a situation where, if the market were left

to decide on its own about the measures taken to promote financial stability, it would not take up all

steps necessary to efficiently achieve a stable situation.

The reason for this sort of market failure is that the producer of the public good does include into its

business strategy that the good will also benefit other market participants. Moreover, every market

participant will anticipate benefits from the provision of other market participants for free. In other

words, they will free ride. This reduces the individual incentive to incur the cost of production.

Preserving stability in the financial markets is one of the main objectives of financial regulators.

Regulatory intervention is warranted since following the reasoning described above private action

does not in general necessitate maintaining market stability and may often have incentives

conflicting with it.

The provision of generic information about financial products can be seen as a public good. There is a

demand from consumers for such information, but it may not be worthwhile for any one firm to

expend significant resources in providing it, because much of the benefit would accrue to its

competitors. The result is that the market – if left to its own devices – does not provide as much

generic information as consumers would be willing to pay for.

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APPENDIX 4 – DIFFERENT TYPES OF COSTS

This appendix provides more details about the types of costs alluded to in the main text of these IA

Guidelines: direct costs (i.e. regulator’s costs and compliance costs), and indirect costs (such as a

change in the quantity, the quality, or the variety of financial products offered, or a change in the

effectiveness of competition).

Regulators' costs A new regulation usually leads to additional costs to the regulator in the area of designing,

monitoring, and the enforcement of policy. For example, the time spent by regulatory staff or the

money spent on required computer hardware or software falls in this category. In some complex

and broad regulatory proposals time spent and other costs for preparing drafts as well as designing

the regulatory regime should be considered part of regulators' direct costs.

Direct costs are often easy to measure, both quantitatively and in monetary terms, since the

information needed is available within the regulatory authority.

Compared to other costs, direct costs are generally easy to quantify and monetise, but they are often

also negligible within the overall costs of a policy. In such a situation, it is not always proportionate

to evaluate the direct costs in a very precise manner – or even to evaluate it at all.

Compliance costs Compliance costs correspond to the value of resources used by regulated entities or individuals in

order to comply with regulation. In general, new regulations will increase compliance costs – but

this need not be the case, e.g. when the aim of new regulation is to reduce bureaucracy and

paperwork within regulated firms.

In the assessment of compliance costs, consultation with affected parties has an important role to

play. When information obtained in this way is used in the IA, special attention should be given to

• the tendency of affected parties to overestimate the costs they incur; often it is possible to

overcome this problem at least to a degree by surveys where affected parties are unlikely to

respond in a co-ordinated way;

• new ways to comply with the regulatory requirements; for example, by using electronic

transmission in a standard format, compliance with data requirements can be made

relatively costless.

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Some examples of compliance costs are listed in the table below, which makes a distinction between

one-off and on-going costs. In general, when regulation is withdrawn, firms will not bear any more

on-going costs (i.e. the fixed and the variable costs), which were linked to the policy, but they have

already incurred one-off costs (or set-up costs) in an irreversible way in order to comply with it. It is

therefore important to think about the relative weight of on-going costs and one-off costs when new

regulatory policies are proposed.

Table A.1: Examples of compliance costs

One-off costs 1. Information costs and training costs arising from knowing and understanding the new regulatory requirement;

2. Upgrading or changing equipment buildings, software, hardware etc.;

3. Buying or subcontracting specialist services (e.g. accounting, IT, legal etc.)

On-going costs 1. Individual or staff costs or time;

2. Inspection fees/ enforcement;

3. Licence application process (application form, writing letters, running advertisements etc.);

4. Form filling /administration / paperwork (compiling necessary information, time taken etc.)

Indirect costs This section deals with the negative impact of a regulation on the market. These costs often are not

obvious and may well be high when compared to other costs. Indirect costs are also often hard to

quantify and monetize, and in many cases, a qualitative assessments will be sufficient in an impact

assessment. Usually indirect costs are considered to be : changes in the quantity, the quality, and the

variety of products or services offered, as well as changes in the effectiveness of competition in the

relevant market.

Quantity of the product offered

Sometimes regulation can influence the quantity of a product offered. The concept of consumer

surplus can be helpful to assess the impact of the regulatory policy. Consumer surplus is the excess

amount consumers would be willing to pay for a product over the amount they have to pay for it.

Consider, for example, an increase in compliance costs which is reflected in a price increase. This

will affect the consumer surplus in two ways. For consumers who continue to purchase the product

after this price increase, there is a loss in surplus. Other consumers will, as a result of the price

increase, stop purchasing the product. For them, the surplus will be negative.

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Quality of the products offered

In markets where the quality of a product is difficult to ascertain, there is a tendency that products

are cheap and of low quality, even though most suppliers and consumers would be interested in

expensive and high quality products. Many regulations are designed to overcome the asymmetry of

information which leads to this kind of market failure.

Conducting surveys on consumer preferences focusing on the willingness to pay for new regulation

may sometimes be a suitable tool to measure the costs incurred by the low quality of products.

Variety of the products offered

By influencing the cost of specific products within a general class, regulation contributes to

determine the variety of the products offered within that class.

As a general rule, it is safe to assume that an increase (decrease) in choice generates a benefit (cost)

to consumers. This needs however not always be true. For example, when there are so many

differences between products that consumers cannot compare them, there is likely to be a loss for

consumers as the product suppliers will fix the prices higher than would be the case when

comparison were possible. Measuring the value of the benefit and cost as a result of change in the

variety of products is often very difficult. Sometimes the extent of the change in variety of products

can be used to decide between several policy options.

Efficiency of competition

Competition is a process which pushes firms to decrease the prices and to increase the quality of

their products, where those who perform better drive out those who perform less well, and where

the entrepreneurial spirit can unfold. It might be tempting to identify competition with rivalry, i.e. a

process where competitors try to outperform each other. However, such a definition would not

convey with any precision how much rivalry is good. Effective competition can be defined as a

situation where firms do not make any excess profit (which is not necessarily the case under

rivalry).

Regulatory policies may affect competition in various ways. For example, regulation concerning the

process of becoming authorised may reduce or erect a barrier to entry and therefore increase or

decrease competition. Imposing high level of fixed costs or limiting activities to some institutions or

individuals may result in a decline in the number of competing firms or individuals.

In order to analyse competition issues it is often helpful to consider what is called the relevant

market. The relevant economic market(s) can be identified by analysing which of the products

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affected are close substitutes for each other. Where they are not obviously close substitutes, the safer

course is to assume that they are in separate markets.

The IA questionnaire (in appendix 1) presents a number of questions which might be helpful to

identify and analyze competition issues related to regulatory policies.

Competitiveness

The evolution of IA as an analytical tool within the EU finds a context within the overall Better

Regulation policy, which itself is an important element of the competitiveness dimension of the

Lisbon Strategy. The IA process also needs to consider the effect that a proposed initiative may have

on the competitiveness of the EU as a whole vis-à-vis non-EU jurisdictions. New or revised

regulations may have effects on economic activity either on a national, regional or global scale. For

example, a proposed regulation might lead to single market harmonisation benefits, that both

specific companies and the EU as a whole might be able to take advantage of. However, changed or

new regulation might also have negative effects on the competitiveness of the EU as a whole vis-à-

vis non-EU jurisdictions.

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APPENDIX 5 – TECHNIQUES FOR ASSESSING BENEFITS

The purpose of this appendix is to illustrate the techniques briefly explained in the main text by the

means of examples.

• Comparison to a relevant historical case (losses of historical as indicator for how much of

the loss could have been prevented through the proposed regulation).

A miss-selling scandal, which is supposed to have had an exceptional strong impact on

investors, might serve as an example. In this case, the loss can be estimated through the lost

contribution and the remaining debt of the victims. The actual loss that could have been

prevented through better regulations and better supervision, however, is less than this. In

order to calculate the actual loss, one has to estimate the percentage of miss-selling. As the

incident had been exceptionally strong, to calculate an annual benefit, the assumption can

be made that such an incident would only occur once every ten years without regulation.

This produces the following estimate of the average annual loss that could be prevented, and

therefore the annual benefit:

Number of victims: 92,044

Loss per victim: €15,283 (survey)

Percentage of miss-selling: 52%. These are people who have stated that when

entering into the deal:

o they did not know they were investing with borrowed funds, and

o they did not know that they could lose their deposit or could be left with a

debt, and

o they were not given any comparison of their financial situation and

resources with the product sold.

Annual benefits: € 74 million (92,044 x 15,283 x 0.528 x 0.1).

An example from the supervision of auditors is the fall in stock market prices of other clients

of Enron auditor Arthur Andersen, after it had admitted to destroying a substantial number

of Enron documents.

• Evaluation by a proxy (observable variables which are linked to the unobservable variable)

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Example: The differences in mortgage rates, under conditions that are otherwise

comparable, cannot be easily explained. The fact that certain mortgages are still sold

despite these differences can often be explained (e.g. by a minimum processing backlog, so

that the mortgage is certain to be executed on time). However, in a number of cases, this

would not happen if there would be a rule which protects the client when (s)he states that

the interest rate is an important decision criterion for him/her. In these cases, an advice

that suits the wishes and profile of the client would lead, for example, to lower interest

charges. An estimate of the percentage that further improved advice receives, multiplied

with the number of decreasing interest instalments per annum, multiplied by the value of

the advice improvement, provides an estimate of the annual benefits. In concrete terms:

3.3 million households have a mortgage, i.e. there is an average debt of €106,000;

Percentage of miss-selling is estimated at between 5% and 30%: 10% assumed;

Interest difference is 0.9% (according to publicly available information); can be

reduced by 0.4% to 0.5%;

1/5 of the portfolio changes each year;

Annual benefits: € 28 million (3,337,797 x 106,000 x 10% x 0.4% x 0.2). A

simulation could consist in using 5% and 30% instead of 10%.

• Use of a break-even approach (calculating the amount of benefit needed - for example a

reduction in loss needed - to cover the costs incurred)

Example: assume that a particular type of incident could generate costs of € 2 billion, and

that, as a result of an accounting scandal, supervision of financial reporting and of

auditors is introduced. Assume further that this regulation brings with it direct and

indirect costs of € 50 million. In this case, the proposed rule will break even if the risk of

an incident is reduced by 2.5%. The question then arises whether this reduction of risk is

expected to be realistic or not15.

• Preparing a survey ( ‘beneficiaries’ of the regulation may be asked what they are prepared to

pay for the supervision)

Example: Market research within the context of evaluating the Financial Information

Leaflet shows that at present the consumer is prepared to spend € 3.10 for this document.

With an annual issue of 12 million Information Leaflets, for example, the estimate of the

value (and therefore the quantification of the benefits) is € 37 million.

15 The analysis in this example looks at a rule in its totality and therefore gives an intuitive indication of the total ratio between costs and benefits. In order to arrive at efficient supervision, an analysis of the individual components must be carried out.

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APPENDIX 6 – COMPARING POLICIES WITH DIFFERENT TIME HORIZONS

Policies with different time horizons can be compared by calculating the annualised value for each

of the alternative policies, i.e. the fixed annual income stream that would be paid by a fixed-interest

annuity with the same NPV as the policy:

trrNPV−+−

×=

)1(1valueAnnualised ,

where the time horizon t is defined in years, and the discount rate r is divided by 100 (e.g. 4% is

0.04).

For example, assuming a discount rate of 0.04, project A with a net present value of €

1,500 and a lifetime of 5 years has an annualised value of € 336.94, whereas project B

with a higher net present value of € 1,750, but a longer lifetime of 7 years, has an

annualised value of only € 291.57.

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APPENDIX 7 – A QUANTITATIVE CBA SPREAD-SHEET MODEL

On the following pages, a Cost-Benefit Analysis (CBA) spreadsheet model is presented. It illustrates

by means of a simple example a number of helpful CBA indicators which can be used in the process

of a quantitative evaluation of a proposed policy (note that the discount factors indicated are

rounded). The model is available as an Excel file on the CESR member website which makes it easy

to apply to a real case.

BASIC COST-BENEFIT ANALYSIS MODEL

This spreadsheet model covers key aspects of a quantitative CBA. It can be modified to include any number of benefits and costs and any number of years.The discount rate can also be changed.The examples on the following pages show how to calculate:

Net Present Value (NPV)This is the usual term for the discounted net benefit (i.e. discounted benefits - discounted costs).Policies should be chosen only if the NPV is significantly positiv (whereby significant can mean having IRR > minimum rate of return).The higher the NPV the better.

Benefit/Cost Ratio (BCR)Policies with a BCR > 1 have a positive discounted net benefit. A BCR of value x>1 indicates that the benefit is x times higher than the costs. BCR can be used to compare policies with a similar NPV (this favours policies with small costs and benefits).The larger the BCR the better.Note: the BCR says nothing about the scale of the NPV. For example, policy 1 can have a higher NPV than policy 2 - even though policy 2 has a higher BCR. In this case, the policy with the higher NPV should be chosen.

Internal Rate of Return (IRR)The IRR is the discount rate at which the NPV is zero. It is usually interpreted as the expected return generated by the investment.The IRR can be used to compare a policy to the status quo and/or a minimum rate of return (but the comparison with alternative exclusiv policies is difficult).The higher the IRR the better.

Cost-EffectivenessTwo types of questions can be adressed:1) At what cost can a given discounted net benefit be achieved?2) How large is the discounted benefit that can be achieved with a given amount of money?

Break-Even PeriodAt the beginning of the implementation of a policy, costs often exceed benefits. It is therefore interesting to know how long it takes forthe accumulated benefits to become equal to the accumulated costs.

Inputs have a blue background colour

Key intermediary results have a yellow background colour

Final results have a purple background colour

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Net Present Value (NPV) and Benefit/Cost Ratio (BCR)

This spreadsheet is set up for 2 benefits, 2 costs, and 5 years. Insert additional benefits, costs, and years, and change the range for the sums in the yellow cells to sum over all benefits, costs, and years. An additional input needed is the discount rate.

Discount rate = 3%

Totals0 1 2 3 4

BenefitsBenefit 1 € 50.000 € 50.000 € 50.000 € 50.000 € 50.000 € 250.000Benefit 2 € 1.000 € 1.000 € 1.000 € 1.000 € 1.000 € 5.000Total Benefits € 51.000 € 51.000 € 51.000 € 51.000 € 51.000 € 255.000CostsCost 1 € 100.000 € 50.000 € 1.000 € 1.000 € 1.000 € 153.000Cost 2 € 7.500 € 5.000 € 2.000 € 0 € 0 € 14.500Total Costs € 107.500 € 55.000 € 3.000 € 1.000 € 1.000 € 167.500Discount Factor 1,00 0,97 0,94 0,92 0,89Discounted Total Benefits € 51.000 € 49.515 € 48.072 € 46.672 € 45.313 € 240.572Discounted Total Costs € 107.500 € 53.398 € 2.828 € 915 € 888 € 165.529

Net present value : discounted total benefits - discounted total costs = € 75.043

Benefit/cost ratio : discounted total benefits / discounted total costs = 1,453

Year

NPV table for different discount rates

A low discount rate favours policies with long-term benefits and near-term costs. When comparing alternative policies, it is often useful to determine the sensitivity of the policies' performance to different discount rates.

Impact of the discount rate on the present value(present value of € 100.000 received in x years)

€ 0€ 10.000€ 20.000€ 30.000€ 40.000€ 50.000€ 60.000€ 70.000€ 80.000€ 90.000

€ 100.000

0 5 10 15 20 25 30

year

valu

e

1,00%3,00%6,00%9,00%12,00%15,00%

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Net Present Value (NPV) and Benefit/Cost Ratio (BCR) - SIMULATION

This spreadsheet simulates the NPV and the CBR of the previous example for three different discount rates used as input.

Discount rate 1 = 3,0%Discount rate 2 = 6,0%Discount rate 3 = 12,0%

Totals0 1 2 3 4

BenefitsBenefit 1 € 50.000 € 50.000 € 50.000 € 50.000 € 50.000 € 250.000Benefit 2 € 1.000 € 1.000 € 1.000 € 1.000 € 1.000 € 5.000Total Benefits € 51.000 € 51.000 € 51.000 € 51.000 € 51.000 € 255.000CostsCost 1 € 100.000 € 50.000 € 1.000 € 1.000 € 1.000 € 153.000Cost 2 € 7.500 € 5.000 € 2.000 € 0 € 0 € 14.500Total Costs € 107.500 € 55.000 € 3.000 € 1.000 € 1.000 € 167.500Discount Factor 1 1,00 0,97 0,94 0,92 0,89Discount Factor 2 1,00 0,94 0,89 0,84 0,79Discount Factor 3 1,00 0,89 0,80 0,71 0,64Discounted Total Benefits 1 € 51.000 € 49.515 € 48.072 € 46.672 € 45.313 € 240.572Discounted Total Benefits 2 € 51.000 € 48.113 € 45.390 € 42.821 € 40.397 € 227.720Discounted Total Benefits 3 € 51.000 € 45.536 € 40.657 € 36.301 € 32.411 € 205.905Discounted Total Costs 1 € 107.500 € 53.398 € 2.828 € 915 € 888 € 165.529Discounted Total Costs 2 € 107.500 € 51.887 € 2.670 € 840 € 792 € 163.688Discounted Total Costs 3 € 107.500 € 49.107 € 2.392 € 712 € 636 € 160.346

Net present value 1: € 75.043Net present value 2: discounted total benefits - discounted total costs = € 64.032 Net present value 3: € 45.559

Benefit/cost ratio 1: 1,453Benefit/cost ratio 2: discounted total benefits / discounted total costs = 1,391 Benefit/cost ratio 3: 1,284

Year

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Net Present Value (NPV) and Benefit/Cost Ratio (BCR) - UNCERTAINTY

This spreadsheet deals with uncertainty concerning benefit 1, benefit 2, and cost 2.Note: some care must be taken when calculating the upper and lower bound values of NPV and BCR.

Discount rate = 3%

Totals0 1 2 3 4

BenefitsBenefit 1 upper bound € 70.000 € 70.000 € 70.000 € 70.000 € 70.000 € 350.000Benefit 1 € 50.000 € 50.000 € 50.000 € 50.000 € 50.000 € 250.000Benefit 1 lower bound € 30.000 € 30.000 € 30.000 € 30.000 € 30.000 € 150.000Benefit 2 upper bound € 2.500 € 2.500 € 2.500 € 2.500 € 2.500 € 12.500Benefit 2 € 1.000 € 1.000 € 1.000 € 1.000 € 1.000 € 5.000Benefit 2 lower bound € 300 € 300 € 300 € 300 € 300 € 1.500Total Benefits upper bound € 72.500 € 72.500 € 72.500 € 72.500 € 72.500 € 362.500Total Benefits € 51.000 € 51.000 € 51.000 € 51.000 € 51.000 € 255.000Total Benefits lower bound € 30.300 € 30.300 € 30.300 € 30.300 € 30.300 € 151.500CostsCost 1 € 100.000 € 50.000 € 1.000 € 1.000 € 1.000 € 153.000Cost 2 upper bound € 10.000 € 7.500 € 3.000 € 1.000 € 0 € 21.500Cost 2 € 7.500 € 5.000 € 2.000 € 0 € 0 € 14.500Cost 2 lower bound € 5.000 € 3.000 € 1.000 € 0 € 0 € 9.000Total Costs upper bound € 110.000 € 57.500 € 4.000 € 2.000 € 1.000 € 21.500Total Costs € 107.500 € 55.000 € 3.000 € 1.000 € 1.000 € 167.500Total Costs lower bound € 105.000 € 53.000 € 2.000 € 1.000 € 1.000 € 30.500Discount Factor 1,00 0,97 0,94 0,92 0,89Discounted Total Benefits upper bound € 72.500 € 70.388 € 68.338 € 66.348 € 64.415 € 341.990Discounted Total Benefits € 51.000 € 49.515 € 48.072 € 46.672 € 45.313 € 240.572Discounted Total Benefits lower bound € 30.300 € 29.417 € 28.561 € 27.729 € 26.921 € 142.928Discounted Total Costs upper bound € 110.000 € 55.825 € 3.770 € 1.830 € 888 € 172.314Discounted Total Costs € 107.500 € 53.398 € 2.828 € 915 € 888 € 165.529Discounted Total Costs lower bound € 105.000 € 51.456 € 1.885 € 915 € 888 € 160.145

Net present value upper bound: dis. tot. benefits upper b. - dis. tot. costs lower b. = € 181.845Net present value : discounted total benefits - discounted total costs = € 75.043 Net present value lower bound: dis. tot. benefits lower b. - dis. tot. costs upper b. = -€ 29.386

Benefit/cost ratio upper bound: dis. tot. benefits upper b. / dis. tot. costs lower b. = 2,135Benefit/cost ratio : discounted total benefits / discounted total costs = 1,453 Benefit/cost ratio lower bound: dis. tot. benefits lower b. / dis. tot. costs upper b. = 0,829

Year

Internal Rate of Return (IRR)

Use the same spreadsheet as previously, but adjust the discount rate until the total discounted benefits equal the total discounted costs.This discount rate will be the internal rate of return.

