Research from KPMG (2014) indicates that the overall regulatory pressure index is slightly higher in 2014 than the previous years. The continuing emergence of new regulatory initiatives, such as leverage, structural separation, localised supervision and capital requirement gives new wave to regulatory reforms. In 2011, the global pressure index was 33.7, which then increased to 36.7 in 2013 and up to 37.3 in 2014 (KPMG, 2014). These regulatory reforms have made some impact on global financial sector, which also includes the Islamic banking sector. The aim of some of these regulatory policy reforms is to emphasise on granting protection to customers.
Markets in Financial Instruments Directive (MiFID 2), which was introduced in Europe, comes at a time when there is fundamental changes sweeping the financial services industry. The failure of Lehman Brothers in 2008, and the financial crisis that ensued, has highlighted some of the shortcomings in financial markets that needed to be addressed. Hence, the aim of MiFID 2 is to reduce systemic risk and strengthen financial stability by ensuring maximum transparency in markets and ensure robust levels of protection for investors.
The United States of America introduced the Dodd Frank Act, which was passed by US Congress in 2010, that led to the establishment of the Consumer Financial Protection Bureau (CFPB or Bureau) as an independent agency within the Board of Governors of the Federal Reserve System. The Bureau regulates the offering and provision of the consumer financial products and services under federal consumer financial laws. Among the duties entrusted to the Bureau is to ensure that the federal consumer financial laws are enforced consistently, hence, providing consumers access to markets for financial products, and also ensuring that these markets are fair, transparent and competitive. The Bureau has the authority to administer, enforce, and otherwise implement federal consumer financial laws, which includes the power to create rules, issue orders, and issue guidance when necessary. The Financial Stability Oversight Council (FSOC) has the power to set aside any of the Bureau’s regulations if the FSOC decides that such regulation could jeopardize the safety and soundness of the banking system, or the stability of the financial system of the United States of America (Wex Legal Dictionary and Encyclopedia).
The Volcker Rule, which was added under the Act, prohibits a banking entity from engaging in proprietary trading, similar to the Glass-Steagall Act. Proprietary trading is defined as “engaging as a principal for the trading account of the banking entity or nonbank financial company supervised by the Board in any transaction to purchase or sell, or otherwise acquire or dispose of, any security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative, or contract, or any other security or financial instrument that the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission may, by rule as provided in subsection (b)(2), determine” (U.S. Code). Thus, compliance with the Rule by a banking entity depends on whether the account for which the trade is placed satisfies within the definition of “trading account” or whether the trade involves a “financial instrument”.
The Swiss Financial Services Act (FFSA) sets new standards for customer protection in financial services in Switzerland. On 27th June 2014, the Swiss Federal Council launched the consultation on the Federal Financial Services Act (FFSA), expected to come in force in 2017. The Financial Conduct Authority in the United Kingdom, also drafted the “Treating Customers Fairly” (TCF) Program to better serve the need and interest of customers for fair treatment. These, and many other, newly drafted laws focus on strengthening customer’s protection. Hence, these rules are drafted to govern the relationship between financial intermediaries and their clients while taking into consideration the complexity and pre-existing knowledge that consumers have when buying financial products. However, would these changes have much effect on the Islamic banking industry?
