## pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative ## Source details **Canonical URL:** [pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative](https://www.imf.org/-/media/files/publications/pp/2017/pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2017/pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2017/pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative.pdf.json) --- ### Overview and purpose - Initiative launched in aftermath of the emerging market crises of the 1990s to strengthen the international financial architecture, focused on emerging markets. - Comprises 12 policy areas grouped into three categories: - Transparency S&C (set by the Fund): data dissemination standards and quality framework, fiscal transparency code (FTC), and monetary and financial policy transparency (MFPT) code. - Financial sector standards (set by external SSBs): banking supervision (BCP), securities regulation (IOSCO), insurance supervision (ICP), financial market infrastructures (FMI), and crisis resolution and deposit insurance (CRDI). - Institutional and market infrastructure standards (external/joint SSBs): insolvency and creditor rights (ICR), corporate governance (CG), accounting and auditing (A&A), and AML/CFT (World Bank‑led). - Three intermediate objectives: assist countries in strengthening economic institutions, inform World Bank and IMF work, and inform market participants. ### Evolution since the 2011 review - Key reforms and milestones: - Fiscal transparency: FTC revised (2014) and new assessment output (FTE) introduced. - Data dissemination: reviews in 2012 and 2015 enhanced dissemination standards; DQAF unchanged since 2003 but domain modules added in 2012. - Financial market infrastructures: new/revised international standards adopted in 2012 (PFMI). - AML/CFT: 2012 FATF Recommendation strengthening; 2013 methodology revision adding effectiveness; 2014 Review of Fund’s Strategy on AML/CFT. - FSAP: 2014 Review assessed changes since 2009 to improve effectiveness. - Mixed implementation of 2011 recommendations: - Substantial adaptation of coverage to safeguard financial stability. - Prioritization across policy areas and linkages to Fund surveillance outside FSAPs remain areas for improvement. - Resource and output trends: - Revisions increased technical complexity and resource intensity for assessments. - World Bank budget restructuring impacted Bank S&C output. - Fund overall S&C output declined, partly reflecting anticipated/implemented revisions to transparency S&C. - Allocation of S&C output has shifted across countries and income groups. ### Findings on initiative value and challenges - Continued substantial contribution to international financial stability after almost two decades. - User perceptions: - EM members and LIDCs perceive the initiative as most useful (survey evidence summarized across policy areas). - Transparency S&C and selected financial S&C perceived useful in identifying vulnerabilities and prioritizing TA. - Persistent and emerging challenges: - Improve linkages with IMF surveillance and capacity development (CD). - Weak uptake by market participants in some areas. - Need to improve traction with policy makers. - Increased resource intensity of assessments, especially financial sector DARs and ROSCs. - Balance clarity/transparency with reform focus and country ownership. ### Strategic conclusions and recommended actions - No major gaps in the overall architecture of the initiative. - Recommended actions: - Proceed with updates to the Fund’s MFPT code and data policy area. - Endorse the Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) as applied to the banking sector and the banking sector assessment methodology (BCP/KA). - Consider new areas for Fund and Bank involvement as they arise (example flagged: Islamic Banking). - Devolve operational review responsibilities to individual policy areas to: - Support contributions to international financial stability and development through institution building. - Strengthen follow-through and accountability on priorities established in reviews. - Improve S&C linkages with IMF surveillance and tighten integration with CD. - Increase engagement with member countries and external SSBs/assessors. ### Implementation and governance observations - Adopt a “strategic approach”: devolve operational reviews to policy areas while conducting top‑down reviews to identify initiative‑level gaps. - Policy area reviews and Board engagement since 2011 improved operational effectiveness, but 2011 recommendations were not pursued systematically. - Operationalizing proposals requires strengthening mechanisms for review, follow‑through, and cross‑policy collaboration. - Proposed member engagement mechanisms include periodic fora (e.g., on margins of IMF/WB Annual Meetings) to familiarize members with initiative offerings and solicit feedback. ### Prioritization, coverage, and tradeoffs - No overall mechanism ensures ROSC choice aligns with Fund/Bank priorities. - Financial sector prioritization guided by Board decision to target systemically important financial sectors: - S25 initially (25 jurisdictions based on 2008 data); revised methodology in 2013 expanded list to S29 (29 jurisdictions). - Consequences: - S29 jurisdictions received concentrated financial S&C outputs (almost all S29 jurisdictions covered during 2012–16 and they received on average of four financial S&C outputs during that period). - Financial sector S&C outputs to non-S29 countries fell by 18 percent during 2012–16 compared to prior period. - S&C country coverage for non-S29 countries fell from close to 40 percent to around one-quarter. - With roughly six FSAPs for non-S29 member countries per year, stand-alone financial sector ROSCs outside FSAPs became increasingly rare. ### Resource intensity, assessment modalities, and efficiencies - Strengthening standards increased complexity and assessment costs: - BCP: Principles increased from 25 -> 29; Sub-Principles increased from 196 -> 231. - DAR lengths expanded (examples: UK 2016 DAR 293 pages vs 2011 DAR 131 pages). - Self-assessment documents prepared by authorities increased to on average 200 pages. - Efficiency and tailoring approaches identified: - Three best-practice assessment modalities: (i) modular (tiered) approach; (ii) graduated approach; (iii) effectiveness/outcome focus. - Targeted ROSCs and Technical Notes (TNs) provide focused analysis; use of TNs increased while DARs declined since 2011. - Data ROSC already supports modular assessments; FTC adopted modular pillars; FTEs use graduated scoring (basic, good, best). - Staff paper “A Macrofinancial Approach to Supervisory Standards Assessments” proposed selective assessments of a subset of principles to integrate S&C into surveillance and help offset costs. ### Integration with surveillance and capacity development - FSAP remains the principal vehicle integrating S&C into Fund surveillance; 2014 FSAP review reaffirmed FSAP value. - Outside FSAPs, link between S&C outputs and Article IVs weakened; DARs length/complexity and resource intensity hinder uptake. - Positive practice: Fiscal Transparency Evaluations (FTEs) provide prioritized, accessible findings and have fed into Article IVs and Fund program design (e.g., structural benchmarks). - Recommendation: adopt FTE‑style summaries/heat maps and prioritize direct integration of S&C outputs with RBM and CD sequencing. ### Publication, accessibility, and uptake - Publication rates improved: 70 percent (2007–11) -> 81 percent (2012–16). - AEs publication rates approach 100 percent. - EMs publication rates rose by 14 percentage points to 76 percent. - Rates declined for LIDCs. - Despite higher publication rates, accessibility deteriorated for many policy areas (Bank website restructuring removed centralized access). - Recommendation: policy areas maintain web platforms and compile links on central S&C initiative site; produce concise summaries for policy makers and market participants. ### Key country and policy‑area statistics and outputs - Annex II — Annual Totals (1999–2016): - 1999: 43 - 2000: 49 - 2001: 135 - 2002: 169 - 2003: 204 - 2004: 149 - 2005: 110 - 2006: 128 - 2007: 80 - 2008: 83 - 2009: 73 - 2010: 73 - 2011: 85 - 2012: 70 - 2013: 60 - 2014: 66 - 2015: 47 - 2016: 52 - Total (1999–2016): 1676 - Cumulative outputs by policy area (1999–2016): - Transparency — Data: 133 - Transparency — Fiscal: 171 - Transparency — MFPT: 115 - Financial Sector — Banking supervision: 325 - Financial Sector — Securities regulation: 145 - Financial Sector — Insurance supervision: 152 - Financial Sector — Financial market infrastructure: 161 - Financial Sector — Crisis resolution & deposit insurance: 27 - Institutional & Market Infrastructure — Accounting & auditing: 157 - Institutional & Market Infrastructure — Corporate governance: 84 - Institutional & Market Infrastructure — Insolvency & creditor rights: 83 - Institutional & Market Infrastructure — AML/CFT: 123 ### Policy‑area highlights and specific proposals - Fiscal transparency - Revised FTC (2014) with four pillars: (i) fiscal reporting, (ii) fiscal forecasting and budgeting, (iii) fiscal risk analysis and management, and (iv) resource revenue management (first three pillars approved in 2014; fourth pillar under development). - FTEs: 21 conducted; 15 published. Geographic distribution: ten in Europe, four in Africa, five in Latin America, one in Asia, and one in the Middle-East. Income-level distribution: five AEs, 11 EMs, five LICs. - FTE findings: fiscal reporting and fiscal risk analysis are common weaknesses; only two of 15 published FTEs produced a comprehensive fiscal risk statement at end‑2016. - Next steps: finalize Pillar IV (Q3 FY 2018), two-volume Fiscal Transparency Manual (Q4 FY 2018), FAD resources plan provides for five FTEs per year. - Data and DQAF - 2012 introduced domain-specific DQAF modules; e‑GDDS endorsed May 2015; SDDS Plus approved February 2012. - Key membership coverage (Table 3, Mar. 2017): - Top tier (SDDS Plus): 13 - Advanced (SDDS): 61 - Basic tier (GDDS; e‑GDDS): 110 - Total: 184 - As of end‑2016, 111 Data ROSC reports published; since 2011 only seven data ROSCs prepared due to resource constraints. - Proposed successor data quality assessment: focus on “operational data,” adopt FTC’s graduated approach, introduce heat maps, and pilot prior to 11th review scheduled for 2019/20. - Financial sector standards and FSAP integration - Major revisions post‑GFC: BCP (2012), ICP (2011), IOSCO (2011), PFMI (2012), KA (2011/2014, banking-sector methodology completed 2016), DICP (2014). - Use of DARs and TNs in FSAPs: 380 DARs/ROSCs/TNs produced 2011–16 (295 published, 78 percent). - Flexible approach agreed with SSBs on graded assessments and focused reviews; Fund Board updated Nov. 2016 and June 2017. - Resource implications: KA assessments large in scope; careful prioritization required. - AML/CFT - FATF 2012 Recommendations; 2013 methodology added systematic assessment of effectiveness across 11 outcomes; Fund conducts one to two AML/CFT assessments per year in practice. - FATF/FSRB mutual evaluations total 17–20 per year and expected to increase to up to 25 per year. - Fund‑supported AML/CFT TTF donors pledged more than $27 million to second five‑year phase (May 2014); TTF supports over 30 countries annually and totals over $6.5 million annually in direct TA/training. - Next AML/CFT program review expected in 2018; second round of assessments expected to start in 2020. - Accounting & Auditing (A&A) - 2016 A&A assessment tool: three modules (Module A: standards; Module B: institutional framework with nine questionnaires; Module C: observed reporting practices and perceptions). - New methodology deployed in Pakistan with positive initial feedback. - World Bank to develop performance indicators and consider “mini” diagnostic tools for LICs. - Insolvency & Creditor Rights (ICR) - 70 full ICR ROSCs and 11 TNs completed as of Dec. 2016 covering 67 countries; publication rate around 19 percent. - Revisions in 2015; joint UNCITRAL‑World Bank revision expected finalized in FY2018. - ICR Task Force issued Report on Treatment of MSME Insolvency (Jan. 2017); proposals to streamline ROSCs and refocus on practical, country‑specific issues. ### Resource implications and tradeoffs - Drivers of higher costs: - Continued evolution and adoption of best practices. - Adoption of effectiveness/outcome assessments and larger scopes (e.g., KA banking methodology, IAIS revised AM 397 pages). - Desire to adopt best-practice assessment modalities across policy areas. - Tradeoffs: - Possible crowding out of non-S29 country coverage and LIDCs by resource‑intensive assessments in S29 jurisdictions. - Need for policy areas to set priorities and consider modular/graduated approaches to improve cost‑effectiveness. - Capacity constraints: - Limited pool of assessors with required specialized skills; increased demand for operational experience in assessments. ### Issues posed for Board/Directors and proposed decision - Questions for Directors include agreement with: - Devolving operational responsibilities to individual policy areas while maintaining strategic oversight. - Proposed approach to modify the data policy area and MFPT. - Forthcoming policy area reviews reporting on actions to improve links between S&C work and surveillance and CD and prospects for adopting best practices. - Proposed decision summary: - Fund takes note of FSB Key Attributes and Key Attributes Assessment Methodology for the Banking Sector. - Fund endorses KA as they apply to bank resolution regimes and related assessment methodology for undertaking assessments and preparing ROSCs. *Source: The 2017 Joint Review of the Standards and Codes Initiative (excerpt).* ### EXECUTIVE SUMMARY ### THE 2017 REVIEW OF THE STANDARDS AND CODES INITIATIVE — EXECUTIVE SUMMARY ### Overview and purpose - The standards and codes (S&C) initiative was launched in the aftermath of the emerging market crises of the 1990s to strengthen the international financial architecture, with a focus on emerging markets. - The initiative’s three intermediate objectives: assist countries in strengthening economic institutions, inform World Bank and IMF work, and inform market participants. - The initiative comprises 12 policy areas relevant to economic and financial policymaking and implementation, grouped into three categories: - Transparency S&C (set by the Fund): data dissemination standards and quality framework, fiscal transparency code (FTC), and monetary and financial policy transparency (MFPT) code. - Financial sector standards (set by external SSBs): banking supervision (BCP), securities regulation (IOSCO), insurance supervision (ICP), financial market infrastructures (FMI), and crisis resolution and deposit insurance (CRDI). - Institutional and market infrastructure standards (external/joint SSBs): insolvency and creditor rights (ICR), corporate governance (CG), accounting and auditing (A&A), and AML/CFT (World Bank-led). ### Evolution since the 2011 review - Progress and reforms since 2011: - Several policy areas have accelerated evolution and undertaken revisions to align S&C work with a risk and vulnerability focus. - Fiscal transparency: 2012 and 2014 Board papers detailed efforts toward a revised fiscal transparency code and a new assessment output. - Data dissemination: 2012 and 2015 reviews enhanced dissemination standards; a 2016 IEO evaluation is informing plans to review the broader framework for assessing data quality. - Financial market infrastructures: new and revised international standards were adopted by the Fund and Bank Boards in 2012. - AML/CFT: 2012 FATF Recommendation strengthening, 2013 revision