Discount rate = 36,8267%

Totals0 1 2 3 4

BenefitsBenefit 1 € 50.000 € 50.000 € 50.000 € 50.000 € 50.000 € 250.000Benefit 2 € 1.000 € 1.000 € 1.000 € 1.000 € 1.000 € 5.000Total Benefits € 51.000 € 51.000 € 51.000 € 51.000 € 51.000 € 255.000CostsCost 1 € 100.000 € 50.000 € 1.000 € 1.000 € 1.000 € 153.000Cost 2 € 7.500 € 5.000 € 2.000 € 0 € 0 € 14.500Total Costs € 107.500 € 55.000 € 3.000 € 1.000 € 1.000 € 167.500Discount Factor 1,00 0,73 0,53 0,39 0,29Discounted Total Benefits € 51.000 € 37.273 € 27.241 € 19.909 € 14.551 € 149.975Discounted Total Costs € 107.500 € 40.197 € 1.602 € 390 € 285 € 149.975

Internal rate of return = 37%

Year

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Cost-effectiveness

To determine the cost to obtain a given benefit, use only the cost portion of the spreadsheet. Enter the desired total discounted benefit as input.

Discount rate = 3% Total discounted benefit = € 100.000 units of benefit (can be in € or any other metric)

Totals0 1 2 3 4

CostsCost 1 € 50.000 € 50.000 € 50.000 € 50.000 € 50.000 € 250.000Cost 2 € 1.000 € 1.000 € 1.000 € 1.000 € 1.000 € 5.000Total Costs € 51.000 € 51.000 € 51.000 € 51.000 € 51.000 € 255.000Discount Factor 1,00 0,97 0,94 0,92 0,89Discounted Total Costs € 51.000 € 49.515 € 48.072 € 46.672 € 45.313 € 240.572

Cost-effectiveness: discounted total costs / total discounted benefit = 2,41 € (or other metric) per unit of benefit(given the benefit)

To determine the benefit from the investment of a given cost, use only the benefit portion of the spreadsheet. Enter the desired total discounted cost.

Discount rate = 3% Total discounted cost = € 200.000

Totals0 1 2 3 4

BenefitsBenefit 1 € 100.000 € 50.000 € 1.000 € 1.000 € 1.000 € 153.000Benefit 2 € 7.500 € 5.000 € 2.000 € 0 € 0 € 14.500Total Benefits € 107.500 € 55.000 € 3.000 € 1.000 € 1.000 € 167.500Discount Factor 1,00 0,97 0,94 0,92 0,89Discounted Total Benefits € 107.500 € 53.398 € 2.828 € 915 € 888 € 165.529

Cost-effectiveness: discounted total benefits / total discounted cost = 0,83 units of benefit per €(given the cost)

Year

Year

Break-Even Period

The break-even period is the number of years until the total benefits exceed the total costs.

Discount rate = 3%

Totals0 1 2 3 4

BenefitsBenefit 1 € 50.000 € 50.000 € 50.000 € 50.000 € 50.000 € 250.000Benefit 2 € 1.000 € 1.000 € 1.000 € 1.000 € 1.000 € 5.000Total Benefits € 51.000 € 51.000 € 51.000 € 51.000 € 51.000 € 255.000CostsCost 1 € 100.000 € 50.000 € 1.000 € 1.000 € 1.000 € 153.000Cost 2 € 7.500 € 5.000 € 2.000 € 0 € 0 € 14.500Total Costs € 107.500 € 55.000 € 3.000 € 1.000 € 1.000 € 167.500Discount Factor 1,00 0,97 0,94 0,92 0,89Discounted Total Benefits € 51.000 € 49.515 € 48.072 € 46.672 € 45.313 € 240.572Discounted Total Costs € 107.500 € 53.398 € 2.828 € 915 € 888 € 165.529Break-Even PeriodCumulative Benefits -€ 56.500 -€ 60.383 -€ 15.139 € 30.618 € 75.043 minus Cumulative Costs

The break-even period is between 2 and 3 years

Year

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APPENDIX 8 – SELECTED REFERENCES

1. BOOKS

• Layard, R. and S. Glaister (1994, 2nd edition): Cost-Benefit Analysis, Cambridge University

Press This collection of articles covers the main problems that arise in a typical cost-benefit exercise. The introduction is an excellent review of the basic principles of CBA. Part One covers the main theoretical issues affecting cost-benefit analysis. Part Two considers the problem of ascribing a monetary value to things. The third part covers six separate case studies drawn from real-life examples.

• Boardman, A., D. Greenberg, A. Vining, and D. Weimer (2005, 3rd edition): Cost Benefit Analysis: Concepts and Practice, Prentice Hall Update of the 2nd edition from 1995. Includes a new chapter on social discount rate. This book is distinct for its consistent application of a nine-step framework for conducting or interpreting a CBA.

• Adler, M. D. and E. A. Posner (2006): New Foundations for Cost-Benefit Analysis, Harvard University Press In this book, the authors reconceptualize cost-benefit analysis, arguing that its objective should be overall well-being. They show why the link between preferences and well-being is more complicated than is often thought. A separate kind of analysis is required to weigh rights and equal treatment. This book not only places cost-benefit analysis on a firmer theoretical foundation, but also has many practical implications for how government agencies should undertake cost-benefit studies.

• Adler, M. D. and E. A. Posner (1997): Cost-Benefit Analysis : Economic, Philosophical, and

Legal Perspectives, University of Chicago Press This volume gathers contributors from economics, philosophy, cognitive psychology, legal studies, and public policy who illuminate different implications of CBA and specify alternative measures. The articles originally appeared in the Journal of Legal Studies.

• Arrow, K. J., et al. (1996): Benefit-Cost Analysis in Environmental, Health, and Safety Regulation: A Statement of Principles. Washington, DC: AEI Press Principles of CBA on 18 pages stated by experts, including a Nobel Prize economist. http://www.aei-brookings.org/admin/authorpdfs/page.php?id=203

• Hahn, R. (2005): In Defence of the Economic Analysis of Regulation, AEI Press A detailed reply to recent criticism. http://aei-brookings.org/admin/authorpdfs/page.php?id=1091 The recent criticism is summarized in the following article: A. Carlin (2005): “The New Challenge to Cost-Benefit Analysis”, Regulation, Fall. www.cato.org/pubs/regulation/regv28n3/v28n3-3.pdf

• Quirk, J. P., and K. Terasawa (1987): The choice of discount rate applicable to government resource use: theory and limitations, Rand Corporation Review of theories of the social discount rate. The authors suggest that the discount rate be used as a filter rather than a device to achieve a desired level of government spending. The approach is based purely on efficiency grounds and thus does not require information on the social rate of time preference.

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Books on the economics of financial markets

• Harris, L. (2002): Markets and Exchanges: Market Microstructure for Practitioners, Oxford University Press This easy-to-read book is about trading, the people who trade securities and contracts, the marketplaces where they trade, and the rules that govern it.

• Lee, R. (2000): What is an Exchange? The Automation, Management, and Regulation of

Financial Markets, Oxford University Press New technology has led to the development of new exchanges and trading systems, posing problems for those concerned with the regulation of trading markets. The author examines the question of what an exchange is, using arguments from both financial economics and law, and sets out a view of how exchanges might be regulated.

• O’Hara, M. (1998): Market Microstructure Theory, Blackwell

This book is a comprehensive guide to the theoretical work on microstructure issues. It examines the main models developed to address inventory-based and information-based issues, with particular attention paid to the linkage with rational expectations model and learning models. The concluding chapters are concerned with price dynamics and with applications of the various models to specific microstructure problems including liquidity, multi-market trading, market structure, and market design.

• Davis, E. Ph., and B. Steil (2004): Institutional Investors, MIT Press

This book provides a comprehensive economic assessment of institutional investment, i.e. the institutionalization of saving associated with the growth of pension funds, life insurance companies, and mutual funds. The book charts the development and performance of the asset management industry and analyzes the implications of rising institutionalized saving for the development of the securities trading industry, the financial sector as a whole, and the wider economy. The book draws extensively on international experience, particularly in the United States, Western Europe, and Japan.

• Campbell, J.Y, A.W. Lo, and A. C. MacKinlay (1996): Econometrics of Financial Markets, Princeton University Press The book covers the entire spectrum of empirical finance, including: the predictability of asset returns, tests of the Random Walk Hypothesis, the microstructure of securities markets, event analysis, the Capital Asset Pricing Model and the Arbitrage Pricing Theory, the term structure of interest rates, dynamic models of economic equilibrium, and nonlinear financial models such as ARCH, neural networks, statistical fractals, and chaos theory. Each chapter develops statistical techniques within the context of a particular financial application.

Books on the economics of banking

• Saunders, A., and M. M. Cornett (2003): Financial Institutions Management, A Risk Management Approach, R. Irwin Publishers A very accessible and comprehensive introduction to the main areas of risk management in financial institutions (specific insurance risk are however not dealt with).

• Greenbaum, S., and A. Thakor (2007): Contemporary Financial Intermediation, Dryden

Press) A very accessible and comprehensive introduction which addresses all types of deposit-type financial institutions by explaining the why of intermediation rather than simply describing institutions, regulations, and market phenomenon.

• Goodhart, C., P. Hartmann, D. Lewwellyn and L. Rojas-Suarez (1998): Financial Regulation,

Why? How? and When?, Routledge Discussion of the nature, objectives and costs of financial regulation around the world.

• Freixas, X., and J-CH. Rochet (1997): Microeconomics of Banking, MIT

An advanced book focussing on microeconomic theories of financial intermediation. It encompasses most of the major developments in the theoretical literature of the last twenty years on credit markets

- 69 -

and rationing, the monitoring and risk-sharing roles of financial intermediaries, the modelling of liquidity risk and its allocational consequences, bank runs and attendant regulatory measures, and the control of risk-taking by banks subject to deposit insurance.

• Allen, F, and D. Gale (2007): Understanding financial crises, Oxford University Press

Based on ten years of research, the authors develop a theoretical approach to analyzing financial crises. Beginning with a review of the history of financial crises and providing readers with the basic economic tools needed to understand the literature, the authors construct a series of increasingly sophisticated models. Throughout, the authors guide the reader through the existing theoretical and empirical literature while also building on their own theoretical approach. The text presents the modern theory of intermediation, introduces asset markets and the causes of asset price volatility, and discusses the interaction of banks and markets. The book also deals with more specialized topics, including optimal financial regulation, bubbles, and financial contagion.

Books on the economics of insurance and pensions

• Eeckhoudt, L., C. Gollier, and H. Schlesinger (2004): Economic and Financial Decisions under Uncertainty, MIT Press A concise summary of basic multiperiod decision-making under risk covering insurance and portfolio decisions, as well as risk sharing (with a treatment of asymmetries of information).

• Dionne, G. (ed, 2000): Foundations of Insurance Economics, Kluwer Academic Publishers Advanced, state-of-the-art survey articles.

• Plantin, G., and J.-Ch. Rochet (2007): When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation, Princeton University Press The authors first identify a fundamental economic rationale for supervising the solvency of insurance companies: policyholders are the "bankers" of insurance companies. But because policyholders are too dispersed to effectively monitor insurers, it might be efficient to delegate monitoring to an institution--a prudential authority. Applying recent developments in corporate finance theory and the economic theory of organizations, the authors describe in practical terms how such authorities could be created and given the incentives to behave exactly like bankers behave toward borrowers, as "tough" claimholders.

Books on the microeconomics of market failures

• Varian, H. (2006): Intermediary microeconomics, Norton A very accessible introduction to the subject covering the main market failures.

• Salanie, B (2005): Microeconomics of Market Failures, MIT Press An advanced introduction to market failures which does not deal with asymmetries of information (see the next two books).

• Bolton, P. and M. Dewatripont (2005): Contract Theory, MIT Press Theoretical treatment of economic contract theory. The book begins by discussing such basic ideas in incentive and information theory as screening, signalling, and moral hazard. Subsequent sections treat multilateral contracting with private information or hidden actions, covering auction theory, bilateral trade under private information, and the theory of the internal organization of firms; long-term contracts with private information or hidden actions; and incomplete contracts, the theory of ownership and control, and contracting with externalities.

• Mas-Colell, A., M.D. Whinston, and J.Green (1995): Microeconomic Theory, Oxford

University Press An advanced and in-depth theoretical treatment.

Books on the economics of competition

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• Cabral, L. (2000): An Introduction to Industrial Organisation, MIT Press A very accessible introduction to the subject.

• Carlton, D. W., and J. M. Perloff (2004): Modern Industrial Organisation, Addison-Wesley Intermediary, comprehensive textbook with empirical evidence and many applied examples. The book covers standard topics such as monopoly, oligopoly, monopolistic competition, games in oligopolies (Bertrand, Stakelberg Cournout-Nash etc.). Then it goes on to topics such as advertising and its effects, price discrimination (1st degree, 3rd degree, bundling strategies), innovation and R&D, etc.

• Motta, M (2004): Competition Policy, Oxford University Press

Links in a comprehensive manner a theoretical treatment to the institutional legal framework for competition in Europe. Presents important recent cases.

• Tirole, J. (1988): The Theory of Industrial Organization, MIT Press

An advanced and comprehensive, in-depth theoretical treatment.

• Hunter, J., C. Ioannidis, E. Iossa and L. Skerratt (2001): “Measuring Consumer Detriment under Conditions of Imperfect Information”, Office of Fair Trading, Research Paper 20, October http://www.oft.gov.uk/NR/rdonlyres/313429B5-695F-45DB-A4D8-F9D92EABD093/0/oft354.pdf

2. GUIDELINES

European Commission

• European Commission (2006): Impact Assessment Guidelines, March In this 2nd version, which, like the first version, is dated 15 June 2005, an appendix about administrative costs has been added. The appendix is also available separately. http://ec.europa.eu/governance/impact/whatsnew.htm http://ec.europa.eu/comm/secretariat_general/impact/docs/SEC2005_791_IA_guidelines_main.pdf Assessing administrative costs set by EU legislation (Annex 10 to the impact assessment guidelines) http://ec.europa.eu/comm/secretariat_general/impact/docs/sec2005_791_march_2006_annex10.pdf

• European Commission (2002): Towards a reinforced culture of consultation and dialogue - General principles and minimum standards for consultation of interested parties by the Commission, COM(2002) 704 final http://ec.europa.eu/governance/impact/docs/com2002_0704en01.pdf

• European Commission (2002): On the collection and use of expertise by the Commission: Principles and guidelines, COM(2002) 713 final http://ec.europa.eu/governance/impact/docs/com2002_0713en01.pdf

OECD

• OECD Guiding Principles for Regulatory Quality and Performance http://www.oecd.org/dataoecd/24/6/34976533.pdf OECD RIA website http://www.oecd.org/document/49/0,2340,en_2649_34141_35258801_1_1_1_1,00.html

Standard Cost Model Network

• SCM Network (2005): International Standard Cost Model Manual This manual contains a detailed description of the Standard Cost Model method, a practical guide on

- 71 -

how to perform SCM measurements, practical experiences from Denmark, the Netherlands, Norway, Sweden and the United Kingdom and a chapter on how to make cross country benchmarks/comparisons. http://www.administrative-burdens.com http://www.administrative-burdens.com/filesystem/2005/11/international_scm_manual_final_178.doc

United Kingdom

• FSA (2006): A Guide to Market Failure Analysis and High Level Cost Benefit Analysis http://www.fsa.gov.uk/pubs/other/mfa_guide.pdf

• FSA (2000): Practical Cost-Benefit Analysis for Financial Regulators (version 1.1)

http://www.fsa.gov.uk/pubs/foi/cba.pdf

• FSA (2000): Making Policy in the FSA: How to take account of competition http://www.fsa.gov.uk/pubs/other/policy_making.pdf

• Alfon, I. and P. Andrews (1999): Cost-Benefit Analysis in Financial Regulation, FSA Occasional Paper 3 http://www.fsa.gov.uk/pubs/occpapers/OP03.pdf

• NERA (2004): The FSA’s Methodology for Cost-Benefit Analysis, Nera Consulting http://www.fsa.gov.uk/pubs/other/nera_cba_report.pdf

• Oxera (2006): A framework for assessing the benefits of financial regulation The report develops a framework which seeks to design the dimesions along which financial services regulation delivers benefits, and having identified what to measure discusses how the benefits should be measured. http://www.fsa.gov.uk/pubs/other/Oxera_report_20060622.pdf

• UK Cabinet Office (2006): Regulatory Impact Assessment Guidance, This a revised version of UK Cabinet Office (2003): Better Policy-Making: A Guide to Regulatory Impact Assessments. It provides background information on the meaning and purpose of IAs and step by step guidance on the procedure for preparing and presenting them. http://www.cabinetoffice.gov.uk/regulation/ria/ria_guidance/index.asp

Ireland

• Irish Financial Services Regulatory Authority (2005): Consumer Protection - Regulatory Impact Analysis http://www.ifsra.ie/data/CP_Files/Consumer%20Protection%20Code%20Regulatory%20Impact%20Analysis.pdf

• Department of the Taoiseach (2005): RIA Guidelines The obligations and guidelines contained in this document as well as in the following one apply only to Government Departments and offices and do not, in any formal way, apply to the IFSRA. http://www.betterregulation.ie/index.asp?docID=78

• Department of the Taoiseach (2005): Report on the Introduction of Regulatory Impact Analysis across the Irish Civil Service http://www.betterregulation.ie/attached_files/Rtfs/RIA%20english.doc http://www.betterregulation.ie/attached_files/Pdfs/RIA%20english.pdf

Germany

• Bundesregierung (2000): Moderner Staat – Moderne Verwaltung – Ein Leitfaden zur Gesetzesfolgenabschätzung The RIA Guidelines of the German government (in German only). http://www.staat-modern.de/Anlage/original_549866/Moderner-Staat-Moderne-Verwaltung-Leitfaden-zur-Gesetzesfolgenabschaetzung.pdf

- 72 -

Netherlands • Dutch National Bank (2002): “Regulatory Impact Analysis as new instrument for the Bank”,

Quarterly Bulletin DNB, June http://www.dnb.nl/dnb/bin/doc/qb2002q2_tcm47-146974.pdf

New Zealand

• Ministry of Economic Development (MED) of New Zealand (1999): A Guide to Preparing Regulatory Impact Analysis http://www.med.govt.nz/templates/MultipageDocumentTOC____607.aspx

United States of America

• Office of Management and Budget - OMB (1996): Economic Analysis of Federal Regulations Under Executive Order 12866 http://www.whitehouse.gov/omb/inforeg/riaguide.html

• OMB (1992): Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, Circular No. A-94 revised http://www.whitehouse.gov/omb/circulars/a094/a094.html

• OMB (1992): Regulatory Analysis http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf

3. IA IN PRACTICE

FSA

• Deloitte (2006): The cost of regulation study (commissioned by the FSA and the Financial Services Practitioner Panel) The report presents the results of an extensive exercise designed to measure on a rule by rule basis the incremental costs of regulation in three sectors: corporate finance, institutional fund management, and investment and pension advice. http://www.fsa.gov.uk/pubs/other/policy_making.pdf

• Real Assurance Risk Management (2006): Estimation of FSA Administrative Burdens The report’s purpose is to evaluate the total cost of the administrative burden imposed by the rules of the FSA’ Handbook by applying the UK Standard Cost Model. http://www.fsa.gov.uk/pubs/other/Admin_Burdens_Report_20060621.pdf

• FSA (2006): Better Regulation Action Plan This document updates the FSA's own plans for reform of its rules and regulations, first set out in December 2005. It reports on the progress made since then, and relates that work to the two studies on costs of regulation also published simultaneously. In particular, it shows that rules which account for over three quarters of the administrative costs are already subject to review by the FSA as part of its Better Regulation Action Plan. The FSA now intends the detailed rule by rule analysis of incremental costs set out in the Cost of Regulation Report by Deloitte to shape its future review of regulatory reform. http://www.fsa.gov.uk/pubs/other/2660_Action_plan.pdf

• Shapiro A.A., Stenby E.H., Franks J.R., Schaefer S.M., and Staunton M.D. (1997): ”The direct and compliance costs of financial regulation”, Journal of Banking and Finance, Vol.21 (11-12), 1547-1572 The study, which was commissioned by an industry body, has been criticised for its opaque methodology.

Netherlands Authority for the Financial Markets (AFM)

- 73 -

• Ruitenbeek, M. and J. Wielhouwer (2006): Cost-Benefit Analysis in Financial Supervision Bundesanstalt für Finanzdienstleistungsaufsicht

• BaFin (2006): Survey on Regulatory Impact Assessment Practices by Financial Regulators in Single Regulator Countries

European Union

• Renda, A. (2006): Impact assessment in the EU: the state-of-the-art and the art of the state, Center of European Policy Research This study focuses on the latest developments in the United States, UK, and EU, and presents a scorecard analysis of the Commission's extended impact assessments. The author concludes with a road map for improving the transparency, efficiency, and effectiveness of the EU Integrated Impact Assessment model.

