Centre for Human Rights, University of Pretoria

Theme 1: Financial regulation

The international financial regulatory regime should be concerned with both solving social and environmental problems and being prudent, efficient, and profitable. It does this by creating enough friction in the system to encourage all actors to consider the consequences of their actions before they act and by creating incentives for profitable transactions that deal directly with poverty, environmental degradation, and the creation of jobs and opportunities for poor people. It should also promote financial innovation that meets two equally important criteria: First, their sponsors must demonstrate how it facilitates financing for environmentally and socially sustainable activities. Second, they must show how it will enhance market efficiencies, create new financing opportunities or mitigate risk.

The mechanisms for global financial governance must also enable all stakeholders to raise concerns and hold financial institutions accountable for their actions. They should encourage corporate governance reforms. All forums in which financial regulations are considered should be transparent and participatory. Similarly, the governance structures and mandates of the key international financial institutions need to be reformed. Their governance structures should be participatory, and accountable. Their mandates need to be defined with greater clarity so that their ability to expand their scope of operations in ways that undermine the scope of operations of other international organization is limited. Further, their mandates must be reviewed to determine if they are fully responsive to the changes in the global financial system and the demand for their services over the past 30 years.

Based on these general considerations, there are five items that should be at the top of the agenda for international financial regulatory reform.

First, there should be an international community reinvestment process so that all financial institutions that receive funds from investors in poor countries and emerging market economies should invest a portion of these assets back into projects and instruments from these countries. Consequently, the regulatory regime should require the financial institutions to demonstrate that they reinvested a stipulated portion of these assets in projects in poor countries and emerging markets that target poverty alleviation and meet certain social and environmental indicators. They should show that they aren’t only investing in the largest and most profitable projects in the developing world - which also often generate intense environmental and social concerns. If they aren’t willing to invest in smaller, more targeted poverty alleviating projects, they should invest the funds in intermediaries that specialize in these projects.

Second, the international regulatory regime should encourage financial institutions, particularly commercial banks and insurance companies, to undertake measures that promote poor people’s access to financial services. This can take the form of accounts with easy admission requirements and no fees or insurance products with low premiums. It should also include establishing easier and cheaper channels for transmission of remittances from richer to poorer countries. If financial institutions find it difficult to provide these services directly, they can invest in institutions that specialize in providing financial services to the poor.

Third, the international regulatory regime should encourage governments to establish licensing requirements for all hedge funds, private equity funds and sovereign wealth funds. These licenses would allow them to operate in that countries’ capital markets in return for either investing a stipulated annual portion of their total resources in investments in that country that are targeted at environmentally responsible poverty alleviation. Alternatively they can contribute the stipulated portion to an institution that specializes in these qualifying investments.