of assessment methodology, and enhanced review mechanisms reflected in the 2014 Review of the Fund’s Strategy on AML/CFT. - FSAP: 2014 Review assessed changes since the 2009 review to improve effectiveness, including S&C work. - Mixed implementation of 2011 recommendations: - 2011 recommendations included adapting coverage to safeguard financial stability, improving prioritization of assessments, better integrating S&C into Fund surveillance and capacity development, and modest efficiency changes. - This review finds substantial efforts to adapt coverage for financial stability, but prioritization across policy areas and linkages to Fund surveillance outside FSAPs remain areas for improvement. - Resource and output trends: - Several S&C revisions since the crisis have increased technical complexity and resource intensity for both country authorities and Fund-Bank staff. - The World Bank’s budget restructuring has impacted its S&C output, though work to improve standards and methodologies has continued. - The Fund’s overall S&C output has declined, partly reflecting anticipated or implemented revisions to transparency S&C. - The allocation of S&C output has shifted across countries and income groups. ### Findings on initiative value and challenges - Continued substantial contribution to international financial stability after almost two decades. - Country authorities generally appreciate S&C work; recent surveys show emerging market (EM) members and low income and developing countries (LIDCs) perceive the initiative as most useful. - Persistent and emerging challenges: - Need to improve linkages with surveillance and capacity development. - Weak uptake by market participants in some areas. - Need to improve traction with policy makers. - Increased resource intensity of assessments, especially in the financial sector. - Prior reviews noted S&C outputs must balance clarity/transparency with reform focus and country ownership. ### Strategic conclusions and recommendations - No major gaps found in the overall architecture of the initiative. - Recommended actions: - Proceed with updates to the Fund’s monetary and financial policy transparency (MFPT) code and data policy area. - Endorse the Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) as applied to the banking sector and the banking sector assessment methodology (BCP/KA). - Consider new areas for Fund and Bank involvement as they arise. - Devolve operational review responsibilities to policy areas to: - Support contributions to international financial stability and development through institution building. - Strengthen follow-through and accountability on priorities established in reviews of the overall initiative. - Improve linkages between S&C work and IMF surveillance, and tighten integration with capacity development. - Increase engagement with member countries and continue collaboration across policy areas. ### Implementation and governance observations - The review adopts a strategic approach to current and forthcoming reviews to address persistent challenges and capitalize on progress. - Policy area reviews and Board engagement since 2011 have been important channels to improve operational effectiveness, but recommendations from 2011 were not pursued systematically in policy area reviews. - Operationalizing strategic proposals includes strengthening mechanisms for review, follow-through, and cross-policy area collaboration. *Prepared by the Fund’s Strategy, Policy, and Review Department under the overall guidance of Sanjaya Panth and supervision of Mary Goodman; approved by Hugh Bredenkamp (IMF), Ceyla Pazarbasioglu, and Carlos Felipe Jaramillo (WB).* ### 8. The contrast between the dynamic evolution of S&C work in individual policy areas ### 8. The contrast between the dynamic evolution of S&C work in individual policy areas ### Need for a new, more strategic approach - The initiative covers 12 very different and highly technical areas across both Bank and Fund work and is decentralized, producing appropriate variations across policy areas. - Past reviews (including 2011) show the challenge of advancing long-standing initiative-level goals—e.g., improving the link with surveillance—through specific operational guidance at the overall initiative level. - Recent innovations in individual policy areas since 2011 may help overcome these challenges. - Proposed role for overall-initiative reviews: - Address emerging gaps and weaknesses in the overall architecture of the initiative. - Facilitate cross-fertilization of promising innovations across policy areas. ### This review’s “strategic approach” - Adopt a “strategic approach” to maximize Board engagement and reinforce the initiative’s contribution to international financial stability through institution-building. - Key elements: - Devolve responsibility for operational reviews and effectiveness considerations to individual policy areas. - Conduct “top-down” reviews to identify gaps and weaknesses in the S&C framework. - Identify “bottom-up” innovations from policy-area reviews for consideration in forthcoming reviews. - Increase engagement with member countries and external SSBs/assessors. - Continue collaboration across policy areas. ### S&C coverage and recent