• Formez (2004): A comparative analysis of Regulatory Impact Assessment in ten EU countries A report prepared by the Italian consulting firm Formez for the Directors of Better Regulation DBR Group. http://www.betterregulation.ie/index.asp?docID=66 http://www.betterregulation.ie/attached_files/Pdfs/Report%20on%20RIA%20in%20the%20EUa.pdf

Policy Research Initiative of Canada

• Jacobs, S., Jacobs and Associates (2006): Current Trends in Regulatory Impact Analysis: The Challenges of Mainstreaming RIA into Policy-making This is a short version of the full report for the Policy Research Initiative. http://www.regulatoryreform.com/pdfs/Current%20Trends%20and%20Processes%20in%20RIA%20-%20May%202006%20Jacobs%20and%20Associates.pdf

• Jacobs, S., Jacobs and Associates (2006): Regulatory Impact Analysis in Regulatory Process, Method, and Co-operation: Lessons for Canada from International Trends, Policy Research Initiative of Canada Working Papers 026 This is the full version. http://policyresearch.gc.ca/page.asp?pagenm=pub_wp_abs#WP026

OECD

• OECD (1997): Regulatory Impact Assessment – Best Practices in OECD Countries, Paris http://www.oecd.org/dataoecd/21/59/35258828.pdf

• OECD: Regulatory Management Reform – Reports by Country, Paris http://www.oecd.org/countrylist/0,2578,en_2649_34141_1794487_1_1_1_1,00.html

• OECD (2002): Government capacity to assure high quality regulation in Turkey, Paris http://www.oecd.org/dataoecd/40/6/1840728.pdf

• OECD (2004): Regulatory Impact Assessment Inventory, Paris http://www.oecd.org/dataoecd/22/9/35258430.pdf

4. EXAMPLES OF CONSULTATIVE PAPERS IN FINANCIAL REGULATION

• FSA

Consultation Papers generally contain a section on CBA and competition analysis. http://www.fsa.gov.uk/Pages/Library/Policy/CP/index.shtml

• BaFin (in German only) http://www.bafin.de/cln_011/nn_722594/DE/Unternehmen/Konsultationen/konsultationen node.html_nnn=true

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• Irish Financial Services Regulatory Authority http://www.ifsra.ie/frame_main.asp?pg=%2Fconsultation%5Fpapers%2Fcp%5Frecs%2Easp&nv=%2Fconsultation%5Fpapers%2Fcp%5Fnav%2Easp

• New Zealand http://www.med.govt.nz/templates/Page____17889.aspx

The Regulatory Impact The Regulatory Impact Assessment in the Area of Assessment in the Area of

PostPost--tradingtrading

CEF RIA SeminarLjubljana, 29 September 2008

Sebastijan HROVATIN

Disclaimer: This presentation reflects only the views of its author. It may not be taken to represent any view, express or implied, on the part of the European Commission.

2

The AgendaThe Agenda

1. Background on post trading

2. The RIA – Two practical examples

3. Conclusions

3

A bit of historyA bit of history……

July 1988:November 2001:May 2002:January 2003:April 2003:February 2004:

April 2004:July 2005:

Kessler report (COM)1st Giovannini Report1st Commission CommunicationAndria Report (EP)2nd Giovannini reportDG Competition report(London Economics)2nd Commission CommunicationVilliers/Kauppi report (EP)

• The post-trading sector has received a fair amount of attention in the last few years:

4

What Is PostWhat Is Post--trading?trading?

• Two sets of functions/activities

those that lead to the completion of a transaction in financial instruments(clearing and settlement)

those that are related to the holding of financial instruments (custody)

5

Who Are the Main Stakeholders?Who Are the Main Stakeholders?

• Post-trading infrastructures(International) Central Securities Depositories –(I)CSDs

Central Counterparties – CCPs

• Usersbanksbrokersstock exchanges, etc.

• Final investors

• Public authorities (at national and EU level)

6

The AgendaThe Agenda

2. The RIA: Two practical examples

7

The AgendaThe Agenda

2.1 Example One:A safer and more efficient post-trading sector

8

What Is the Wider Objective?What Is the Wider Objective?

• The challenge: increase growth potential of the EU economy and create more jobs

• Financial market integration plays an important role in this process

• Integrated post-trading landscape part of the solution

Lisbon agenda

FSAP

?

9

What is the current situation?What is the current situation?

• Inadequate post-trading landscape:domestic: efficient and safe

cross-border: fragmentation costly and, potentially, more risky

• Reason: barriers to cross-border provision

national differences in technical requirements/market practice

national differences in tax procedures

issues of legal certainty that may arise between national jurisdictions

10

What can the Commission do? (1)What can the Commission do? (1)

2004 Communication: the Commission’s main objective is

“…to foster an EU-wide securities post-trading environment which is efficient andsafe and which ensures a level playing field among the different post-trading service providers.”

11

To increase financial stability and investor protection.

Financial stability and investor protection

Safety

Directive -To be tested in RIA

Facilitate the integration of systems. Addressing the issue of diverging treatment of similar concerns by national authoritiesCommon

regulatory and supervisory framework

Directive (governance rules, i.e., account separation and unbundling of services) - To be tested in the RIA

To increase pricing and cost transparency as a means to make the detection of possible abuses of market power, and therefore distortions of competition by CSDs/CCPs, easier.

Ex-ante competition legislation

Directive (access and location issues) -To be tested in the RIA

FISCO group (fiscal barriers)

Legal Certainty group (legal barriers)

CESAME group (market barriers)

Liberalisation of the cross-border distribution of post-trading services, increase of competition and cost reduction

Dismantling of market, legal and fiscal barriers

IntegrationLevel playing field

Investigations and decisions by the Commission and national competition authorities

Tackle abuses of dominant positions, including discriminatory practices

Ex-post competition policy

Efficiency

Practical initiativesRationalePolicies

and measures

Specific objectives

Objectives

What can the Commission do? (2)What can the Commission do? (2)

12

What can the Commission do? (3)What can the Commission do? (3)

The Communication indicated that the Commission would have to play three distinct roles to achieve this objective:

1. “Honest broker”

experts’ groups (CESAME, Legal Certainty Group,FISCO)

2. Enforcer

DG Competition

3. Legislator

DG Internal Market and Services (directiveRIA)

13

The Policy OptionsThe Policy Options

• Four possible options were considered:

• Each of them needed to be analysed for its merits and its drawbacks

Structural intervention

Community legislation

No policy action

Guidelines / standards

RIA

14

The Steering GroupThe Steering Group

• The role of the Steering Group (SG)• The composition of the SG

Representatives from six different Directorates General (Internal Market and Services, Competition, Economic and Financial Affairs, Joint Research Center, BEPA, Secretariat General)

• Regular meetings to discuss progress on the RIA

• Division of labour in terms of drafting the RIA

15

• In our case (numerous groups of stakeholders with very different and often conflicting interests) extensive consultations were of paramount importance

• The 2004 Communication served as the basis for a first broad consultation with the various stakeholders

• In addition, during the RIA drafting process, there were constant contacts with the various stakeholders

ConsultationsConsultations

16

VerificationVerification

• Internally: within the SG

• Externally: presentations of parts of RIA to various stakeholders

particularly important in the case of the economic analysis

17

The Main Parts of the RIAThe Main Parts of the RIA

• Definitions• Characteristics of the industry• The current state of play in the industry• The economic analysis

static existing studiesdynamic econometric paper

• Analysis of pros and cons of the different policy options

18

Estimating the benefits (1)Estimating the benefits (1)

Three questions were asked:

1. Are there extra costs in cross-border post-trading when compared to domestic post-trading?

2. If so, how big are they?

3. If these extra costs were reduced (or even eliminated), what would be the benefits for the EU economy?

19

Estimating the benefits (2)Estimating the benefits (2)

• The answers to the first two questions are provided by the analysis in Annex I.

• The Annex reviews and, if possible, updates and refines all existing studiesexamining post-trading costs.

20

Estimating the benefits (3)Estimating the benefits (3)

• The answer to the third question is provided in Annex II.

• To answer the question, an econometric model is used.

• The data used in the econometric model consists of 14,902 traded shares at 21 major OECD stock (more than 90 percent of the world stock market capitalization). The frequency of the data is monthly over the period 2000-2001.

21

Estimating the benefits (4)Estimating the benefits (4)

The analysis in Annex II uses a three step approach:

1. How does a reduction in transaction costs impact on market liquidity?It increases liquidity.

2. What is the effect of increased liquidity on cost of capital?Cost of capital falls.

3. What is the impact of lower cost of capital on GDP? GDP increases.

22

Estimating the benefits (5)Estimating the benefits (5)

23

The Final ResultThe Final Result

Subsidiarity/Proportionality

Transparency and the ability to monitor prices

"Stability" and flexibility of the regulatory, supervisory and oversight regime

Costs of compliance

Benefits (size, likelihood and timeframe)

Structural intervention

Community legislation

Guidelines/ Standards

“Doing nothing”Criterion / Option

24

The AgendaThe Agenda

2.2 Example Two:Financial collateral and the safety of securities settlement systems

25

Background (1)Background (1)

• The Settlement Finality Directive (SFD)a response to the need to minimise systemic risk and to ensure the stability of payment and securities settlement systemsprovides that transfer orders (for both payments and securities) entered into such systems cannot be revoked or otherwise invalidatedcovers other dimensions as well (e.g. collateral provided to systems)

26

Background (2)Background (2)

• The Financial Collateral Arrangements Directive (FCD)

divergent national rules applied to the use of collateral were frequently impractical and often not transparentthe FCD created a uniform EU legal framework for the (domestic and cross-border) use of financial collateralabolished most of the formal requirements traditionally imposed on collateral arrangements

27

ConsultationsConsultations

• External consultationsboth directives underwent an evaluation process which resulted in the publication of two evaluation reportsgeneral satisfaction with the functioning of the two directiveshowever, some improvements possible

• Internal consultationsinformal approach preferred to formal SG

28

The Structure of the RIAThe Structure of the RIA

• Problem definition• Definition of objectives• Policy options and policy instruments• Analysis of impact• Monitoring and evaluation

29

Problem DefinitionProblem Definition

• Relative scarcity of high-quality collateral in the EU economy

no harmonised framework for using credit claims as collateralformal requirements discouraging the use of credit claims as collateral

• Problems related to settlement systemslack of clarity regarding moment of entry/irrevocability of transfer ordersfinality in case of night-time settlementlack of level playing field in the payments area

• Problems related to the conflict-of-laws regime

30

Definition of ObjectivesDefinition of Objectives

Harmonize treatment of credit claims when used

as collateral

Remove obstacles to use of credit

claims as collateral

Adapt protection to recent solutions

adopted by settlement systems

Extend protection to relevant new

types of institutions

Establish a clear conflict-of-laws

regime for book-entry securities

OPERATIONAL

Facilitate use of credit claims as

collateral

Ensure stability of settlement systems

Enhance legal certainty

SPECIFIC

Efficiency of EU financial markets

Safety of EU financial markets

Level playing field

GENERAL

Group 1

Group 2

Group 3

31

Policy OptionsPolicy Options

• Defining the policy optionsGroup 1 (credit claims) – 3 sets of options

- use of credit claims- formal requirements- additional measures

Group 2 (settlement systems) – 3 sets of options

- moment of entry/irrevocability- night-time settlement - ELMIs

Group 3 (conflict of laws)

10 options

10 options

3 options

32

Policy InstrumentsPolicy Instruments

• No action• Self regulation• Communication• Recommendation• Directive• Regulation

Selection of preferred policy instrument done before impact analysis in order to simplify the latter

33

Policy instrumentsPolicy instruments

?/≈?/≈?/≈?/≈?/≈?/≈Communi-cation

≈/+≈/+≈/+≈/+≈/+≈/+Recommen-dation

+++/+++++/+++++/++Directive

+++++++++Regulation

EfficiencyEffectivenessEfficiencyEffectivenessEfficiencyEffectiveness

Enhance legal certainty

Ensure stability of settlement

systems

Facilitate use of credit claims as

collateral

Policy instrument/

Specific objective

Notes: ++ = strongly positive; + = positive; ≈/+ = slightly positive; ≈ = neutral/marginal; ≈/- slightly negative; - = negative; -- = strongly negative; ? = uncertain.

34

Impact Analysis (1)Impact Analysis (1)

- : ↑ costs of modifying legislation (D)+: ↑ liquidity in financial markets (I)

-: in case of default on his loan, a consumer would not be able to renegotiate its terms or would have to accept more unfavourable terms than if the claim remained with the original bank (I)

-/--: in case of default on his loan, a consumer would not be able to renegotiate its terms or would have to accept more unfavourable terms than if the claim remained with the original bank (I)

++: ↑ legal certainty as credit claims provided as collateral would enjoy the same protection as cash and securities (D)?/+: potentially ↑benefits as the higher amounts of collateral available, the clients of the collateral taker may conduct more business with the latter (I)-: ↑ cost of implementing systems for handling credit claims in case they are not already in place (D)

+/++: ↑ benefits asmore collateral available to secure both domestic and cross-border transactions (in latter case due to harmonised legal framework) (I)+: easier mobilisation of dormant capital on balance sheets (D)-: ↑ cost of implementing systems for handling credit claims in case they are not already in place (D)

Option 1.3 -extend FCD to all credit claims

n.a.n.a.n.a.n.a.n.a.Option 1.1 - do not extend FCD to credit claims

OthersConsumers

Member States

DebtorsCollateral takersCredit institutionsOption /

Affected parties

Notes: ++ = strongly positive; + = positive; -- = strongly negative; ≈ = neutral/marginal; ? = uncertain; n.a. = not applicable. D = Direct impact. I = Indirect impact. ↑ = increase/rise. ↓ = decrease/fall.

35

Impact Analysis (2)Impact Analysis (2)

• The preferred options were selected on a group-by-group basis

• Nevertheless, potential interdependen-cies between the different groups were taken into account in the analysis

• Final proposal was constructed by putting together all the preferred options

36

Monitoring and EvaluationMonitoring and Evaluation

• The implementation of the amending directive will be monitored by the Commission

• The changes introduced will be subject to ex-post evaluation

• Some potential indicators and sourceswhich could be used in the evaluation process were identified

37

The AgendaThe Agenda

3. Conclusions

38

The Main Lessons (1)The Main Lessons (1)

• Plan carefully• Gather as many minds as practically

possible…• … but have only one hand holding the

pen• Be transparent about your work…• … but do not disclose too many details• Consult as widely as possible…• … but do not overdo it…

39

The Main Lessons (2)The Main Lessons (2)

• … and keep in mind that your interlocutors’ interests may differ from yours

• Be careful about the data• Remember: whereas the RIA is a technical

document, the final decision is political

Thank you !

(ONGOING) IMPACT ASSESSMENT ON A CREDIT CARDS REGULATORY PROPOSAL

How to Design Better Financial RegulationSeptember 29, 2008LjubljanaSLOVENIA

Mr Riccardo BrogiRegulatory Affairs

2

Current presentation as a brainstorming session

Disclaimer:Disclaimer:This presentation draws from an Impact Assessment exercise still in the process of being finalized

In this context, please note that:In this context, please note that:

•• All data which follow are for simulation purposes only. Most of them are about to be replaced with evidence-based figures;

•• Moreover, since not accomplished, the document underpinning the current presentation has not been presented yet to target authorities and other interested parties.

3

An inter-disciplinary team work

• To produce a professional contribution for a technical discussion, convergence and coordination of different competences and background is crucial

Unit Professional

• Regulatory Affairs Mr Riccardo Brogi

• International Relations Ms Serena MassimiMs Gea Straccamore

• Yapi ve Kredi Bankasi Mr Ahmet ÇimenogluMrMr Muhammet Mercan Muhammet Mercan

4

Regulatory Affairs committed to speak the Better Regulation language

• Purpose of the Impact Assessment Report:

To provide policy makers with an evidence-based analysis that could promote and facilitate a policy dialogue on whether the current regulatory proposal on credit cards is «justified in terms of a proper understanding of the nature of perceived problem» [1].

[1] CESR - CEBS - CEIPOS, Impact Assessment Guidelines, April 2008.

• A pioneering “line of products” for a market participant:

the undertaking of the Impact Assessment ReportsImpact Assessment Reports

5

The issue to deal with

• In Turkey, a draft of new Credit Cards’ legislation aims to cap interest rates for credit card loans at a level that is at most two times the deposit interest rate.

Example: Deposit Rate=10% Max Credit Card Rate: 20%

• Currently:contractual market interest rate (monthly): 4.54%;deposit interest rate (monthly): 1.35%.

As a result, the proposed legislation would halve monthly credit cards rates from the current 4.54% to implied 2.7%.

6

Structure of Impact Assessment Report

The Issue;

Background;

International comparison;

Problem scoping Problem identification;Policy goals at risk;Policy options.

Causal model of impacts;Causal model of impacts;

Impact Analysis EvidenceImpact Analysis EvidenceImpact on the sample of banks;Impact on consumers;Impact on Government.

Conclusions;

Annex A – Impact Assessment Calculations;

Annex B – Data and Assumptions

7

A key tool to find out regulatory consequences: Causal Model of Impacts

Introduction of a cap on interest rates for credit card loans, that is going to be at most 2 times the deposit interest rate

Financial intermediaries cannot adequately price the

risk associated to Credit Card loans

Price of Credit Cards products

does not incorporate

buyer's creditworthiness

11 22

Negative externalies are produced for

existing customer

Efficient allocation of financial

resources is impaired

33

44

Moral hazard opportunities for customers using Credit Cards

products(significant increase in the usage of

credit cards limits at low cost)

55

Worsening of credit quality

(NPLs on the rise)

Risks of fueling inflation

66 77

Financial intermediaries

lower the offer of Credit Cards

products

88

99

Less customers

access finance

1010

Credit Cards business is not

adequately profitable

1111

Financial intermediaries loose hold on Credit

Cards business

Investment effort is reduced

(less investment in infrastructure security and

product innovation)

Higher demand for cash

1212

1414

1515"black

economy" is encouraged

1616

Reduction in tax revenues

1717

Interest rates on loans in other

segments may rise to subsidise/partially offset the reduced margin on Credit Cards segment

1818

Reduction in borrowings in

other segments1919

Money supply

reduction

2020

Less business

2121

2222

2323

Less market-friendly

regulatory environment

2424

Investors are less protected2525

Foreign Direct Investment may be negatively affected

2626

Risks of concentration of the

business in few competitors

1313 LEGENDALEGENDA

Instrument

Policy goal at risk

Causal link

Abcdefg… Impact

8

Causal Model of Impacts – some conclusions

To figure out which possible consequences a proposed policy intervention may bring about;

To get the full picture from a dynamic perspective;

To identify policy objectives negatively influenced;

In this case the policy objectives that are negatively influenced are the following:

• Proper functioning of the financial market (efficient allocation of financial resources);

• Performance of the financial system (i.e. financial efficiency and stability);

• Performance of the economy (i.e. economic growth and price stability);

• Access to finance for households;

• Prevention of black economy

9

International benchmarking

CountryIs there a

cap in place?

Regulation referring to cap-like measures

Key methodological criteria Formula (to determine the cap)

Who sets the cap

USA Not set at Federal level

U.S. Truth in Landing Act 1968 - Regulation Z

Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.

UK No Consumer Credit Act 1974

The Credit Act permits a court to reopen terms of credit agreement that it finds "extortionate" so as "to do justice between the parties“

Austria No Federal Act of 8 March

1979 governing Provisions to Protect

Consumers

According to case law, interest rates of about 20% or more are regarded as being contra bona mores.

i) In France the interest rates to be applied by a bank cannot exceed the reference rate by more than 33% percent

ii) the reference rate is represented by the sector average interest rate (SAIR)

iii) Ministry of Economy and Finance designates Banque de France to set the cap

Germany Yes Sect. 138 of German Civil Act

The courts have defined a usury interest rate ceiling of approximately twice the average rate for consumer credit (ARCC).

Cap = ARCC*(1+100%) Jurisprudence

i) AOER is drawn from market interest rates for each business segmentii) Each business segment is made up of omogeneous operations (considering the following: nature, amount, object, maturity, risks and guarantees)iii) previous quarter as reference periodiii) market interest rates

Spain Not defined by law

Anty Usury Law - 23 June 1908

It is ruled by the Court on a case by case basis

Ministry of Economy (on a quarterly basis

with a decree)

On a quarterly basis the Average Overall Effective Rate (AOER) is computed along the following criteria:

Cap= SAIR+ (33%*SAIR) Banque de France(on a quarterly basis)Consumer CodeYesFrance

Italy Yes Law 108/1996, Anti-usury Cap= AOER+ (50%*AOER)

Regulatory profile

10

Impact on industry economics (1)

The inefficiency of a rate ceilingThe inefficiency of a rate ceiling

SS

DD

Credit Credit card card

interest interest raterate

Volume Volume grantedgrantedthrough Credit through Credit CardsCards

i*i*

Q*Q*

Rate Rate ceilingceiling

DialogueDialogue GapGap

DeadweightDeadweight losslossMeasureMeasure of of inefficiencyinefficiency

((lowerlower consumer consumer surplussurplus++ lowerlower producerproducer sprlussprlus))

Q Q PolicyPolicy targetargeQ Q SupplySupply

11

Impact on industry economics (2)

LAS=LAS= LongLong--runrun aggregate credit aggregate credit supplysupply

SAS=SAS= ShortShort--runrun aggregate credit aggregate credit supplysupply

AD=AD= Aggregate credit Aggregate credit demanddemand

LASLAS00

SASSAS00

ADAD00

Volume Volume grantedgrantedthrough Credit through Credit CardsCards

Credit card Credit card interest rateinterest rate

SASSAS11

•• Revised risk management policies;Revised risk management policies;•• R&D expenses cuts;R&D expenses cuts;•• Impaired profitability.Impaired profitability.

