Building capacity to help Africa trade better

Regulatory coherence, cross-border externalities: A financial sector perspective from Africa


Regulatory coherence, cross-border externalities: A financial sector perspective from Africa

Ashly Hope, tralac Associate, discusses the concept of regulatory coherence in the context of financial services regulation in Africa

Modern trade agreements are concerned less and less with tariffs and more and more with other, more elusive barriers to trade. Key to this is the increasing focus on regulatory barriers to trade. Some recently negotiated trade agreements, notably the now defunct Trans-Pacific Partnership (‘TPP’), have attempted to address these barriers by including comprehensive provisions on regulatory coherence.

Regulatory coherence captures two key concepts – the first relating to process in regulation making – including transparency, impact analysis, cooperation and consultation. This effectively reflects the principles of good regulatory practice as articulated by the OECD. Regulatory coherence also refers to an outcome – coherence – regulation that works closely and well together. Cross-border, this could be in the form of mutual recognition, regulatory harmonisation or regulator cooperation.

As a general goal, regulatory coherence, as part of a comprehensive trade agenda, is likely to benefit both small and large businesses engaging in domestic and international trade. However, the particular mechanisms and specific goals of regulatory coherence need to be considered carefully. Different sectors warrant different treatment – for example, regulatory harmonisation in all sectors of the economy is unlikely to be either desirable or achievable. Similarly, the elements of regulatory coherence that may be of most benefit to large businesses may not work for small businesses.

Nonetheless, elements of the regulatory coherence agenda are likely to help address some of the problems that arise for all businesses. The use of trade agreements, as an additional layer to other domestic and international mechanisms, can add to the likelihood of meeting regulatory coherence goals.

While the TPP is unlikely to ever see implementation, the idea of regulatory coherence has taken hold as an important consideration for international trade. In Africa, both tariff and regulatory barriers to trade need to be addressed to realise the full benefits of a continental free trade area. Regulatory coherence provisions can potentially have an important impact on regulatory barriers and should therefore be considered as part of modern trade agreement.

Finance has been a global service for much longer than many other services that have historically been geographically constrained. This means international regulatory norms and guidelines have already been developed. The challenge for developing countries is in participating in the setting of these global rules and ensuring that they reflect and acknowledge the difference between countries and systems and enable countries to pursue development goals. In considering financial sector trade rules, the primacy of prudential regulation has been long acknowledged, but this doesn’t mean there is no room in trade agreements for regulatory commitments.

Regulatory coherence as good regulatory practice

Regulatory coherence – to the extent it is concerned with good regulatory practice (due process, transparency, regulatory assessment, consultation and reviews) – is generally desirable, but even good regulatory practice needs to be considered in the context which it occurs. While intended to improve the regulation making process, and to ensure that regulation is fit for purpose, it has potential to be used to enforce or promote particularly regulatory ideologies.

So while trade agreements can certainly encourage regulatory coherence, they must be careful to ensure that this does not interfere with countries’ legitimate interest in setting their own policy direction – choosing a policy outcome and choosing the best intervention to achieve that outcome are separate propositions. Good regulatory practices will help ensure that the interventions – whether rules and laws or other government action – are appropriate, effective and fit for purpose. They also help to mitigate against unintended outcomes of the intervention, by engaging potential stakeholders early in the process.

The absence of good regulatory practices can mean that too much regulation is imposed, and innovation is stifled. In the financial sector this can mean a lack of access to finance, and more expensive products and services. Without good regulatory practices, unintended consequences of regulation are more likely and regulation can diverge from international norms or rules for no good reason. It can mean that outdated regulation stays in place and a lack of consideration of consequences for cross-border businesses can result in regulation that impedes trade. This might be something as simple as requiring a particular standard to be met, or specifying particular service providers. When trade is built in to the regulation making process, mistakes such as this are less likely to occur – both due to turning minds towards trade implications, and inviting input from businesses who might be involved in trade.

Good regulatory practice also requires the explicit consideration of trade-offs – for example, requiring a financial services provider to keep its data onshore will certainly have trade implications, but these may be outweighed by the consumer protection benefits – good regulatory practice means this issue is acknowledged.

Good regulatory practice should result in more efficient regulation. That is, the least possible regulation to achieve the policy outcome. This is disproportionately beneficial for small businesses who need to expend a higher proportion of their resources on compliance than large businesses. On the other hand, large businesses are much better equipped than small to influence the regulatory process and, particularly in developing countries may be able to achieve big-business friendly outcomes at the expense of smaller businesses. This is not, however, a good argument against consultation – large businesses always have access to governments and therefore the explicit consultation process may make the process easier for small businesses. But to help offset this, collective action by smaller businesses can help.

Overall, good regulatory practice is a desirable goal, with few downsides. Major barriers to developing countries in Africa in implementing the principles of good regulatory practice are resources and capacity. Yet there is significant capacity building assistance and donor support available for regulatory improvements, so this barrier can be overcome. Good regulatory practice is beneficial not just for trade but also for the general domestic business environment and therefore should be prioritised.