ADAD11

•• The supply of money being the same, negative The supply of money being the same, negative effects on financial innovation brings the money effects on financial innovation brings the money market equilibrium less leftward than it would market equilibrium less leftward than it would have been with under present situationhave been with under present situation

LASLAS11

•• Worsening of technology Worsening of technology state brings about a leftward state brings about a leftward shiftshift

Bottom line: lower credit at higher costBottom line: lower credit at higher cost

ADAD22

12

Bottom line quantitative impact calculations:

a feasible task and useful decision-making “compass”

13

Impact on Consumers (1)

Scenario 1st full year impact 5-year impact

Present situation Number of people 250.000 2.660.000

Proposed new regulation Number of people 96.000 - 1.500.000 Reduction in new

Credit Card Clients 154.000 4.160.000

14

Impact on Consumers (2) YearYear: t: t11

All figures: ≅ BaselineBaseline

OptionOption 11

A Incremental credit card outstanding volume Incremental credit card outstanding volume ((TRYMnTRYMn)) 1,400

B Annual growth Rate of balance per credit card Annual growth Rate of balance per credit card (%)(%) 15%

C=A*B Estimated Estimated avgavg balance/credit card balance/credit card (TRY (TRY MnMn)) 765

D=A/C Marginal number of credit cards Marginal number of credit cards (#)(#) 1,878,000

Number of credit cards/cardholder Number of credit cards/cardholder (#)(#) 1.5E

Number of new credit cardholders Number of new credit cardholders (#)(#) 1,250,000F=D/E

% of people accessing to finance through c. cards% of people accessing to finance through c. cards 20%G

Number of people financially included through c. cards Number of people financially included through c. cards (#)(#)1Y1Y 250,400

5Ys5Ys 2,650,000H=F*G

Number of people financially included through c. cards Number of people financially included through c. cards (#)(#)1Y1Y 96,000

5Ys5Ys -1,500,000I

15

Impact on Government (1)

1st full year impact (Mln, €, Present Value)

5-year impact (Mln, €, Present Value)

Scenario Additional costs (relative to 2007)

Additional benefits

(relative to 2007)

Additional costs (relative to 2007)

Additional benefits

(relative to 2007) Tax revenue from banking profile

Present situation Tax revenue stemming from marginal credit-

card business generated profit

- 3,1 - 32,0

Proposed new regulation

Tax revenue stemming from marginal credit-

card business generated profit

- 1,2 - - 17,8

Black economy profile Present situation Tax revenue that could

be forgone - 0,9 - 6,5 Proposed new

regulation

Tax revenue that could be forgone - 0,3 - -3,3

Overall Difference 2,5 59,6

16

Impact on Government (2) YearYear: t: t11

All figures: ≅ BaselineBaseline

OptionOption 11

A Incremental credit card outstanding volumeIncremental credit card outstanding volume((TRYMnTRYMn)) 1,400

B Pretax income attributable to Pretax income attributable to C.CardC.Card business/business/incremental outstanding volume incremental outstanding volume (%)(%)

3.1%

Tax rate Tax rate (%)(%) 15.9%

D=A*B*C Tax revenue Tax revenue ((TRYMnTRYMn)) 7

Discount factorDiscount factor 0.854701E

PV tax revenue PV tax revenue (EUR (EUR MnMn))1Y1Y 3

5Ys5Ys 32

1Y1Y 1

5Ys5Ys -18

C

- A calculation excerpt -

PV tax revenue PV tax revenue (TRY (TRY MnMn)) 6.1F=C*D

G

PV tax revenue PV tax revenue (EUR (EUR MnMn))H

17

Impact on (sample) banks (1)

1st full year impact (Mln, €, Present Value)

5-year impact (Mln, €, Present Value)

Scenario Additional costs (relative to 2007)

Additional benefits

(relative to 2007)

Additional costs (relative to 2007)

Additional benefits

(relative to 2007) Present situation

NPL/total loans ratio – CAGR 0% - 0% -

Incremental Credit Card debit volume - 636 - 6.500 Proposed new

regulation

NPL/total loans ratio – CAGR 15% - 15% -

Incremental Credit Card debit volume - 245 - - 3.600

Difference 391 10.000

18

Impact on (sample) banks (2) YearYear: t: t11

All figures: ≅ BaselineBaseline

OptionOption 11

A Sample credit card outstanding volumeSample credit card outstanding volume–– End 2007 End 2007 -- ((TRYMnTRYMn))

11,000

B Expected annual growth in the segment Expected annual growth in the segment (%)(%) 13%

Sample Sample cred.cardcred.card. . outstoutst. Volume . Volume –– end tend t11 –– (TRY (TRY MnMn)) 12.400

D=C-A Incremental outstanding volume Incremental outstanding volume (TRY (TRY MnMn)) 1,400

Discount factorDiscount factor 0.854701E

PV outstanding incremental volume PV outstanding incremental volume (EUR (EUR MnMn))1Y1Y 630

5Ys5Ys 6,400

1Y1Y 245

5Ys5Ys -3,600

- A calculation excerpt -

PV outstanding incremental volume PV outstanding incremental volume (TRY (TRY MnMn)) 1,200F=C*D

G

PV outstanding incremental volume PV outstanding incremental volume (EUR (EUR MnMn))H

C=A*B

19

A professional dialogue on evidence-based economic analysis could help authorities better understand the Supply and Demand dynamics of proposed regulatory interventions;

The point of view of market participants is very useful to understand supply dynamics (practical knowledge of how banking business is conducted);

Involvement of other market stakeholders (e.g. consumers association) would raise both financial education and effectiveness of the regulatory initiatives.

Take-away points

20

ThanksThanks forfor youryour attentionattention!!

[email protected]@unicreditgroup.eu

Regulatory Impact Assessments and market failure analysis

Prepared for World Bank Convergence

Programme Seminar, Ljubljana

Dr Paul GowerSeptember 29th 2008

2 September 29th 2008

Overview

- introduction

- review of assumptions of well-functioning markets

- economic rationale for intervention

- the importance of impact assessments

- market failure analysis in practice

- initial steps in preparing an impact assessment

3 September 29th 2008

Introduction

- policy-making is about making informed choices

- the use of impact assessments helps in the making of such choices

- creating impact assessments is not an exact science

- in an ideal world an impact assessment can: - identify whether there is a need for government intervention in

the first place

- help to identify the most appropriate form of intervention

- be used to undertake evaluation of existing policies

4 September 29th 2008

Review of assumptions of well-functioning markets

- it is important to be able to define a market

- a market is where individuals transact with each other in the specified product

- profit/utility maximisation is the key objective

- a well-functioning market is one in which resources are allocated efficiently

- based on assumptions of:- no asymmetries of information

- prices reflecting all costs, including costs to third parties

- no excess profits

5 September 29th 2008

Economic rationale for intervention

- in reality, markets are not ‘perfect’ and may fail to achieve ‘efficiency’

- the benefits of government intervention are improvements in market outcomes compared with a situation without intervention (eg, consumer choice, prices, costs of financial failure)

- with no intervention, adverse effects in the provision of financial services may arise from:- market failures (asymmetric information, market power,

externalities)

- risks (operational, default, systemic)

- incentive problems

6 September 29th 2008

Importance of impact assessments

- impact assessments should be undertaken at the beginning of the policy-making process—not the end

- market failure analysis is vital at an early stage

- this can be used to justify government intervention, but cannot identify the most appropriate intervention

- all potential government interventions should be considered, including the ‘do nothing’ option

- the do-nothing option may still be appropriate even if market failures have been identified

- monitoring and evaluation plans need to be formulated

7 September 29th 2008

Market failure analysis in practice Asymmetric information

- two types of asymmetric information- hidden information prior to a transaction being completed

- hidden action by one party after a transaction is completed

- with hidden information, the seller will generally have more information than a buyer- the purchased product may differ from the buyer’s expectations

- the price paid may not reflect the underlying value of the product/service

- hidden action may arise in principal–agent relationships

- the principal cannot costlessly observe the actions of the agent- for example, a client passing money to another firm for the purpose of

investment business

- the client may be affected by asymmetric information

8 September 29th 2008

Market failure analysis in practice Market power

- in a market where a single firm or firms have excessive market power- prices will be higher

- output will be lower

- compare this with a well-functioning market

- there may be collusion between firms

- the market structure may be one of only a few firms

- the market may be able to support only one firm due to high fixed costs and economies of scale (natural monopoly)

- an example could be clearing and settlement systems

9 September 29th 2008

Market failure analysis in practice Externalities

- externalities arise when the production/consumption of a good or service affects the welfare of other economic agents in addition to those consuming it

- such effects are not taken into consideration by the producers or suppliers of the good/service

- there is a mismatch between private and social costs and private and social benefits

- externalities can be positive or negative

- an example would be when a bank’s risk-taking behaviour does not take into account the systemic effect it might have on others

10 September 29th 2008

Market failure analysis in practiceRisks

- in financial services market, failures are linked directly to risks

- with little risk, the potential detriment from a market failure would be low- information asymmetry is not a problem if there is no risk of

consumers losing money in the event of firm default

- externalities combined with default risk give rise to potential systemic failures in the banking sector

- but risks alone cannot justify intervention- if product risks were understood, they could be priced in terms of

anticipated returns

- so, the combination of market failures and risks is important

11 September 29th 2008

Market failure analysis in practice Incentive problems

- market failures are also linked with incentive problems in financial services

- asymmetric information might not be a problem if the incentives of the buyer and seller could be matched- need for a completely specified contract

- incentive misalignment heightens the negative impact of market failures- particularly in retail financial services when products are

provided on a commission basis by intermediaries

- an example would be where an independent financial adviser is receiving commission from a product provider

12 September 29th 2008

Preparing an impact assessmentInitial steps

- beware: market failure alone may not be sufficient justification for intervention

- market failure, risks and incentive problems are all linked

- may also need to assess the impact on competition and distributional issues

- need to think about these market failures/risks/incentive effects in terms of adverse/unwanted outcomes- prices too high

- costs too high

- consumer choice is limited

13 September 29th 2008

Concluding remarks

- impact assessments - are a vital tool in the policy-making process

- can be used to inform policy choices

- must be undertaken at early stage in the policy-making process

- must be combined with market failure analysis and assessment of risks and incentive problems

- always think in terms of desired outcomes and how they can be measured

14 September 29th 2008

References

- Oxera (2007), ‘Assessment of the Benefits of the FSA Suitability Letter’, report prepared for the Financial Services Authority, April, available at www.oxera.com

- Oxera (2007), ‘What is the Impact of the Proposed Consumer Credit Directive?’, prepared for APACS/BBA/CCA/FLA, April, available at www.oxera.com

- Oxera (2004), ‘Competition Review of the Financial Services and Markets Act 2000’, report prepared for the Office of Fair Trading, November, available at www.oxera.com

www.oxera.com

Contact:

Dr Paul [email protected]

Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents.

Oxera Consulting Ltd is not licensed in the conduct of investment business as defined in theFinancial Services and Markets Act 2000. Anyone considering a specific investment shouldconsult their own broker or other investment adviser. The Company accepts no liability for anyspecific investment decision, which must be at the investor’s own risk.

© Oxera, 2008. All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission.

How does economic analysis help regulatory policy design?

The FSA experience

Stephen DickinsonEconomics of Financial Regulation Department

UK Financial Services Authority

Overview

• Some contextual remarks

• Our approach to impact assessment (IA)

• The FSA experience

• Concluding remarks

• Questions

Some contextual remarks

• In seeking to use economic analysis as an aid to better policy making we have made many mistakes and learned many lessons over the years

• What follows describes some of the most notable mistakes and lessons learned

• They relate to the use of economic analysis in a large national regulator

• But some of the most important messages apply equally to smaller regulators

• Personal observations

Our approach to IA (1)

What do we mean by market failure?

“In the FSA's work, a principle we have enunciated…is thatregulatory action should only be taken when there is market failure.Now this is in fact a weak definition of the circumstances of whenregulatory action is justified, since all realistic markets – that is allmarkets which exist in practice – have some elements of marketfailure...It is an argument too often deployed by those who favourintervention that any market failure justifies intervention. The strong– and to me correct – test goes beyond that: there must be bothmarket failure and the prospect that intervention will provide a netbenefit. This involves recognising that regulatory intervention has acost and…a probability of failure. Identification of a market failureshould not lead to the assumption that regulatory failure is less likely, orless costly. It is an open and empirical question, which needs analysis on acase by case basis." [Hence the need for CBA]Callum McCarthy, Chairman, FSA

Our approach to IA (2)

What do we mean by regulatory failure?

• Regulatory failure is, like market failure, an economic justification for further regulatory intervention (including deregulation)

• For our purposes, regulatory failure means an intervention whose economic costs were higher or economic benefits lower than was originally expected such that the net effect is harmful (or more harmful than it need have been)

Our approach to IA (3)

• MFA/RFA (to decide whether an intervention can produce net benefits):– What is the relevant economic market or

markets?– What are the material market failures

and/or regulatory failures in the relevant market(s) now?

– If no intervention or no further intervention takes place, will an improvement in welfare take place? will the market failures be corrected in the short term?

Our approach to IA (4)

• High level CBA (to decide how to intervene):– What broadly are the regulatory options?– What are the economic and other costs

and benefits of the options, relative to doing nothing?

– What is the plan for further CBA work?

Our approach to IA (5)

• Sometimes MFA and HLCBA can tell us that a particular intervention is almost certain to produce net benefits

• In such cases full CBA becomes virtually redundant

• Nevertheless, FSMA requires us to publish a CBA (and compatibility statement) as part of formal consultation arrangements

• This is important for reasons of accountability• And as a check on whether the decision makers

got their facts right

Our approach to IA (6)

• IA conducted within redesigned institutional arrangements

• Independent sign off of MFA and HLCBA before policy papers go to decision making body

• Independent quality control process improves policy making

• European Commission’s IA Board performs a similar role

The FSA experience (1)

Issues1. Organisational2. Resourcing3. Scope4. Technical considerations5. Integration6. Outputs7. Communication

The FSA experience (2)

1. OrganisationalDoA. Promote an evidence–based culture – consensual

approach

B. Get senior management buy-inC. Establish internal controls and incentives –

challenge and assistanceD. Set clear reporting lines and status –

independence from policy area

E. Clearly define division of responsibilities

The FSA experience (3)

1. OrganisationalDon’tA. Practice apartheid

B. Pursue incompatible goals

The FSA experience (4)

2. ResourcingDoA. Fully recognise constraints

B. Focus on quality and seniority – influencing skillsC. Employ policy-focussed and outcome-focussed

economists – non-technical dialogueD. Use full range of inputs – firms, consumers, each

national authority

The FSA experience (5)

2. ResourcingDon’tA. Free-ride – many markets are national or sub-

national B. Outsource everything – need to build centre of

expertise (subject to resource constraints)C. Rely on consultants whose interests may be more

closely aligned with those of financial firms

D. Skimp on project management skills

The FSA experience (6)

3. ScopeDoA. Clarify with Government/Commission what the

goal/scope is – preferably narrow to avoid general equilibrium problems

B. Establish a proper market definition – product and national – crucial for reliable analysis

C. Set the right depth of analysis – proportionate use of resources – stop when appropriate degree of confidence achieved – recognise what is impossible

The FSA experience (7)

3. ScopeDon’tA. Try to explain the whole world – however

interesting it may be: focus on what is policy-relevant

B. Keep changing the scope of an IA exercise unless unavoidable

C. Ignore overlapping policy initiatives

The FSA experience (8)

4. Technical considerationsDoA. Keep the framework for analysis rigorous but

practical

B. Be consistent in treatment of data/issues

C. Exploit previous IAs and existing economic literature – empirical and theoretical

The FSA experience (9)

4. Technical considerationsDon’tA. Simply assume that national research is/is not

relevant across the EU

B. Let the approach/methodology grow stale –continuous innovation (finding ways to solve problems drawing on work – other fields e.g. evolutionary biology, regulation of pig farms…)

C. Give up just because a lack of data prevents use of ideal methodology

The FSA experience (10)

5. IntegrationDoA. Embed IA in the culture of the organisation

B. Integrate with research – already mentioned

C. Integrate IA into the policy making and decision taking cycle

The FSA experience (11)

5. IntegrationDon’tA. Integrate legal considerations in a way that

nullifies economic assessment- Completely different mindset- Non – compliance is a fact of life: the set of

incentives matters not just the legal incentive (to comply)

- What we can do v what markets will do

The FSA experience (12)

6. OutputsDoA. Use plain languageB. Tailor outputs to objectives C. Tailor outputs to audience – relevance to

decisions and the audience’s value setD. Set economic material in sufficient context to

make it intelligibleE. Make uncertainties explicit

The FSA experience (13)

6. OutputsDon’tA. Try to show how clever you areB. Quote important economic papers that aren’t

really relevant to the issue/targeted audienceC. Spurious accuracy

The FSA experience (14)

7. CommunicationsDoA. Consider partnerships with firms/their

representative bodiesB. Consider partnerships with consumer

representativesC. Try to hear the voice of consumers themselves

(e.g. behavioural studies/experiments)D. Provide clear feedback to stakeholders (to secure

future co-operation)

The FSA experience (15)

7. CommunicationsDon’tA. Necessarily believe what firms and consumer

groups sayB. Underestimate the efforts stakeholders have to

make in order to help us

Concluding remarks (1)

• MFA helps us to decide whether any intervention can produce net benefits

• It has materially affected policy within the FSA

• MFA and HLCBA together can sometimes remove the need for more detailed CBA work – helps overcome data problems

Concluding remarks (2)

• Organisational controls and incentives help give economic analysis traction

• Also critical to success are:– Effective stakeholder engagement – Proper planning (to deliver high quality outputs

on time)– Early definition of policy options– Availability (or generation) of data– Availability of skills– Budget for academic/consultancy support as

required

Questions…

…are very welcome

How to Regulate Bank Lending Risks to UnHow to Regulate Bank Lending Risks to Un--Hedged Hedged Borrowers in AlbaniaBorrowers in Albania

How to Design Better Financial Regulation

Presentation by:

Mr. Gerond Ziu,Supervision Department, Bank of AlbaniaMrs. Ermira Curri,Supervision Department, Bank of Albania

Ljubljana, 29 September- 01 October, 2008

Summary Of ExerciseSummary Of Exercise

January 31-February 1 Convergence’s RIA Program & Launch of RIA exercise

Early February Preliminary Issue Analysis

February 21 Market Consultations

March Analysis Completed

April Public Presentation of Results

Exercise Topics

Regulation “On Credit Risk Administration”

Regulation for transparency and information publication

Working Group CompositionWorking Group Compositionfor Credit Risk Administrationfor Credit Risk Administration

Facilitator

Co-facilitator

Mr. Luigi PassamontiHead of Convergence Program

Mr. Riccardo BrogiSenior Regulatory Economist

Convergence Program

WG Coordinator

WG # 1Bank of Albania

Gerond Ziu

Bank of Albania

Brisilda Bala

Bank of Albania

Ervin Sahatçiu

Bank of Albania

Roden Pajaj

Union Bank

Ilirjan Ligaçaj

Impact Assessment Impact Assessment ProccessProccess

1. Regulatory Context

2. Problem Identification

3. Statutory Goals at Risk

5. Stakeholders Consulted

4. Proposed Regulatory Action

6. Feedback Goals

7. Questions Asked

9. Policy Recommendation

8. Overall Feedback and Responses

Main Findings OverviewMain Findings Overview

1. Regulatory Context

2. Problem Identification

3. Statutory Goals at Risk

5. Stakeholders Consulted

4. Proposed Regulatory Action

6. Feedback Goals

7. Questions Asked

9. Policy Recommendation

8. Overall Feedback and Responses

Questions were provided based on arguments raised and supposed effects

1. Market Failure 2. Regulatory Failure

1. Do nothing Option 3. Quantitative Option 2. Qualitative Option

1. Banks operating in the banking system2. Non-bank institutions

1. Capacity to absorb shocks 2. Fair business conduct rules 3. Costumer awareness

Regulatory changes more relevant in terms of costs and benefits.

“On credit risk administration”

A detailed description is presented in a longer form of presentation

Final Step

1. Regulatory1. Regulatory ContextContext

Regulation “ On Credit Risk Administration”.

- It is aimed at improving requirements for reducing credit risk exposures, especially to foreign currency loans issued to unhedged customers.

- Other regulations or guidelines might be identified for further improvement in respect to the identified issue.

2.2. Problem IdentificationProblem Identification

The problem addresses the following:

Market FailureMarket Failure1. Asymmetric Information2. Negative External Factors

Regulatory FailureRegulatory FailureIn the past we have had weaknesses in regulatory enforcement regarding

transparency issues; as well as the absence of regulatory requirements regarding the creation of specific structures for product design and monitoring.

Credit expansion has raised concerns over specific risks issue. Our focusis especially on foreign currency loans provided to unhedged customers. At

the end of 2007, credit to unhedged customers over total portfolio is at 44.5%. The risks of foreign exchange rate fluctuation especially of American currency

the last years is a matter of unease which needs intervention.

3. Statutory Goals3. Statutory Goals

Statutory Goals at risk:Statutory Goals at risk:

Capacity to absorb shocks (loan portfolio quality)

Fair business conduct rules

Customer awareness

4. Proposed Regulatory Actions4. Proposed Regulatory Actions

1.1. ““Do nothingDo nothing”” optionoption1st – major banks established risk management deps. But

the time required to secure its proper functioning and final results can extend beyond the necessity to mitigate the already evidenced risks.

2nd – the market is left like it is and hence it is unlikely to enhance towards better standards. Some banks will react passively, just designing product features based on markets not being able to create the internal necessary environment for smoothing the effects.

3rd – industry and banks themselves will find difficult to address this goal which can be regarded as “public good”

4. Proposed Regulatory Actions4. Proposed Regulatory Actions

2. 2. Qualitative OptionsQualitative OptionsEstablishment of a special unit for risk management and economic

analysis. Restricting rules for Board of Directors in order to secure an improved process of credit risk management and mitigation andsetting of transparency prerequisites for minimum information provided to the customers.

3. Quantitative OptionsQuantitative OptionsLimit growth of loans to unhedged customers

- make each loan more expensive (e.g. provisions, risk weighting)

- quantitative restrictions (e.g. install./income ratio) - make loans beyond a threshold less feasible (e.g. % of reg.

cap.)

5. Stakeholders Consulted5. Stakeholders Consulted

Banks operating in the Banking Sector

Non-bank financial Institutions

6. Feedback Goals6. Feedback Goals

Which are the costs related to possible regulatory changes and what is their impact on the firms activity and to the customers?

What regulatory choices are more relevant in terms of costs and benefits?

Understanding how the proposed regulatory changes would impact the firms operating

in the Albanian banking sector.What is their overall opinion on the raised issue

and what are their proposed actions.

7. Questions Asked7. Questions Asked

Do you agree with us that the problem is as described?

Do you agree with our analysis if no intervention would have taken place?

Do you agree with the possible policy solutions?

Do you agree with the listed costs and benefits for each option? Please provide an estimate of the costs and benefits (qualitative and quantitative).

8. Overall feedback and responses8. Overall feedback and responsesProblem identificationProblem identification

Stakeholders

WG

Stakeholders generally agree on the fact that there is a need for a regulatory improvement mainly due to the low level of transparency.Some banks instead believe that the problem sounds more dramaticthan it actually is.

Small firms generally don’t agree on the use of quantitative options which may affect more small firms and may reduce the credit growing.

Market risk is significant because not addressing the internal riskmanagement properly might cause high exposures to possible shocksfrom international or national developments. This would raise concernfor future developments. There is also a regulatory failure to address.

8. Overall feedback and responses8. Overall feedback and responsesCBA (Indirect Costs/Quantitative option)CBA (Indirect Costs/Quantitative option)

Stakeholders

WG

Quantity of products offered –Quantity will be reduced because loans inforeign currency will be more expensiveQuality – As a matter of principle, regulatory change can improve the decision-making process at banking organizations and the entire process will lead to an improved selection process of the products. Variety – the changes may affect the variety of productsEfficiency of competition – Small operators will suffer more than big ones

from this regulatory extra burden.

Quantity of products offered - WG believes that an increase of 5% of provisions will reduce the initiative of banks to offer loans in foreign currencyQuality – The entire process will lead to an improved selection process of theproducts. Variety – As long as quality is enhanced, the variety will be manageable according to institutional capacities.Efficiency of competition – it is possible that costs associated with the possible regulatory changes are more difficult to bear for small intermediaries.Meanwhile, these ones will enhance competition in the hedged costumers’market segment.

8. Overall feedback and responses8. Overall feedback and responsesCBA (Costs/Qualitative option)CBA (Costs/Qualitative option)

Stakeholders

WG

Generally participants didn’t have a good reaction to the establishment ofa special unit. This was mainly due to the costs which they pretend to affectmore small banks than higher ones.

Some banks supplied us with figures but they weren’t based on carefulcalculations, they were generally empirical figures.

• One-off cost for the hiring process, training, buying and/or introducing a new electronic system and/or other office equipment • Operational costs: salaries for staff (on-going costs), IT hardware and software, office equipment and office materials maintenance (on-going costs) • Operational cost for management and Board of Directors: One-off cost for structure improvement as per the new unit establishment, one-off cost for policy and procedure writing, costs for annual review of the procedures (on-going cost) • Costs for complying transparency requirements: costs for publications(on-going costs)

8. Overall feedback and responses8. Overall feedback and responsesCBA (Benefits/Qualitative option)CBA (Benefits/Qualitative option)

Stakeholders

WG

Banks believe that higher transparency requirements will lead to fair market rules. This as a result will benefit banks, costumers and the whole banking system.

In our point of view, there will be major benefits as better internal organization can lead to a decrease of operational and market risks associating with activities of the intermediaries. Applying these rules can lead to greater confidence in the market. Banks are better protected from possible collapses due to the incapacity of debtors to repay their loans. We believe that possible intervention options will lead to higher protectionand transparency. Higher stability in the banking system, higher financial stability and higher confidence in the financial market.

9. Policy Recommendations9. Policy Recommendations

WG suggests that both qualitative and quantitative options should be included in the regulatory change.

It is essential for banks to have a unit / function for risk management and economic analysis. We agree with the small banks which concern about the costs related to the implementation of this unit, but its size should match the bank’s size and type of activity.

Banks do all agree with the fact that more transparency requirements are needed.

5% of increased provisions for each category for new loans to unhedged costumers will increase the interest rate for this type of loans at least of 4% (if all costs are passed to costumers). This raises the comparability of loans in foreign currency and local currency.

Some of the banks are near the limit of 400% of regulatory capital (loans in foreign currency to unhedged costumers/regulatory capital). This limit will discourage banks to raise the amount of loans in foreign currency to unhedged costumers or will encourage them to raise the capital. In both cases the systems’ stability benefits.

9. Policy Recommendations9. Policy Recommendations((optionalitiesoptionalities))

Banks - for new loans to unhedged customers, application of:5% rate of provision increase for each category OR150% to 200% risk weight.

Branches of foreign banks - application of:An obligatory deposit held at Bank of Albania, calculated as a percentage of the new portfolio to unhedged customers ORA limit exposure toward entire portfolio of loans to unhedgedcustomers.

There are alternatives between options and for different market participants under consideration.

LESSONS LEARNED

9. Policy Recommendations9. Policy Recommendations((optionalitiesoptionalities))

Banks - for new loans to unhedged customers, application of:5% rate of provision increase for each category OR150% to 200% risk weight.

Branches of foreign banks - application of:An obligatory deposit held at Bank of Albania, calculated as a percentage of the new portfolio to unhedged customers ORA limit exposure toward entire portfolio of loans to unhedgedcustomers.

There are alternatives between options and for different market participants under consideration.

INTRODUCTION

What is Regulatory Impact Assessment - RIA?

RIA is a policy tool designed:

1. to identify and quantify where possible, the impact of new regulations;

2. to be used also in the review of existing regulations;

3. to clarify the relevant factors for decision-making through comprehensiveness and awareness;

4. to encourage policy-makers to make balanced decisions when considering regulatory action that deals with the possible solutions to a problem, aiming the financial stability goal .

RIA ADVANTAGESRIA ADVANTAGES

Effectiveness - efficient regulation that address market failures

Transparency - setting out ex-ante the reasons for policy decision,addressing the identified and quantified problem, anticipating costs and benefits.

Accountability - improving the regulatory body reliability

Consistency - compatibility with laws/regulations/standards

Calibrating expectation - ex-ante effects calculations

Communication - increasing understanding

Experience sharing - building-in comprehensive consultation process

RIA Challenges of Implementation

Institutional capacity.Necessity for staff with the requisite training, overall resources.

Participatory level.A coherent, evidence based and market actors participatory and consideration is needed.

What does RIA really improve?

RIA directly improves three stages:

facilitates consultative, evidence-based, rational policy development;provides a framework against which the policy development process can be judged; andprovides a benchmark against which policies can be monitored and evaluated.

At last, but not least, RIA establishes ways of doing things.

Conclusions

Although in our practice, many of the steps in the RIA process are already undertaken when a regulation is being prepared.

Introduction of a formalized system of RIA will increase the consistency with the steps undertaken and will assist in the application of best practice during the regulation designing process.

THANK YOUTHANK YOU

MINISTRY OF ECONOMY AND FINANCEROMANIA

Regulatory Impact Assessment Regulatory Impact Assessment Main Findings and Policy RecommendationsMain Findings and Policy Recommendations

Ljubljana, September 30, 2008

Regulation no. 3/2007 on restriction of the credit risk on credits

granted to individuals

2

Working Group CompositionWorking Group Composition

Facilitator Mr. John Pyne, Senior Regulator, Irish Financial Regulator

Mr. Dragos NegoitaMr. Laura Radut

Participants AuthorityMr. Gabriel Valvoi National Bank of Romania

Ministry of Economy and FinanceMr. Emanuel ConstantinMr. Dorel OnetiuMs. Oana Mesea National Bank of Romania

National Bank of Romania

Ms. Beatrice Verdes Insurance Supervision CommissionGeneral Secretariat of the GovernmentNational Authority for Consumer Protection

3

Table of ContentTable of Content1.1. Problem identificationProblem identification2.2. Policy objectivesPolicy objectives3.3. Policy optionsPolicy options4.4. Cost/Benefit analysisCost/Benefit analysis5.5. Comparison of the optionsComparison of the options6.6. Policy recommendations.Policy recommendations.AnnexesAnnexesStakeholders consultedStakeholders consultedConsultation processConsultation process

4

1. Problem identification

The 2005 NBR Norm nr. 10 needed to be repealed because of increased competition from EU banks

Standard indebtedness levels - monthly reimbursements lower than 30 % of family net incomes for personal loans and 35% for real estate loans

Compulsory down payment for real estate loans (25%)

5

Problem identification (2)Problem identification (2)

Banks were not able to establish categories of customers

Authorities were considering if and how to replace this norm

We have prepared analysis and recommendations for a policy initiative

6

Due to the fact that the maximum uniform indebtedness levels did not allow lenders to set their own risk management system based on their risk profile in order to provide a higher level of competitiveness and that they restrained some categories of consumers to obtain bigger credits, it was necessary to eliminate them.

It was a regulatory failure.

Problem identification (3)

7

Problem Identification (4)Problem Identification (4)

The consulted stakeholders agreed that the problem was the above mentioned one.

Issues:- the new regulation does not create a sound competitive market for credit institutions;

- consumers’ interests seemed not to be taken into consideration.

8

2. Policy objectives2. Policy objectives

The working group identified the followingobjectives for a new policy initiative:

General objectives:- the financial stability; - the proper functioning of the credit sector.

Specific objectives: - developing responsible lending practices;- provide enhanced access to credits to specific categories of clients.

9

Operational objectives: banks’ internal norms shall provide: specific rules regarding the risk profile of the clients, the eligible categories of clients, rules setting out the eligible incomes and the deductible expenses, the main criteria the internal norms should be based on;

the NBR’s validation process of the lenders’internal norms.

Policy objectives (2)Policy objectives (2)

10

3. Policy options3. Policy options

Do Nothing Do Nothing OptionOption

Option 1Option 1 Option 2Option 2 Option 3Option 3

-- Maintaining the Maintaining the provisions of provisions of Norms no. Norms no. 10/2005 .10/2005 .--There would have There would have been been maintained maintained restrictionsrestrictionsimposed by NBR, imposed by NBR, the banks could the banks could not develop their not develop their own policies in own policies in

this field.this field.

--The new Regulation no. The new Regulation no. 3/2007.3/2007.-- responsible lendingresponsible lendingprinciples based on principles based on consumersconsumers’’ risk profile and risk profile and risk managementrisk management-- no specified levels for no specified levels for indebtedness indebtedness -- lenders shall provide their lenders shall provide their own levels within their own levels within their internal normsinternal norms for each for each category of clientscategory of clients-- the internal norms are the internal norms are subject to NBRsubject to NBR’’s validations validation

-- Self Self RegulationRegulation(e.g. A (e.g. A Voluntary Voluntary Code Code elaborated by elaborated by Lenders Lenders Professional Professional Association). Association).

-- Bring Bring amendments to amendments to Norms no. Norms no. 10/2005 in order 10/2005 in order to keep to keep uniform uniform limitslimits at the level at the level of all financial of all financial institutions, but institutions, but adjusted to adjusted to different categories different categories of consumers of consumers (incomes).(incomes).

11

3.4 Cost/Benefit Analysis 3.4 Cost/Benefit Analysis -- ConsumersConsumers

CostsCosts Benefits Net BenefitsNet BenefitsDNODNO: : increased fees and increased fees and commissions, lending on commissions, lending on longer termslonger terms

Protection to Protection to overindebtnessoverindebtness

Difficult to estimateDifficult to estimate

O1: more time spent on O1: more time spent on comparing options; higher comparing options; higher fees; living expenses fees; living expenses deducted from the available deducted from the available resourcesresources

Increased variety of Increased variety of products; more products; more opportunities for certain opportunities for certain categoriescategories

Difficult to estimateDifficult to estimate

O2: fees and commissions O2: fees and commissions even higher than in the even higher than in the other 2 previous optionsother 2 previous options

Diversity of products; Diversity of products; customer oriented approach; customer oriented approach; better credit risk better credit risk managementmanagement

Difficult to estimateDifficult to estimate

O3: limited access for some O3: limited access for some consumers; no ticket mealsconsumers; no ticket meals

Increased access to lending Increased access to lending for some consumersfor some consumers

Difficult to estimateDifficult to estimate

12

Cost/Benefit Analysis Cost/Benefit Analysis –– Credit InstitutionsCredit Institutions

CostsCosts Benefits Net BenefitsNet BenefitsDNODNO: : asymmetric impact; asymmetric impact; limited offer; limited offer;

Higher fees and Higher fees and commissions; low commissions; low competitioncompetition

Difficult to estimateDifficult to estimate

O1: banks: 21.800 EuroO1: banks: 21.800 EuroNBFIs: 42.000 EuroNBFIs: 42.000 Euro

More responsible lending; More responsible lending; risk management improvedrisk management improved

Difficult to estimateDifficult to estimate

O2: compliance costs to O2: compliance costs to regulated banksregulated banks

Lower costs than Lower costs than implementing mandatory implementing mandatory legal provisionslegal provisions

Difficult to estimateDifficult to estimate

O3: same as Option 1O3: same as Option 1 No estimation providedNo estimation provided Difficult to estimateDifficult to estimate

13

5. Comparison of the options5. Comparison of the options

The recommended policy option is Option 1.

The reasons that stand behind this decision are:

In terms of costs incurred by regulated firms:

Option 1 seems to be more expensive than the other options but this is due also to the fact that the main stakeholders did not provide the relevant information needed to assess the costs for Option 2 and Option 3.

In terms of benefits to regulated firms:

Option 1 offers more responsible lending and improved risk management than the other options;

14

Comparison of the options (2)Comparison of the options (2)In terms of market impact:

Option 1 generates a low variety of products, the efficiency and the quality of products offered is low as well;

Option 2 seems to be offering an improved quality and variety of products, and a more efficient competition. However, Option 2 seems unlikely to be favored at this moment due to a different mentality necessary to implement “voluntary regulations”;

In terms of costs supported by the consumers:

Option 1 may lead to increased credit costs (due to implementation and compliance costs). However, the increased competition between regulated credit institutions may reduce these costs in long term;

15

Comparison of the options (3)Comparison of the options (3)

In terms of benefits to consumers:Option 1 provides improved access to lending for certain categories of consumers and a wider range of products then the other options;In terms of impact on competition:

Option 1 increases the competition on the credit market, and in the end the consumers are the main beneficiaries.

16

6. Policy Recommendations6. Policy Recommendations

There is no doubt that the NBR’s Regulation nr. 3/2007 has brought an improvement in terms of access to credit, risk management, development of the credit market.

However, there are still some aspects that need to be corrected like creating the conditions for a sound competitive market for credit institutions, and an enhanced emphasis on consumers’ needs and protection.

17

Policy Recommendations (2)Policy Recommendations (2)

• Taking into consideration the objective of maintaining financial stability, the problems related to the distortion of competition can not be corrected at the moment. Regarding the consumers’ needs and protection, this issue can be corrected if the internal norms calculate the amount of living expenses according to the different categories of consumers.

18

Annexes Annexes -- Stakeholders consulted Stakeholders consulted

Banks ;

Non-banking financial institutions ;

The National Authority for Consumer Protection - representing the consumers.

19

Consultation process Consultation process –– credit institutionscredit institutions

Problem identification

Assessments – quality and variety of products

- efficiency of competition

Estimation of – compliance costs

- impact on competition

- social impact

- benefits

20

Consultation process Consultation process -- consumersconsumers

Consumers’ access to lending

Do you think that lending costs will increase? (each option)

Do you think that lower income consumers will be disadvantaged because of taking in consideration the deductible expenses (living)? (option 1)

Risk Management for Investment Intermediaries

Risk management forinvestment intermediaries

Bulgarian RIA example

Based on case study from the RIA Execution on FSC regulations in BulgariaResearch carried out September 2007 through February 2008

Ivo Stankov – chief expertMarket Supervision DepartmentBulgarian Stock Exchange - Sofia

Risk Management for Investment Intermediaries

Preliminary notes – Regulatory ContextWhat was the situation before 01.11.07?Ordinance 1 on the requirements to the activity of the investment intermediaries (Ordinance 1) was was enacted on the 10.10.2003. The internal control division was the only mechanism of self-control, compliance and investor protection in the IIm. There were no risk management provisions in Ordinance No 1. There were no provisions about internal audit either. All of this often lead to asymmetric information, taking too much risk by the IIM itself or on clients' behalf, violation of the clients rights, etc. clients rights were not always protected, different clients were treated equally, regardless of their financial potential, level of risk they can take, etc., transactions would be made to fulfill clients' orders, regardless the risk, as long as they are profitable to the investment intermediary, settlement would be delayed due to lack of securities as a result of intraday trading, the IIms often took advantage of information they had for their clients' activities and upcoming trades, etc.

What was to be done ?The idea was to introduce another level of internal protection of investors against any intentional or unintentional acts that could violate their best interests and in some cases - prevent systematic risk to the market. In some cases, lured on the bigger profit, the IIms are willing to take higher risk, thus endangering their clients and the reputation of the capital market as a whole.