Another, perhaps more important, barrier is a lack of political support. This is where trade agreements have an important role to play. Trade agreements are unlikely to be the only driver towards changing regulatory practice, and nor should they be. But as part of an overall move towards improvement, they come with high level political support, the threat of international sanctions or reprobation and, in modern agreements often additional assistance and capacity building from trading partners. And while in many cases good practice regulation obligations exist in domestic law already, layering the commitment to these principles can provide additional political, social and business impetus to compliance with and improvement upon these obligations.

Regulatory coherence – cooperation; harmonisation; convergence and mutual recognition

Even the most efficient regulation can be a barrier to trade if it is not compatible with or comparable to trading partner countries’ regulation; and similarly if the relevant regulators do not have a cooperative relationship. This is a particular barrier for multi-national corporations, but regulatory coordination, harmonisation and convergence has benefits and downsides. As such, it must be considered on a sectoral basis, and considered consistently with good regulatory practice.

For multinational corporations, similar or the same regulatory requirements across borders have multiple advantages – in particular by reducing resourcing for compliance, and reducing the regulatory risks of investment. We often think of multi-nationals as the big US and EU corporations – the Apples, the BPs, the Deutsche Banks… But there are also African multinationals – many headquartered in South Africa, but also in the other large economies – Nigeria, Egypt, Morocco… These include corporations that are active in markets like the US and the EU, but also include those that operate across the African continent. For example, Pan-African financial services companies are becoming increasingly important as global banks and financial services providers change their business models and withdraw from the continent. For these kinds of businesses, regulatory alignment within Africa would be a major cost saving and enabler of business.

In financial regulation, the risks seen by financial regulators of international investment can be reduced by similar regulatory regimes and by cooperation with host country regulators. Cooperation is particularly salient in developing countries, where the capacity to regulate large, complex multinationals may be limited. This means that for developing countries, implementing the same or similar regulations to finance centres such as the US, UK and Europe can help to encourage financial services investment. However, the complex, stringent globally driven regulation can also mean that not enough goods and services are available in developing countries.

The problem of de-risking – where global banks have withdrawn from developing economies partly in order to eliminate money laundering and terrorism financing risks is a good example of the unintended consequences of global financial regulation. The global anti-money laundering and combating the financing of terrorism laws are intended to do just that, but rather than doing this, they have in some cases meant that the services simply no longer exist and potentially had the opposite effect.

For small businesses, the availability of finance is an enormous barrier to growth and indeed international trade. According to the World Bank, SMEs in sub-Saharan Africa are almost twice as likely to report access to finance as an obstacle to their growth. The factors affecting the availability of finance are broad, but global standards relating to risk can have an impact on the availability of finance to smaller enterprises.

While it is important that multinational businesses meet international standards, it is not always necessary for a domestic provider to meet those same standards, and it can mean that small local businesses who could effectively supply a service to other local businesses aren’t able to enter the market.

Regulatory coherence for trade

As we navigate a changing global conditions, African countries need not be bound by decisions made and rules developed far from our shores in vastly different environments with little attention to our needs. But at the same time, we can’t deny the realities of the global economy and part of that is to cohere or converge on regulatory issues.

We want our big businesses to be able to integrate into the global economy. We want our small businesses to be able to buy and sell across borders and to make niches for themselves in global value chains. We also want to ensure our businesses are able to flourish domestically and to meet the needs of our populations. These goals need not be mutually exclusive, but we must guard against being too quick to prioritise the international over the domestic.

Most importantly, we need to be committed to progress in outcomes – improving the lives of the people – rather than by trade numbers alone. This is why we have regulation; it is why we have trade. Its why these two critical economic governance mechanisms can achieve more if they are complementary, and when the proponents of each acknowledge both the limitations and the benefits of the other.

So, what can we do? As ‘trade people’ it is important to try to better understand regulation, regulatory principles, and importantly, regulatory concerns. In the developing world we can learn from the mistakes of our developed friends and neighbours – and we should take notice of these lessons. Trade and its benefits need to be ‘sold’ to populations more than ever before, and part of that is acknowledging risks and trade-offs when regulatory obligations are including in trade agreements. As ‘regulatory people’ we need to try to better understand trade – to acknowledge that it matters and to continue to consider it in our regulatory policy making. Including regulatory coherence provisions in trade agreements is an important layer in ongoing efforts to improve regulatory processes and practices but trade agreements should not attempt to indiscriminately enforce regulatory harmonisation.



IMF (2017) ‘Pan-African Banking Finding its Stride http://www.imf.org/en/News/Articles/2017/02/10/NA021317-Pan-African-Banking-Finding-its-Stride

Mumford, P (2014) ‘Regulatory Coherence: Blending trade and regulatory policy’ Policy Quarterly 10:2, pp 3-9 2014 http://apo.org.au/files/Resource/7e97fc4f3a8.pdf

Ciuriak D and Curiak N (2016) ‘Regulatory Coherence and the Trans-Pacific Partnership’ Working Paper 3 February 2016 http://ssrn.com/abstract=2727524

Basedow, R. and C. Kauffmann (2016), ‘International Trade and Good Regulatory Practices: Assessing The Trade Impacts of Regulation’ OECD Regulatory Policy Working Papers, No. 4, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jlv59hdgtf5-en


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