Risk Management for Investment Intermediaries

1. Problem Identification

1.1 Was there a significant market failure - the market failure market failure was decreased consumer protection and and market integrity;1.2 If no intervention would have taken place, would the the market have corrected the failure by itself in the short term short term - the problems mentioned above were widespread widespread among all IIm and clients and the question was question was not if, but when the market failures, described described above, would occur;1.3 What was the evidence that the market/regulatory failure market/regulatory failure is significant – many evidences evidences proved, that the internal control unit does not work not work as expected;1.4 Which objective is threatened by the failure - consumer consumer protection and market integrity were threatened and threatened and asymmetric information existed;

Risk Management for Investment Intermediaries

2. Definition of policy goals2.1 General goals

A. Restoring consumer protection;B. Increasing and strengthening market integrity;C. Decreasing the asymmetric information to a low, bearable

bearable level;

2.2 Specific goalsA.2.1 Increasing risk management of the IIms;A.2.2 Increasing capital adequacy requirements;A.2.3 Requirements for clients’ consent on possible low-

low-liquidity financial instruments trade on their behalf;behalf;

B.2.1 Termination and prevention of intraday trading and other and other such practices, that unnecessarily increase increase customer risk;

B.2.2 Estimating risk per customer and for the IIm as a whole;whole;

C.2.1 Decreasing the level of informational asymmetry;asymmetry;

C.2.2 Creating effective prevention mechanisms for the IIms to the IIms to use the information they receive;

Risk Management for Investment Intermediaries

2.3 Operational goalsA.3.1 Increasing requirements for customers’ consent

consentA.3.2 Increasing the IIm’s own risk management and creating

creating a risk-management divisionA.3.3 Creating set of internal rules in the IIm for preventing

preventing customers from taking more risk than their than their financial capabilities allow

B.3.1 Eliminating cases of intraday trading by applying applying internal rules on the matter;

B.3.2 Estimating risk per customer and for the IIm as whole whole and requiring collateral for each investment investment exceeding client’s capabilities;

C.2.1 Creating and implementing the "need-to-know" principle principle and narrowing the group of people, who have who have access to sensitive information in the IIms;IIms;

C.2.2 Applying rules for close monitoring on the actions of actions of people, who have access to sensitive information inside the IIms;

Definition of policy goals – continued (2)

Risk Management for Investment Intermediaries

3. Development of “do nothing option”3.1 How the option to “do nothing” would have looked

looked like - no regulation on IIm risk;

4. Development of alternative policy optionsoptions

4.1 The option that has been implemented in the the Regulation - Establishing and introducing of introducing of common rules regarding the risk risk management and containing policy and procedures, which identify the risks relating to the to the investment intermediary’s activities and and including mechanisms for exercising control control over the adequacy and efficiency of the the policy procedures;

4.2 Alternative policy options - In certain cases the the small intermediaries could not create departments for internal audit and risk management. Scale of the IIm should be addressed addressed in further amendments to the Ordinance Ordinance 38;

Risk Management for Investment Intermediaries

Cost / Benefits Analysis

5. Analysis of impacts (Users)5.1. Direct costs5.2. Compliance costs5.3. Benefits5.4. Quantity of the products offered5.5. Quality of the products offered5.6. Variety of the products offered5.7. Efficiency of competition

6. Analysis of impacts (Regulated firms)6.1. Direct costs6.2. Compliance costs6.3. Benefits6.4. Quantity of the products offered6.5. Quality of the products offered6.6. Variety of the products offered6.7. Efficiency of competition

Risk Management for Investment Intermediaries

Stakeholders Session1. Identifying the main Stakeholders

Stakeholdersa) Investment intermediaries;b) Bulgarian banks association;c) Bulgarian association of asset

management companies;2. Designing the questionnaire

Main topics:a) Identifying stakeholders main concerns;

concerns;b) Identifying main costs;c) Effect on competition;

Consulting the stakeholders (1)

Risk Management for Investment Intermediaries

3. Stakeholders, taking part in the the survey:

a) Bulgarian Association of AssetManagement Companies

b) Investment intermediary “Beta corp”corp”

c) Central Depositary

4. Stakeholders main concerns:a) Expenses will be too high;b) There will be negative effect on

competition;c) Smaller intermediaries may go out of

of business;d) Asset management companies may have

have to increase staff significantly.

Consulting the stakeholders (2)

Risk Management for Investment Intermediaries

Questionnaire results – Problem IdentificationIdentification

Stakeholders It’s necessary to reduce the asymmetry. On the other hand, there will be a duplication in the functions of the internal audit and the internal control. It’s important that the self – regulation is given as a possibility.The regulation is flexible. The risk management is more focused on the companies’ side. It must be focused on the both of them.Each of them is a different institution. There is no point to separate the internal audit and the internal control. The asymmetry is in an acceptable band.

Working Group There is asymmetric information between consumers and the investment firms about the quality of the investment process. Especially with respect to the big intermediaries, the irregularmanagement of their internal processes and especially the false defining of the operational and market risks could damage their financial status and have a negative impact on market stability and investor confidence.

Risk Management for Investment Intermediaries

Questionnaire results – Defining Policy SolutionsSolutionsStakeholders The MiFID provisions should be implemented at the

minimum levels required. Intermediaries should be left to decide themselves if they need internal audit and risk management divisions based on size, number and volume of operations, number of clients, etc. In general it is not necessary to have two different departments.

Working Group Given that the domestic regulation under review transposes a Directive, we don't analyse other policy options. The main implementation provisions are broken down taking into account when they strictly comply with MiFID and, if any, when they are super-equivalent.

Risk Management for Investment Intermediaries

Questionnaire results - Cost-Benefit AnalysisStakeholders There is a general sense that the regulations are

beneficial (increased trust, confidence, possibly more demand for higher-risk investment products, etc.). However, it is difficult to assess which part of this is due to the regulations on internal control, internal audit and risk management or if this is due to the implementation of MiFID as a whole.We expect foreign competition to increase. It takes time to have large western competitors entering the market because it is still small to date. We think 2-3 foreign competitors will enter the Bulgarian market full scale.We believe 1-2% oif the intermediaries will be pushed out of the market and some 20% will have to restructure to fill in the requirements. But everything depends on the enforcement of the regulation by FSC. It’s difficult to say.

Risk Management for Investment Intermediaries

Questionnaire results - SummaryStakeholders The new regulations will increase the costs for the

stakeholders. One-off costs will be minor in short term, but the on-going costs will be significant as new staff and will be hired and compliance costs will rise. It will be difficult to pass costs to the clients. Some intermediaries may be pushed put of business.

Workgroup 1. The FSC monitors the status of implementation of the rules (looking specifically at the potential identified problems: overlap of internal audit and internal control). Dialogue with the firms is necessary for that;

2. The FSC monitors the number of complaints which relate to this regulation.

3. The FSC monitors the market structure of the investment intermediaries market (i.e. how many firms go out of the market, how many firms enter the market)

4. If the FSC thinks after a certain period that the implementation is not smoothly, the FSC could suggest to:

- Allow firms to combine their independent internal audit and internal control departments into 1 independent department.

- It is important that the market participants should be consulted.

Victor Burunsus, Chisinau, August 2008 1

Regulatory Impact Assessment

Paving the way to a better business environment and increased national

competitiveness

an essential instrument of the Reform of Business Regulations in

Moldova

Victor Burunsus, Chisinau, August 2008 2

RIA was envisioned part of a regulatory Reform Strategy

Offering better business environment is

a key success factor in making a

country attractive for investment

GoM realized the need to reform as a result of the findings of Cost of Doing Business, BEEPS and ICA

Victor Burunsus, Chisinau, August 2008 3

A two stage Regulatory Guillotine preceded the

introduction of RIA• Law #424 on revision and optimization of

regulatory framework for business activityPaved way for Guillotine -1

• GoM Decision #1030 on the Registry of Official acts – Finalized the Guillotine-1

Instituted an online registry of regulatory acts after a review of 1130 regulations

• Law on the Basic Principles of Business Regulations,

Introduced 5 principles of good regulationPaved the way for second stage GuillotineInstitutionalized RIA

Victor Burunsus, Chisinau, August 2008 4

Implementation Challenges were significant

Guillotine -1Ensuring positive security of the online registry of business regulation

Guillotine -2Political pressure for tight deadlines Inclusion of legislation stemming

from independent regulators including National Bank of Moldova.

Victor Burunsus, Chisinau, August 2008 5

Second stage Guillotine attained important outcomes

Cut for fee services rendered by public authoritiesStreamlined economic and financial inspectionsSimplified licensing proceduresRIA capacities being built at ministry levelRIA made part of the curriculum of Public Administration Academy

Victor Burunsus, Chisinau, August 2008 6

Second stage Guillotine shortcomings

The financial sector was excluded from the auspices of the law #235 on Basic Principles of Business Regulation

The ICT legislation was left over for a later stage review

Victor Burunsus, Chisinau, August 2008 7

Institutional setup for Regulatory Reform and RIA

• Interministerial group on business regulation superseded by

• National Working Group on Business Regulation

• RIA Secretariat under MoET• State Commission for Business

Regulation• RIA Units in ministries and in the

Parliament

Victor Burunsus, Chisinau, August 2008 8

Donor Support for Business Regulations Reforms

WB helped designing a comprehensive regulatory review – Regulatory Guillotine.

USAID/BizPro helped implementing the Regulatory Guillotine-1 eliminating 12% of the unnecessary business regulations.

WB is financing Competitiveness Enhancement Project helped implementing Guilotine-2, streamlining 88 laws.

Victor Burunsus, Chisinau, August 2008 9

Encouraging results are present to date

Management time affected to regulatory

compliance dropped from 18 to 16%

Increased investment

One stop shops for business authorization

are in place countrywide

Silence is consent for business licensing

Victor Burunsus, Chisinau, August 2008 10

Some challenges remain

Raising the profile of RIA and fully absorbing it into public administration;

Developing Special Initiatives for areas covered by independent regulators based while applying same principles of good regulations.

Victor Burunsus, Chisinau, August 2008 11

Lessons Learned

☺High level political support neededBroad involvement of the cabinet of ministers and assuming responsibility☺Building RIA into national education

systemSufficient resource allocations☺Particular attention to the club of

independent regulators

Victor Burunsus, Chisinau, August 2008 12

Competitiveness agenda prioritized high in the National

Development Plan

National Development Plan is built

around the Competitiveness goal

Further simplification of business

regulations is a key pillar

Victor Burunsus, Chisinau, August 2008 13

Thank you for your attention

How to Design Better Financial Regulation

How to Design Better Financial Regulation

Impact Assessment Template for a RIA Application to Case Studies

October 01, 2008

Case Study Working Group 2:

Restrictions on Credit Granted to Individuals

Please tick the box that best captures the project's public-private modernization impact:

PUBLIC-PRIVATE FINANCIAL SECTOR MODERNIZATION MATRIX European Central Bank CRITERIA

Italian Banking Association CRITERIA

Asymmetric information reduction

Completeness of the market

Increased opportunities to engage in

financial transactions

Reduced transaction

costs

Increased competition

Business development Industry competitiveness

Industry reputation Description of the modernization impact: (Please make a summary of the modernization impact of the project under review)

Case Study Objectives The purpose of this session is to make participants undertake a RIA exercise by applying RIA methodology to case studies illustrated the day before. Each Working Group needs to assign one member who would be the leader of each step of the RIA process and one additional member who would be the note taker of the discussed and proposed solutions. Participants will take note of the brainstorming and the solutions proposed in their own RIA Simulation Template included within the Seminar Package. The Facilitators assigned to your Working Group as well as the composition of your group along with the maximum time to allocate on each exercise is listed in the tables below.

Chair & Facilitators Chair: Mrs. Ramona Bratu, SPI Regional Operations Director; General Coordinator: Mr. Stephen Dickinson, Senior Regulator, UK Financial Services Authority; Facilitators:

• Ms. Ermira Curri , Chief of Regulation, Supervision Department, Bank of Albania; • Mr. Emanuel Constantin, Public Manager, Public Policies Unit, Ministry of Economy

and Finance, Romania.

Working Groups Composition

Ms. Elona Bollano Albania Convergence Programme Mr. Ivan Lažeta Croatia Ministry of Finance Ms. Mimoza Berisha Kosovo Ministry of Energy and Mining Mr. Dugagjin Krashniqi Kosovo Ministry of Economy and Finance Mr. Ibrahim Xhaka Kosovo UNMIK Custom Services Mr. Daniel Stojanovski Macedonia Ministry of Finance Ms. Svetlana Popova Moldova National Bank of Moldova Mr. Eugeniu Cozmulici Moldova Ministry of Finance Ms. Sorin Hadarca Moldova Government of Moldova Ms. Mirjana Ivezić Montenegro Central Bank of Montenegro

Wor

king

Gro

up 2

Ms. Laura Eliza Roman Romania Ministry of Economy and Finance

2

Case Study Division of Tasks

Working Group # 2

All WG members work together

Ms. Elona Bollano - Albania

Mr. Ivan Lazeta- CroatiaMs. Mimoza Berisha - Kosovo

Mr. Ibrahim Xhaka- Kosovo

Mr. Daniel Stojanovski- MacedoniaMs. Svetlana Popova- Moldova

Mr. Eugeniu Cozmulici- Moldova

Ms. Mirjana Ivezic- Montenegro

240 (4hrs00min)

Time allocated ( minutes)

Purpose of each RIA stepSteps of the RIA process Questions for analysis

60

20

20

1. Problem Identification

All WG members work together

2. Definition of Policy Objectives

To identify the effects of policies and check whether regulatory policies bring the marjets closer to organizational regulatory objectives

All WG members work together

To understand a market/regulatory failure analysis and to identify whether there is a need of regulatory intervention.

Total Time:

20

20

20

20

20

To identify and state the costs borne to consumers under all options

7. Analysis of Impacts: Cost to Regulator and Regulated Firms

To identify and state the costs borne by reulator and regulated firms under all options considered

6. Analysis of Impacts: Benefits to Consumers

To identify and state the benefits yielded by consumers under all options considered

5. Analysis of Impacts: Costs to Consumers

Break 20 min

9. Public Consultations: Arrangements of Consultation Process

To identify all main relevant stakeholders that should be consulted,choose the possible way(s) the consultation might run and outline questions to be discussed in the consultation

8. Analysis of Impacts: Benefits to Regulator and Regulated Firms

To identify and state the benefits yielded by regulator and regulated firms under all options considered

4. Alternative Policy Options

To identify and state alternative policies and among them the "market solution" consisting of no market intervention but solely relying on market forces to solve the problem.

20

3. Development of "do nothing" option To identify and state the status quo

Ms. Laura Eliza Roman- Romania

Mr. Sorin Hadarca- Moldova

Mr. Dugagjin Krashniqi-Kosovo

3

4

INTRODUCTION

The present Impact Assessment Template is designed to take you through the main steps of the analysis and data requirements, regardless of the stage of the regulatory design process you are in. At an early design stage, with little quantitative data available, this template can help prepare a Preliminary Impact Assessment. Later on, the template can help prepare a Full Impact Assessment. The template builds on the EU Better Regulation Impact Assessment process.

The EU Better Regulation Approach

Steps Purpose Scoping of problem

1. Problem identification To understand if a market/regulatory failure creates the case for regulatory intervention.

2. Definition of policy objectives To identify the effects of the market /regulatory failure to the regulatory objectives.

3. Development of “do nothing option”

To identify and state the status quo.

4. Alternative policy options To identify and state alternative policies (among them the “market solution”).

Analysis of impact 5. Costs to users To identify and state the costs borne by consumers 6. Benefits to users To identify and state the benefits yielded by consumers 7. Costs to regulated firms and regulator

To identify and state the costs borne by regulator and regulated firms

8. Benefits to regulated firms and regulator

To identify and state the benefits yielded by regulator and regulated firms

Consultations 9. Data Questionnaire To collect market structure data to feed into cost and

benefit analysis 10. Policy Document To learn market participant opinions on various policy

options Conclusion

11. Final Recommendations Final report to decision-makers, based on Cost Benefit Analysis and market feedback

Rather than being a step-by-step process, RIA is a highly iterative process. As it

advances, it is likely that previous steps need to be fine tuned accordingly.

The template is made up of the following 4 sections: The first section sets the stage of a preliminary IA by describing the main information of the draft regulation on which RIA is being practiced.. Section 2 aims to scope the underlying problem in order to see whether or not it is necessary a regulatory intervention to address that problem. Section 3 is devoted to Cost-Benefit Analysis. In this part the main qualitative and quantitative economics are illustrated under the various perspectives: from the regulator and the government; from consumers and from the regulated firms. Finally, Section 4 brings the main findings explored in the previous 3 sections together in a conclusion. This template is based on the following sources:

- CESR-CEBS-CEIOPS, Draft Impact Assessment Guidelines; May 2007; - UK Financial Services Authority; - Oxera; - Lessons learnt by Convergence through the RIA Capacity Building sessions.

.

5

Section 1:

Setting the stage:

6

Background1

1 Please describe concisely the draft regulation which RIA is being applied to.

Section 2:

7

Scoping the problem

1. Problem Identification

a) What is the problem under consideration? All WG members discuss this step jointly

1. Problem Identification b) Why is regulatory intervention necessary?

All WG members discuss this step jointly

2. Definition of Policy objectives All WG members discuss this step jointly

3. Development of “do nothing” option 2

8

All WG members discuss this step jointly

4. Alternative Policy options3

WG members discuss separately. The following members present the results of the group discussion:

Ms. Elona Bollano (Albania)

5. Analysis of Impacts: Costs to Consumers WG members discuss separately. The following members present the results of the group

discussion: Mr. Ivan Lazeta(Croatia); Ms. Mimoza Berisha ( Kosovo)

2 Once the problem has been identified [see item a)], in this section you need to concisely explain how the problem would evolve if the current regulatory framework (also ‘baseline’) were to continue without regulatory change. 3 You may wish to draw from ToR’s project objective as a first input. When policy analysis is more advanced, this box should contain the feasible policy options produced by the expert staff of the regulator (or equivalently by the Project Working Group) responsible for the regulatory analysis task.

6. Analysis of Impacts: Benefits to Consumers

WG members discuss separately. The following members present the results of the group discussion:

Mr. Dugagjin Krashniqi (Kosovo); Mr. Ibrahim Xhaka( Kosovo)

9

7. Analysis of Impacts: Costs to Regulator and Regulated Firms

WG members discuss separately. The following members present the results of the group discussion:

Mr. Daniel Stojanovski (Macedonia); Ms. Svetlana Popova (Moldova)

8. Analysis of Impacts: Benefits to Regulator and Regulated Firms

WG members discuss separately. The following members present the results of the group discussion:

Mr. Eugeniu Cozmulici (Moldova); Mr. Sorin Hadarca (Moldova)

9. Arrangements of Consultation Process

WG members discuss separately. The following members present the results of the group discussion:

Ms. Mirjana Ivezic (Montenegro); Ms. Laura Eliza Roman (Romania)

10

Please tick the appropriate box as a result of the previous answers:

Summary Problem Scoping

Market failure Asymmetric information Market power Positive

externalities Negative

externalities

(Existing) Regulatory failure

Regulation wrongly

prescribed for the market

Regulation succeeded in addressing the failure; a different market failure (e.g.

side effect)

Regulation made it worse

Regulation so far has failed to work;

maybe in due course

11

Section 3: Summary: impact analysis evidence

Table 1

Regulated firms Benefits & Costs

(in terms of Key economics)

Quantitative summary results (Mln, Euro)

Qualitative summary results(High, medium, Low)

i) Costs

ii) Benefits (quantity of products/services offered; price increase; cost reduction)

iii) Quantity of the products offered

iv) Quality of the products offered

v) Variety of the products offered

vi) Efficiency of competition

Please enter in the boxes the main quantiative findings from Table 1

Regulated firms Main quantitative aspects to be assessed

(scenario vs baseline)

Key economics Time span

Additional Loans Cost Savings /Additional Revenues Equity relief

First full year

5-year time horizon

==================================================================

12

Please tick the appropriate box and enter the degree of qualitative impact:

Consumers Main quantitative/qualitative aspects to be assessed

(scenario vs baseline) (Qualitative impact: high, medium, Low)

Key economics

Time span Choice aspect (sub-optimal or reduced)

Cost impact aspect (operational-financial-systemic-risks, market

power, transaction inefficiencies)

Financial exclusion

First full year

5-year time horizon

==================================================================

Table 2 Regulator and Government

Benefits & Costs Quantitative summary results

(Mln, Euro)

Qualitative summary results

(High, medium, Low) i) Direct costs

Regulator

perspective ii) Benefits*

G

overnment

perspective iii) Government taxation

*= Benefits have to be meant either: i) as the Regulator’s statutory objectives (if so, please enter which); ii) as one of the ECB criteria aforesaid, namely Asymmetric information reduction, Completeness of the market, Increased opportunities to engage in financial transaction, reduced transaction costs, Increased competition

13

Section 4:Conclusions

Please summarize in the box below the main findings learnt:

• Section 1 – Background information:

• Section 2 – Problem scoping:

• Section 3 – Impact Analysis evidence:

Regulated firms:

Consumers:

Regulator and Government:

14

Next steps

1 Policy Options – Consultation questionnaire Assuming that first this template is used to run a Preliminary Impact Assessment, you need to convey the main findings obtained together with the policy options that are going to be considered in order to address the problem and bearing in mind that the identified policy options alternative to the “do nothing” scenario ought to be consistent with the preliminary even though rough analysis previously undertaken. Therefore, the next document to be prepared is a detailed questionnaire addressed to interested stakeholders. They are expected to give their views and remarks about how you approach the problem, the regulatory options you propose and, on top of that, the qualitative and quantitative information which the respondents own in order to establish a concrete dialogue and reduce information gap between regulation maker and regulation taker. You then send this document out to the identified stakeholders and asking for a written reply in approximately two weeks’ time. The collected written answers will help you understand which impact aspects are straightforward and which ones instead need further investigation. At this stage, then, a second-round consultation between the regulator and market participants may be appropriate. This time a consultation meeting is highly suggested so as to allow all parties engaging in such exerciser express their views and better understand the reasoning of counterparts. 2 Summary of consultation feedback In this document you are supposed to collect in a systematic manner all information gathered through the consultation process (both on a written and oral basis). You may organize everything resorting to a grid in which the rows bring the questions and each column contains the feedback from various stakeholders consulted. 3 Policy recommendations At that stage you have all required information set to the whole picture of the regulatory issue under discussion. The documents produced so far are supposed to be a fair enough basis to come up with the main findings and set some policy recommendations. So this document should reinforce the following aspects of the IA analysis:

a) Problem identification; b) Goals (namely the objectives that the regulator intends address through this

regulatory action); c) Policy options; d) Analysis of qualitative and quantitative impact (per each option considered, also

including the “do nothing option”); e) Comparisons of the options [as a result of the findings emerged in item d)];

The Policy recommendations document should bring the table here below in which all options considered are compared and quantified so as to come up with a preference in terms of overall net benefit.

Option-3

Option-2

Option-1

NETBenefitsCostsNETBenefitsCosts

OVERALL NET EFFECT

LONG TERMSHORT TERM POLICY OPTIONS

Option-3

Option-2

Option-1

NETBenefitsCostsNETBenefitsCosts

OVERALL NET EFFECT

LONG TERMSHORT TERM POLICY OPTIONS

f) Policy recommendations. Since the Policy Recommendation Document is necessarily the outcome of the policy dialogue between interested parties needless to say that each of the aspects aforesaid which has gone through the consultation process should be framed as follows:

Feedback from consulted stakeholders on that specific issue (e.g This reasoning was unanimously supported by respondents on the basis that…; A majority of the respondents supported this view but a minority disagreed on the basis that they believed that…. They argued that…)

Our response (this document will need to be able to respond to

every argument made by the stakeholders in their feedback. Where the WG agrees with their points the WG should say so, where the WG disagrees the WG should also say so, and support our view with evidence and argument. The aim is to develop a policy that is capable of being supported by all stakeholders):

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Annex 1– Methodological Section • Problem identification: Concepts are explained further in 3L3 Draft Impact Assessment Guidelines, at pp. 20-25, Appendix 2 p. 48. (http://www.spi-romania.eu/ria-capacity-building/key-documents/) • Cost and Benefit Analysis: The following methodological excerpts by Oxera are also strongly suggested for an effective and systematic approach towards costs and benefits assessment.

7 November 14th 2007

Costs for firms: compliance costs (I)

Total costs of compliance activities

Behavioural restrictions

Product restrictions

External advice

Fees payable

External auditingCapital

Systems and controls

Disclosure to clients

People standards Regulator notification

AuthorisationRegulator relationship

16

8 November 14th 2007

Costs for firms: compliance costs (II)

Good business practice costs

Incremental costs

Behavioural restrictions

Systems and controls etc

Checking identity of client

Training Preparingdocumentsfor regulator

Printing and postage

Notification

Operating IT systems

Hiring consultants

etc

People standards

Record-keeping

Good business practice costs

Incremental costs

Total incremental costs of regulation

Total costs of good business practice

Total costs of compliance activities

2 November 14th 2007

Types of detrimental market outcomes for consumers

Market failures

Risks

Incentive problems

Higher costs—from transaction inefficiencies

Financial exclusion

Higher costs—from systemic risks

Higher prices—from market power

Higher costs—from operational risks

Higher costs—from financial risks

Sub-optimal choice

Reduced choice

An efficient market may deliver outcomes that are considered ‘unfair’from a public policy point of view

17

3 November 14th 2007

Direct measurement of consumer benefits

reduction of losses or other costs associated with firm default

Higher costs—financial risks

reduction of losses or other costs associated with operational failure

Higher costs—operational risks

increased choice (wider availability of what consumers need)

Reduced choice

reduction of losses or other costs associated with systemic failure

Higher costs—systemic risks

better choice (more optimal fit between what consumers buy and what they need)

Sub-optimal choice

improved access to financial servicesFinancial exclusion

reduction in transaction costs, including search costs

Higher costs—transaction inefficiencies

reduction in excessive pricesHigher prices—market power

Relevant measure of benefit is thevalue that consumers derive from …

Type of detrimental market outcome that regulation may improve

4 November 14th 2007

Indirect measurement of benefits (II)

Identify the market outcome that regulation is seeking to improve

Identify the mechanisms by which regulation delivers the improvement

Identify and measure the corresponding proxy metrics

Validate the link between the proxy and market outcome

Disclosure rule intended to benefit consumer purchase decisions

More information leads to better purchase decisions

Degree of information provision by firms

Test whether consumers use/ understand information and adjust their decisions

Illustration

18

5 November 14th 2007

Summary of measurement framework

What to measure- identify the market outcome dimensions that the regulation may be

improving

Identification of mechanisms by which regulation delivers an improvement in market outcome

- analyse the causality links between regulation and outcome

Direct measurement- evaluate feasibility of methods and techniques for measuring changes in

market outcomes

Indirect measurement using proxy metrics- identify proxy metrics (metrics that reflect improvements in mechanisms)

and apply methods and techniques for measuring changes in proxies

Validation of links- test that proxies can be used to infer a change in the final market outcome

Completeness check- analyse other (unintended) impacts on market outcomes and repeat

exercise if required

Concepts of cost/benefit assessment are also explained further in 3L3 Draft Impact Assessment Guidelines, at pp. 31-34 and in Appendixes 3-4.

19

Reducing Systemic RiskAssociated with Foreign Exchange

lending in Albania

Milen SavovRade JovanovicIva KopeckiBurin GashiAgron Medjiti

Veronica CuhalNatalia AgapiiFelicia MaciacVictor BurunsusPaul MarisTomaz Rotovnik

The market information• Floating rates – pretty stable domestic currency• 44,5% in unhedged customers• 16 banks – 95% of the market• 7 NBFI – 5% of the market• Interest rates – 9% on loans in FX• Interest rates – 14% on loans in domestic currency• Surplus of savings over loans • 50% of borrowers are individuals

Problem identification (1)

• Management failure- banks expose themselves to too much risk

• Regulatory failure – minor because the problem is still manageable

• Market failure- comes from market wide management failure

• Asymmetrical info – between banks and customers

Problem identification (2)

• Why is regulatory intervention necessary – in this time of financial turmoil banks will probably react too late and too slow to the flip of foreign currency loans / LEK loans ratio, many customers will go default and will bring risk to banks, other customers and a whole system.

Policy objectives

• Protect market stability

• Protect customer rights

GoalsStatutory Specific Operational

•Financial stability

•Risk management

•Soundness of banking

system

•Guidelines management•Definition of U-H lending•Sanctions •Limit to FX exchange•Reporting

•Consumer protection

•Reduce asymmetrical information•Reduce risk exposure•Fair competition

•Transparency of transactions•Sanctions •Definition of U-H lending•Advertising rules

Policy options1. Do nothingFinancial stability• No incentives to change the situation• No harmonized guidelines

Consumer protection • No transparency due to high competition• Advertising with hidden information

Policy options

2. Create law, forbidding unhinged lending

3. Creating a guarantee fund funded and operated by

banks on the basis of % of unhinged lending

4. Impose rules on risk management – ceiling on loans,

minimum reserve on Fx funds, accounting to ratio

UBFx/TDfx 1pp for each 10pp over 100

Expetations Option 2BANKS CUSTOMERS REGULATOR NBFI

1. Depends on percentage of the profit formed by unhinged loans

2. Implication of new regulation

3. Lower risk in long term

4. Several new products5. Increasing the quality due

to reduced risk6. New credit products7. Improve competition

between big and small banks

Decreased access to loans

Better customer protection

Costs for: - regulation-Education-Extra inspections to enforce new loans

-Increase market stability-Reduce number of inspections

1. Depends on percentage of the profit formed by unhedgedloans

2. Implications of new regulation

3. Lower risk in long term

4. --5. Increasing the

quality due to reduced risk

Expectations / Option 3 Guarantee fundBANKS CUSTOMERS REGULATOR NBFI

1. Setting up costsfor the fund2. Installments to

the fund3.Lower default

loans ratio4.Increased profits,

products5,6. Increased

quality and variety

7. Improved position of less exposed banks

Costs passed on by the banks

Costs passed on by the banksBetter access to creditHigher accessBetter choice

Positive effectsReduced local currency interest rates

Creating an ordinance/law

Costs for inspecting complianceReduced market risksIncreased credits to economy

- // - Same as banks

-- // --

-- // --

-- // --

Expectations 4. Risk managementBANKS CUSTOMERS REGULATOR NBFI

1. Opportunity costs2.No additional costs3. less risk

4. Less quantity

5. Shifted variety to hedge lending6. Export loans to mother banks*lower competition-Space for banks to increase-Lower capital building capacity

--------

Less risk

Less quantity

Hedged loans to customersHigher prices

-Supervision costs----

-Improved stability

-Reduced risk in economy

---

Reduced efficiency of competition

-- // -- as banks-- // --

-- // --

-- // --

-- // --

Consulted stakeholders

• Banks

• Non-banking financial institutions

• Consumer protection agencies

• Banking associations

• Customers (individuals and businesses)

Policy recommendationsOption 4 – Risk management

Reasons to recommend this option:• Less time• Fast effects• Most efficient in terms of stakeholders benefits• Best addresses identified problems• Biggest quantity and quality of products of all options

analyzed• Positive side effect: increase in bank share capital• Negative side effect : export of loans to headquarter bank

abroad

Restriction on Credits Restriction on Credits Granted to IndividualsGranted to Individuals

RIA Excersise Group 2RIA Excersise Group 2

Svetlana PopovaEugeniu CozmuliciSorin HadarcaMirjana IvezićLaura Eliza Roman

Elona BollanoIvan LažetaDugagjin KrasniqiIbrahim XhakaDaniel Stojanovski

BackgroundBackground

Norm NR.10Norm NR.10-- Standard indebtedness levelsStandard indebtedness levels

30 % ,35% income30 % ,35% incomeDown paymentDown payment-- mortgage loansmortgage loans25 %25 %Market Market –– 1.consumer loans1.consumer loans

2.loans on residential property 2.loans on residential property StakeholdersStakeholders

Consumers (low, Consumers (low, medium/highmedium/high incomeincome))

Regulators Regulators –– National National bankbank

Sellers Sellers –– banks, nonbanks, non--banking financial banking financial institutions, real estate institutions, real estate agency, retailersagency, retailers

Problem Problem identificationidentification

Market distortionMarket distortionRestriction of credit activities:Restriction of credit activities:

banks complain they cannot lend morebanks complain they cannot lend moreHigh income borrowers cannot borrow for shorter time horizonHigh income borrowers cannot borrow for shorter time horizon

AssetAsset--Liability Mismatch:Liability Mismatch:interest rate riskinterest rate riskliquidity riskliquidity risk

Increased used of Black Market financingIncreased used of Black Market financing

Regulatory Failure !!!

Policy objectivesPolicy objectivesGeneralGeneral SpecificSpecific OperationalOperational

Financial Financial StabilityStability

1.1. Efficient use of financial resourcesEfficient use of financial resources2.2. Sound financial managementSound financial management3.3. Adequate risk management in Adequate risk management in

banksbanks

1.1. Sketch risk profiles for Sketch risk profiles for clientsclients

2.2. Develop a comprehensive Develop a comprehensive risk management risk management frameworkframeworkassess quality of collateral;assess quality of collateral;estimated cash flows;estimated cash flows;risk provisioning rulesrisk provisioning rules

Access to Access to financefinance

1.1. Access to shortAccess to short--term financing for term financing for highhigh--medium income personsmedium income persons

2.2. Fulfill demand for financing for Fulfill demand for financing for some clientssome clients

1.1. Abolish quantitative limits Abolish quantitative limits for lending activitiesfor lending activities

Alternative OptionsAlternative Options

Option 1: Option 1: Do NothingDo NothingOption 2: Option 2: Increase limits /decrease downIncrease limits /decrease down--

paymentpaymentOption 3:Option 3: Introduce new methodologyIntroduce new methodology

Option 1: Option 1: ““Do NothingDo Nothing””

Cost for the customersCost for the customersUnmet demandUnmet demand

Higher interest ratesHigher interest rates

Benefit for regulated firms Benefit for regulated firms Simple to apply / controlSimple to apply / control

Cost for regulated firmsCost for regulated firmsNot able to lend more Not able to lend more /lower profits/lower profits

UnUn--hedged exposurehedged exposure

Liquidity drainLiquidity drain

Benefit for customersBenefit for customersSome protection from Some protection from indebtednessindebtedness

Cost for regulatorCost for regulator??????

Benefit for regulatorBenefit for regulatorSimple to superviseSimple to supervise

Cheap control of inflationCheap control of inflation

Option 2: Increase limits /decrease Option 2: Increase limits /decrease downdown--paymentpayment

Cost for the customersCost for the customersStill, some unfulfilled demandStill, some unfulfilled demand

Higher indebtednessHigher indebtedness

Benefit for regulated firms Benefit for regulated firms

Improved use of resourcesImproved use of resources

Improved ALMImproved ALM

Cost for regulated firmsCost for regulated firmsIncreased default riskIncreased default risk

Some AL mismatchSome AL mismatch

Benefit for customersBenefit for customersIncreased access to Increased access to financefinance

Cost for regulatorCost for regulatorHarder to tackle inflationHarder to tackle inflation

Benefit for regulatorBenefit for regulatorStill simple to superviseStill simple to supervise

Better alignment to policy Better alignment to policy objectiveobjective

Option 3: Introduce new methodologyOption 3: Introduce new methodology

Cost for the customersCost for the customersMaybe some transfer of costs in the Maybe some transfer of costs in the short termshort termLonger application proceduresLonger application procedures

Benefit for regulated firms Benefit for regulated firms More business/increased More business/increased profits;profits;Better risk / liquidity Better risk / liquidity managementmanagement

Cost for regulated firmsCost for regulated firmsCompliance (IT, training, Compliance (IT, training, control, personnel)control, personnel)

Benefit for customersBenefit for customersAccess to financeAccess to finance

Lower costs in long termLower costs in long term

Cost for regulatorCost for regulatorTraining of supervisorsTraining of supervisors

Inspection costs (more time Inspection costs (more time needed)needed)

Benefit for regulatorBenefit for regulatorMore stability in the financial More stability in the financial systemsystem

Impact AssessmentImpact Assessment

Do NothingDo Nothing Option 2Option 2 Option 3Option 3

CostCost ++++ ++ ++++

ComplianceCompliance ++

BenefitsBenefits ++ ++++++

QuantityQuantity ++ ++++

QualityQuality ++

CompetitionCompetition ++ ++++

Consultation processConsultation process

Prepare a questionnairePrepare a questionnaireI part I part –– Credit institutionsCredit institutions

-- Problem identification,Problem identification,-- assessments (variety of products, developing of assessments (variety of products, developing of

competition) competition) II part II part –– ConsumersConsumers

-- Access to lendingAccess to lending-- Lending costsLending costs-- Unfair treatment (low and medium/high income Unfair treatment (low and medium/high income

consumers) consumers)

Policy RecommendationPolicy Recommendation

Recommend Option 3:Recommend Option 3:Abolish old regulationAbolish old regulationAdopt new regulation in a way as to give more Adopt new regulation in a way as to give more discretion to the financial institutions with regard to discretion to the financial institutions with regard to the appropriate risk managements systems;the appropriate risk managements systems;Train personnel (regulator and regulated firms)Train personnel (regulator and regulated firms)Inspect and supervise proper implementation of risk Inspect and supervise proper implementation of risk management systemsmanagement systemsEvaluate the regulatory impactEvaluate the regulatory impact

Expected outcomeExpected outcome (benefits from increased (benefits from increased turnover will outperform the costs)turnover will outperform the costs)

CENTER OF EXCELLENCE IN FINANCE Cankarjeva 18, 1000 Ljubljana

Tel. ++386 1 369 6190, Fax. +386 1 369 6244 Date: October 17, 2008

How to Design Better Financial Regulation – Regulatory Impact

Assessment (RIA):A Key Policy Analysis Tool –

29 September -1st October, 2008

The workshop took place in Ljubljana from September 29 to October 1st, 2008 Course objectives: Regulatory Impact Assessment (RIA) consists of a systematic analysis of the likely impact of a proposed policy intervention and of discussion of a range of alternative policy options. The first day of the course consisted of an overview of RIA as a tool to make regulation more effective. Participants were be taken through procedural steps used by European financial sector regulators (CEBS-CESR-CEIPOS), the European Commission and other national regulators in performing RIA. Participants were presented existing approaches, methodologies and case studies. They were also be asked to interact with the instructors to discuss the various topics. During the second day, instructors that attended prior Convergence Program RIA Workshops illustrated several case studies of micro-regulatory impact assessment. Case studies touched on several aspects of economic impact assessment on banking and financial market regulations. Participants were invited to undertake role-playing based on case studies presented. The third day focused on the concrete application of RIA methodology on regulations with a plenary final presentation to a local high-level panel with authorities and market participants.

Since the first edition of this course in September 2007, Convergence has undertaken country RIA knowledge transfer programs in Bulgaria and Albania, in addition to Romania’s. This year’s course featured among the instructors also country experts that have gained RIA experience in the context of the aforesaid local RIA programs. Topics covered:

(1) How the regulatory process in financial sector can be shaped in a more systematic and efficient manner; (2) How to blend law background with economic and financial evidence; (3) How to deal with regulatory options by applying a benchmarking approach; and (4) Which stakeholders to involve in the process and in which way.

1

Presentations from: • Mr. Ricardo Brogi, Unicredit Group Italy • Mr. Emanuel Constantin, Romanian Ministry of Finance • Mrs. Ermira Curri, Bank of Albania • Mr. Stephen Dickinson, Senior Regulator, UK Financial Services Authority • Mr. Thorsten Freihube, BaFin Germany • Mr. Paul Gower, Oxera, London • Mr. Sebastijan Hrovatin, European Commission, DG Internal Market and Services, Financial

Market Infrastructure Unit • Mr. Ivo Stankov, Senior Expert, Bulgarian Stock Exchange • Mr. Gerond Ziu, Bank of Albania General appreciation and comments of participants 1. Workshop assessment: a.) Did the workshop disappoint, meet, or exceed your expectations? 88,89 % of participants answered “meet” and 11,11% “exceed”. Remarks: − Very useful for my further work. − Presentation were correct and focused to the issue. − Meet but very close to disappoint. Didn’t meet my expectations. Will see the folowup. − This workshop meet my expectations. I was very excited that I am part of this workshop and I

learned many new topics. − The workshop meet my expectation of learning for this issue. The workshop connects very

good theory and practical cases. − In order to be able that the goal is fully met I will need to see the evolution of the contribution of

participants from my country in their practical work. − I have learned several aspects of the RIA and several practical applications. − The workshop was very exciting and very useful for all participants, we’ve discussed a lot of

rules and regulations to each other, practice from other countries is a good knowledge for everyone.

− Sometimes too much accent was put in significant details, especially within case studies discussions.

− The workshop fully met my expectations and brought me new and interesting knowledge on RIA approach. It helped me to better understand the importance of RIA in my day-to-day activity.

− It was pretty good, but the part presented by Mr. Ivo Stankov I find missed the point of the workshop because people didn’t have the relevant knowledge about stoch exchange market (according to participant’s background).

− It was structured well and the practical exercises gave us the last elements of the puzzle. b.) What did you like best about the workshop and how would you compare it to other workshops you have attended? Remarks: − I had attended many workshops, if compared this RIA workshop with other, I think this is the

best workshop, expert chairman and other presentaters. − The best was to work in groups on study cases. − The breaks were always late and they lasted bit too short.

2

− Presentation of Stephen Dickinson and Bulgarian case study. − Presentation of Thorsten Freihube and Romanian case study. This workshop is one of the best. − Workshop’s organization was really good. − Open discussion. Participants were very cooperative in general. − The practical approach was the best, but weakness was that not all of the participants were

included. Only 2 participants were making presentation. − I think the most interesting was case study working in groups. − If I compare it to other workshops I may say it’s in advantage because it’s more synergy on it

(more participants discussion) − Involvement of participants was greater then usual. − Practical examples of the application of the RIA. − This is the first one. − Case studies. Group presentations. − How the subject was covered by the speakers. The implication of the participants in the

discussion. − At this workshop I likked best the presentation of Sebastijan Hrovatin, EC, DG Market and

Services. − In this workshop organizing and implementation of the previous experiences of speakers has

success for everybody of the participant for exemple, discussions, working in groups, etc. c.) Did you feel enough time was allowed for questions and free class discussion? 3,63 Participants were asked to evaluate listed by scoring from 1 to 4, where 4 was the best. Remarks: − I think there was enough time for question and discussion. − Yes, we have enough time for question. − Yes, really enough. But I think the break between the workshop was very useful, because the

participants exchange experiences. − Time management was exactly planned as it should be, but did not executed properly. Always

were delays for starting and especially ending the day sessions. − Facilitation left a lot of time for discussion and they motivate participants to express their

opinion and views. − Was allowed enough time. − I feel enough time to express questions and every time we have time and cooperation for

discussion. d.) What makes this seminar useful for you and your job? Participants were asked to evaluate listed by scoring from 1 to 4, where 4 was the best. Newly-acquired knowledge 3,17 Refinement of existing knowledge 2,76 Exchange of experience with other participants 3,37 Practical case studies 3,40 Final day team presentation 3,43 e.) Would you find is useful if this workshop or a continuation of it would be delivered in your institution (in your country)? Participants were asked to evaluate listed by scoring from 1 to 4, where 4 was the best. 3,24 Remarks: − I will deliver to my country the best parts from presenters Albania and Bulgaria. − It would be very important taking into accent all the reforms and the staff being involved in it.

3

− It would be very helpful to deliver such workshop for our institution and our country too. − Useful but not applicable. − Yes, for any failure in regulation we will try to use RIA steps. − Definitely we would need tailor made RIA training separately for NBU, NCFU, Ministry of

Finance. − Yes, I find useful that this workshop would be delivered in my institution and Ministry of

Finance. − Yes. In such case more people can be instructed and understand RIA approach and its

usefulness. f). Do you recommend more workshop or training on training on this topic? − I recommend more workshops on this topic because regulation rules are important things to

have a good development for all such financial and other sectors where we have strong rules. − Better regulation. Reducing administrative burdens. Assessing administrative costs, using

strudord cost model. − Not more but better structured. We would need better case studies that can be read in

advance. − Yes, finance regulation. − Maybe more case studies and training on this topic. − It should be performed on regular basis. − I would recommend that the workshop will be extended for 5 days instead of 3 and to extend

the theoretical presentation to 2 days and practical – 3 days. − Yes, more trainings on different subjects (insurance, security market and microfinance). − Yes, but more on practical issues (train the trainers). − Yes, because we are all countries of many development, changes, problems, crises, etc. g.) Please give the workshop an overall rating 3,58 Participants were asked to evaluate listed by scoring from 1 to 4, where 4 was the best. h.) How useful did you find the following parts of the Workshop? Participants were asked to evaluate listed by scoring from 1 to 4, where 4 was the best. RIA – The EU Financial Regulators Approach 3.26 RIA – European Commission DGMarkt Case Studies 3.58 RIA Case Study by Market Participant 2.95 The Underpinning of Financial Regulation Design – Market Failure Analysis 3.45 How does Economic Analysis Help Regulatory Design – The FSA Experience 3.53 Day’s chairperson support (Mr. Luigi Passamonti) 3.81 Albania RIA Case – How to regulate bank lending risk to un-hedged borrowers 3.50 Romania RIA Case – Restrictions on Credit Granted to Individuals 3.68 Bulgaria RIA Case – Risk Management for Investment Intermediaries 3.39 Discussion, Feedback and Interventions 3.33 Class Practice Session of the Bulgaria RIA Case 3.22 Day’s Chairperson support (Mr. Stephen Dickinson) 3.53 The Institutional Context of RIA Implementation: Lessons from the World Bank’s experience in Moldova 2.84 Plenary Discussion on Impact Assessment exercises 3.24 Day’s Chairperson support (Ms. Ramona Bratu) 3.65

4

2. The Content and the Lecturers: The participants were asked to evaluate each lecturer by technically skilled in subject, effective workshop design and delivery and if participant would attend or recommend others attend different workshop by this lecturer, by scoring from 1 to 5, where 5 was the best. Mr. Riccardo Brogi Technically skilled in subject? 3.95 Effective workshop design & delivery? 3.89 Would you attend or recommend others attend different workshop by this lecturer? 3.70 Mr. Emanuel Constantin Technically skilled in subject? 4.42 Effective workshop design & delivery? 4.16 Would you attend or recommend others attend different workshop by this lecturer? 4.11 Ms. Ermira Curri Technically skilled in subject? 4.05 Effective workshop design & delivery? 3.75 Would you attend or recommend others attend different workshop by this lecturer? 4.00 Mr. Stephen Dickinson Technically skilled in subject? 4.40 Effective workshop design & delivery? 4.10 Would you attend or recommend others attend different workshop by this lecturer? 4.25 Mr. Thorsten Freihube Technically skilled in subject? 4.20 Effective workshop design & delivery? 3.75 Would you attend or recommend others attend different workshop by this lecturer? 4.00 Mr. Paul Gower Technically skilled in subject? 4.25 Effective workshop design & delivery? 4.26 Would you attend or recommend others attend different workshop by this lecturer? 4.21 Mr. Sebastijan Hrovatin Technically skilled in subject? 4.70 Effective workshop design & delivery? 4.50 Would you attend or recommend others attend different workshop by this lecturer? 4.55 Mr. Mario Martelli Technically skilled in subject? 3.88 Effective workshop design & delivery? 3.75 Would you attend or recommend others attend different workshop by this lecturer? 3.63

5

Mr. Ivo Stankov Technically skilled in subject? 4.30 Effective workshop design & delivery? 4.10 Would you attend or recommend others attend different workshop by this lecturer? 4.05 Mr. Gerond Ziu Technically skilled in subject? 4.26 Effective workshop design & delivery? 4.20 Would you attend or recommend others attend different workshop by this lecturer? 4.15 a.) Which workshop topics could be dropped in the future? − Monetary police. − RIA aspects in finance. − The Institutional Context of RIA implementation lessons from the World Bank’s experience in

Moldova. − Designing processes yes, but maybe on a second level, rulebooks, etc. − I would not exclude any of the topics. I’d complete the topics with the analysis of the regulatory

framework. − No one. − Analyse GDP (Import, export). b.) Would you recommend this workshop to your colleagues? 60% of participants answered “Yes”, 35% “Yes, with minor adjustment” and 5% “No”. Comments: - With less discussion and much more practical examples of applicance of RIA tools. c.) Which department of your institution should be represented in future RIA workshop? Multiple answers allowed. 24,5 % of answers are Legal Department 26,5 % of answers are Regulaton Department 16,3 % of answers are Financial Department 20,4 % of answers are Supervision Department 12,2 % of answers are Research/Economic Department Other: - ECSPF – WBG d.) Which Authorities/Institutions, other than Central Bank and Ministry of Finance, should be represented in future RIA workshops? Multiple answers allowed. 29,7% of answers are Stock Exchange 29,7% of answers are Insurance Supervision Authority 18,9% of answers are Prime Minister’s Office 10,8% of answers are Economic Think-Tanks 10,8% of answers are Private sector firm

6

Other: - Securities commissions. - The authority that supervises the financial non-banking market. - Private sector firm organizations, unions. Consumer Protection Agencies. - Central Bank. e.) How soon do you expect to use the knowledge acquired in your work? 21,1 % of answers are Yes immediately in my regular workflow 26,3 % of answers are Partially, if I speak with my superior and colleagues 47,4 % of answers are No, but expect to use it in the future 5,3 % of answers are No, relevant for my job f.) Will in your opinion RIA implementation in your country improve the quality of regulatory activities? Select an answer closest to your opinion. 52,63 % of participant answered “Yes, a lot”, 42,11 % “Perhaps” and 5,26 % “I am not sure” 3. Organizational Arrangements: Participants evaluated organizational arrangements by the following categories, by scoring from 1 to 5, where 5 was the best: Organization of the workshop 4.42 Reception by CEF 4.78 Accommodation and meal arrangements 4.67 Classroom 4.61 Lunch and coffee breaks 4.42 Length of the “school day” 3.58 Remarks: − Please try to adjust the schedule to the regular Slovenian business day. − Lessons must be shorter, around 45 min. − Every thing is ok. − I think the length of school day was too long and we can’t have good attention for other topics. − The length of the school day was too long. Participants can not be concentrated (focused) on

the time. In addition the length of the breaks was almost always shortened by speakers. Organisators almost always shortened the lunch break for 30 minutes. This is not the way!

− It is desirable to take into consideration the fact that workshop participants would like o see the beautiful places of Slovenia and Ljubljana and need more time for sightseeing.

− Too many topics in one day, becoming tired. − School day too long. a. Recommendations for future workshops in this or related areas − Case studies should be divided in two days and after, each to have a debate on basic

elements. − Forcing participation on every one of the participants.

7

4.Application of RIA techniques to real regulatory making a.) To build better RIA awareness among your superiors and colleagues, would you suggest that Convergence helps design an in-country capacity building exercise tailored to your country's specific needs? 72,22 % of participant answered “Yes” and 27,78 % “No”. b.) If you answered 'Yes' to the previous question, please make your choice for the specific elements of the capacity building program: b.1.) Length: 8,33 % of answers are 1 session for a total of 2 days 75 % of answers are 2 sessions for a total of 3 days 16,67 % of answers are 3 sessions for a total of 5 days b.2.) Content: Participants were asked to evaluate listed by scoring from 1 to 4, where 4 was the best. RIA techniques (e.g. methodology and procedures) 3.40 RIA case studies drawn from international experience 3.67 Application of RIA techniques to an existing domestic regulation 3.40 Application of RIA techniques to a regulation still in draft 3.50 b.3.) Participant: 31,25 % of answers are Ministry of Finance 34,38 % of answers are Central Bank 21,88 % of answers are other financial supervisors Remarks: - securities commission - Securities market supervisor, insurance supervisor. - Hanfa – Croatian agency for supervision of financial inst. - Insurance supervisory authority. - NCFM. 3,13 % of answers is other local agencies 3,13 % of answers are private sector 6,25 % of answers are independent experts

8

PART 1 – WORKSHOP ASSESSMENT

No. of responses Percentage

Disappoint 0 0.00Meet   16 88.89

Exceed 2 11.11

No. of responses 18 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 0 7 12 19 3.63Percentage 0.00 0.00 36.84 63.16 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 1 2 8 7 18 3.17Percentage 18.00 11.11 44.44 38.89 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 3 2 8 4 17 2.76Percentage 17.65 11.76 47.06 23.53 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 3 6 10 19 3.37Percentage 0.00 15.79 31.58 52.63 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 2 8 10 20 3.40Percentage 0.00 10.00 40.00 50.00 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 2 4 8 14 3.43Percentage 0.00 14.29 28.57 57.14 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 1 1 8 7 17 3.24Percentage 5.88 5.88 47.06 41.18 100.00

6. Do you recommend more workshops or training on  this topic?(Not for calculation; narrative feedback).

4.3. Exchange of experience with other participants

4.4. Practical case studies

4.5. Final day team presentation

5. Would you find it useful if this workshop or a continuation of it would be delivered in your institution (in your country)?

3. Did you feel enough time was allowed for questions and free class discussion?

4. What makes this Seminar useful for you and your job? (Multiple answers allowed. Mark relevance 1 to 5, with 4 as the best.)4.1. Newly­Acquired Knowledge

4.2. Refinement of Existing Knowledge

HOW TO DESIGN BETTER FINANCIAL REGULATION (RIA), Ljubljana, 29 September ­ 1st October 2008

1. Did the workshop disappoint, meet, or exceed your expectations? (Please circle one.)

2. What did you like best about the workshop and how would you compare it to other workshops you have attended?(Not for calculation; narrative feedback).

1 2 3 4 No. of responses

Averagemark

No. of responses 0 0 8 11 19 3.58Percentage 0.00 0.00 42.11 57.89 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 2 10 7 19 3.26Percentage 0.00 10.53 52.63 36.84 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 0 8 11 19 3.58Percentage 0.00 0.00 42.11 57.89 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 1 5 7 6 19 2.95Percentage 5.26 26.32 36.84 31.58 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 3 5 12 20 3.45Percentage 0.00 15.00 25.00 60.00 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 0 9 10 19 3.53Percentage 0.00 0.00 47.37 52.63 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 0 3 13 16 3.81Percentage 0.00 0.00 18.75 81.25 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 1 1 5 13 20 3.50Percentage 5.00 5.00 25.00 65.00 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 1 4 14 19 3.68Percentage 0.00 5.26 21.05 73.68 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 3 5 10 18 3.39Percentage 0.00 16.67 27.78 55.56 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 0 4 2 6 3.33

a) Albania RIA Case ­ How to regulate bank lending risk to un­hedged borrowers (Mrs. Ermira Curri, Chief of Regulations, Bank of Albania; Mr. Gerond Ziu, Chief 

b) Romania RIA Case ­ Restrictions on Credit Granted to Individuals (Mr. Emanuel Constantin, Romanian Ministry of Finance, Romania)

c) Bulgaria RIA Case ­ Risk Management for Investement Intermediaries (Mr. Ivo Stankov, Senior Expert, Bulgarian Stock Exchange)

d) Discussion, Feedback and Interventions (Prof. Mario Martelli, Regulatory Simplification Unit, Prime Minister'e Office, Italy)

d) The Underpinning of Financial Regulation Design ­ Market Failure Analysis (Mr. Paul Gower, Oxera, London)

e) How Does Economic Analysis Help Regulatory Design ­ The FSA Experience (Mr. Stehen Dickinson, Senior Regulator, UK USA)

f) Day's Chairperson support (mr. Luigi Passamonti)

8.2. September 30

8.1. September 29a) RIA ­ The EU Financial Regulator Approach (Mr. Stephen Dickinson, Senior Regulator, UK FSA; Mrs. Thorsten Freihube, BaFin Germany)

b) RIA ­ European Commission DGMArkt Case Studies (Mr. Sebastijan Hrovatin, European Commission, DG Internal Market and Services, Financial Market 

c) RIA Case Study by a Market Participant (Mr. Riccardo Brogi, Unicredit Group Italy; Mr. Rok Rozman, Unicredit Group Slovenia)

7. Please give the workshop an overall rating.

8. How useful did you find the following parts of the Workshop? (Mark relevance for each part from 1 to 4, with 4 being the highest.)

1 2 3 4 No. of responses

Averagemark

No. of responses 0 2 10 6 18 3.22Percentage 0.00 11.11 55.56 33.33 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 1 5 9 15 3.53Percentage 0.00 6.67 33.33 60.00 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 3 2 9 5 19 2.84Percentage 15.79 10.53 47.37 26.32 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 3 7 7 17 3.24Percentage 0.00 17.65 41.18 41.18 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 1 4 12 17 3.65Percentage 0.00 5.88 23.53 70.59 100.00

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 2 4 7 7 20 3.95Percentage 0.0 10.0 20.0 35.0 35.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 2 2 11 4 19 3.89Percentage 0.0 10.5 10.5 57.9 21.1 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 3 4 9 4 20 3.70Percentage 0.0 15.0 20.0 45.0 20.0 100.0

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

b) Plenary Discussion on Impact Assessment exercises

c) Day's Chairperson support (Ms. Ramona Bratu)

9. Lecturer Assessement (Mark relevance for each part from1 to 5, with 5 being the highest.)9.1. Ricardo Brogi

e) Class Practice Session of the Bulgaria RIA Case

f) Day's Chairperson support (Mr. Stephen Dickinson)

8.3. October 01a) The Institutional Context of RIA Implementation: Lessons from the World Bank's experience in Moldova (Mr. Victor Burunsus, Private Sector Development 

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 2 7 10 19 4.42Percentage 0.0 0.0 10.5 36.8 52.6 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 0 4 4 10 19 4.16Percentage 5.3 0.0 21.1 21.1 52.6 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 0 2 9 7 19 4.11Percentage 5.3 0.0 10.5 47.4 36.8 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 0 3 9 7 20 4.05Percentage 5.0 0.0 15.0 45.0 35.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 1 4 10 4 20 3.75Percentage 5.0 5.0 20.0 50.0 20.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 0 3 9 6 19 4.00Percentage 5.3 0.0 15.8 47.4 31.6 100.0

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

9.3. Ermira Curri

9.2. Emanuel Constantin

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 1 1 7 11 20 4.40Percentage 0.0 5.0 5.0 35.0 55.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 2 1 10 7 20 4.10Percentage 0.0 10.0 5.0 50.0 35.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 1 2 8 9 20 4.25Percentage 0.0 5.0 10.0 40.0 45.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 4 8 8 20 4.20Percentage 0.0 0.0 20.0 40.0 40.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 2 2 11 4 20 3.75Percentage 5.0 10.0 10.0 55.0 20.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 1 3 11 5 20 4.00Percentage 0.0 5.0 15.0 55.0 25.0 100.0

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

9.5. Thorsten Freihube

9.4. Stephen Dickinson

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 4 7 9 20 4.25Percentage 0.0 0.0 20.0 35.0 45.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 5 4 10 19 4.26Percentage 0.0 0.0 26.3 21.1 52.6 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 6 3 10 19 4.21Percentage 0.0 0.0 31.6 15.8 52.6 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 0 6 14 20 4.70Percentage 0.0 0.0 0.0 30.0 70.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 1 8 11 20 4.50Percentage 0.0 0.0 5.0 40.0 55.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 1 7 12 20 4.55Percentage 0.0 0.0 5.0 35.0 60.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 3 3 2 8 3.88Percentage 0.0 0.0 37.5 37.5 25.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 4 2 2 8 3.75Percentage 0.0 0.0 50.0 25.0 25.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 1 3 2 2 8 3.63Percentage 0.0 12.5 37.5 25.0 25.0 100.0

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

9.8. Mario Martelli

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

9.7. Sebastijan Hrovatin

9.6. Paul Gower

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 1 2 7 10 20 4.30Percentage 0.0 5.0 10.0 35.0 50.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 1 3 5 10 20 4.10Percentage 5.0 5.0 15.0 25.0 50.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 2 2 5 10 20 4.05Percentage 5.0 10.0 10.0 25.0 50.0 100.0

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

9.9. Ivo Stankov

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 1 3 5 10 19 4.26Percentage 0.0 5.3 15.8 26.3 52.6 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 1 4 5 10 20 4.20Percentage 0.0 5.0 20.0 25.0 50.0 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 2 3 5 10 20 4.15Percentage 0.0 10.0 15.0 25.0 50.0 100.0

a b c d No. of responses

Averagemark

No. of responses 12 5 2 1 20 1.60Percentage 60.00 25.00 10.00 5.00 100.00

a b c d e No. of responses

Averagemark

No. of responses 12 13 8 10 6 49 2.69Percentage 24.5 26.5 16.3 20.4 12.2 100.0

a b c d e No. of responses

Averagemark

No. of responses 11 11 7 4 4 37 2.43Percentage 29.7 29.7 18.9 10.8 10.8 100.0

a b c d e No. of responses

Averagemark

No. of responses 4 5 9 1 0 19 2.37Percentage 21.1 26.3 47.4 5.3 0.0 100.0

No. of responses Percentage

a.) Yes, a lot 10 52.63

b.) Perhaps 8 42.11

c.) I am not sure

1 5.26

No. of responses 19 100.00

15.) Will in your opinion RIA implementation in your country improve the quality of regulatory activities?(Select an answer closest to your opinion.).

13.) Which Authorities/Institutions, other than Central Bank and Ministry of Finance, should be represented in future RIA workshops?(Multiple answers allowed).

14.) How soon do you expect to use the knowledge acquired in your work?(Select an answer closest to your opinion.).

(Not for calculation; narrative feedback).

11.) Would you recommend this Workshop to your colleagues?

12.) Which departements of your institution should be represented in future RIA workshops?(Multiple answers allowed).

a) Technically skilled in subject?

b) Effective workshop design & delivery?

c) Would you attend or recommend others attend different workshop by this lecturer?

10.) Which workshop topics could be dropped in the future?

9.10. Gerond Ziu

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 2 7 10 19 4.42Percentage 0.0 0.0 10.5 36.8 52.6 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 2 0 16 18 4.78Percentage 0.0 0.0 11.1 0.0 88.9 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 1 4 13 18 4.67Percentage 0.0 0.0 5.6 22.2 72.2 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 0 0 1 5 12 18 4.61Percentage 0.0 0.0 5.6 27.8 66.7 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 1 2 0 15 19 4.42Percentage 5.3 5.3 10.5 0.0 78.9 100.0

1 2 3 4 5 No. of responses

Averagemark

No. of responses 1 2 6 5 5 19 3.58Percentage 5.3 10.5 31.6 26.3 26.3 100.0

PART 2 – APPLICATION OF RIA TECHNIQUES TO REAL REGULATORY MAKING

yes no No.  of responses

13 5 18

72.22 27.78 100.00

No. of responses Percentage

a.) 1 8.33b.)  9 75.00

c.) 2 16.67

No. of responses 12 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 1 7 7 15 3.40Percentage 0.00 6.67 46.67 46.67 100.00

(Multiple answers allowed. Mark usefulness from 1 to 4, with 4 as the best.)a.) RIA techniques (e. g. methodology and procedures)

10.) If you answered „Yes“ to the previous question, please make your choice for the specific elements of the capacity building program.10.1.) Length:(Select an answer closest to your opinion.)

10.2.) Content:

16.6.) Length of „school day“

g y p g g y p y g ycountry`s specificneeds?(Select an answer closest to your opinion.)

16.2.) Reception by CEF

16.3.) Accommodation 

16.4.) Classroom

16.5,) Lunch/coffee breaks

16.) Organisational arrangements16.1) Organisation of the workshop

1 2 3 4 No. of responses

Averagemark

No. of responses 0 1 3 11 15 3.67Percentage 0.00 6.67 20.00 73.33 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 1 1 4 9 15 3.40Percentage 6.67 6.67 26.67 60.00 100.00

1 2 3 4 No. of responses

Averagemark

No. of responses 0 1 5 8 14 3.50Percentage 0.00 7.14 35.71 57.14 100.00

a b c d e f No. of responses

Averagemark

No. of responses 10 11 7 1 1 2 32 2.31Percentage 31.25 34.38 21.88 3.13 3.13 6.25 100.00

d.) Application of RIA techniques to a regulation still in draft

10.3.) Participants:(Multiple answers allowed.)

b.) RIA case studies drawn from international experience

c.) Application of RIA techniques to an existing domestic regulation