trends (2012–16 context) - S&C work over 2012-16 reflected: - A shift toward S29 jurisdictions related to the orientation of financial sector S&C work. - Reduced non-financial S&C output. - Transparency S&C work has been limited in recent years, reflecting: - Anticipated revisions of the MFPT and in the data policy area. - Revamping of the FTC. - The largest share of S&C output—financial—has been primarily oriented around S29 jurisdictions. - World Bank-led S&C work continues to benefit EM and LIDC members, but its footprint has been impacted by the Bank’s budget restructuring. - Notable quantitative and coverage signals reported: - Almost all S29 jurisdictions were covered during 2012–16 and they received on average of four financial S&C outputs during that period. - Financial sector S&C outputs to non-S29 countries fell by 18 percent during 2012-16 compared to the prior period. - S&C country coverage for non-S29 countries fell from close to 40 percent to around one-quarter. - With roughly six FSAPs for non-S29 member countries per year, stand-alone financial sector ROSCs outside FSAPs became increasingly rare. ### Evolution since 2011 and progress on 2011 recommendations - The 2011 Review emphasized adapting coverage, better prioritization, integrating ROSC findings into surveillance, and enhancing efficiency (Box 1 recommendations). - Box 1 (2011 endorsed recommendations) summarized: 1. Adapt initiative coverage to better safeguard financial stability (strengthen weak institutions and cross-border arrangements; review/update transparency areas; finalize insolvency and creditor rights standard; enhance coordination between SSBs and assessors). 2. Improve prioritization of standards assessments across policy areas, countries, and principles (ensure S29 focus does not crowd out LIDC/EM; improve link between ROSCs and capacity building). 3. Better integrate ROSC findings into Fund surveillance (improve public access to ROSCs and encourage publication). 4. Enhance efficiency (broader use of targeted ROSCs; foster ownership through self-assessments). ### Adaptation of coverage to safeguard financial stability (post-crisis changes) - New and revised policy areas and standards: - A new policy area on Crisis Resolution and Deposit Insurance (CRDI) was incorporated in the 2011 S&C review and is underpinned by IADI Core Principles for Effective Deposit Insurance Systems (DICP), which the Fund’s Board endorsed in 2011. - The FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) and its modular assessment methodology have been under development; the standard and the banking-sector assessment methodology are being submitted to the Board for endorsement as part of this review. - Most financial sector standards were revised substantially to address systemic risks, systemically important institutions, cross-border collaboration, safety nets, and crisis resolution. - FTC underwent a complete revision to give greater attention to fiscal sustainability. - The ICR standard revision process is ongoing; first step completed in 2015, second step involving UNCITRAL is underway, and the process is expected to be concluded in FY2018. - The MFPT code was not revised as envisaged. - Assessment cost and complexity: - Changes emphasizing actual effectiveness, complexity, and comprehensive coverage have increased resource costs of assessments, particularly in financial sector standards assessments (require greater technical expertise and quality/consistency checks). - Reference: “A Macrofinancial Approach to Supervisory Standards Assessments” for detailed analysis of such costs. ### Cooperation with SSBs and expanded implementation monitoring - Concerns about potentially coercive external-party frameworks (e.g., NCJ processes) were addressed by: - Ensuring the Fund and Bank play a “good offices” role and refrain from participating in coercive aspects. - SSBs ensuring processes respect the Fund’s legal framework, cooperative relationship with members, and voluntary nature of ROSC exercises. - SSBs increasing implementation monitoring activities: - IOSCO experimenting with member reviews and self-assessments of IOSCO principles. - CPMI-IOSCO regularly monitoring implementation of the Principles for Financial Market Infrastructures (PFMI). - IAIS intending to launch its own TA program to support ICP implementation. - BCBS implementing programs to monitor Basel III adoption and assess consistency via RCAP. - Fund and Bank collaborate closely with BCBS, CPMI, FSB, IADI, IAIS, and IOSCO. - FSB peer reviews and timing: - Many peer reviews of FSB member jurisdictions undertaken, focusing on steps to address FSAP and ROSC recommendations and other G20 priorities. - FSB member jurisdictions committed to undergo an FSAP every five years historically; country peer reviews typically occurred 2-3 years afterward. - The FSB review cycle has recently been moved to eight from five years. - Handbook for FSB Peer Reviews: Standing Committee on Standards Implementation will conduct around three country reviews per year, completing a full cycle over an eight-year time period. ### Increased SSB activity outside financial supervisory area and related challenges - AML/CFT: FATF and nine FATF-style regional bodies (FSRBs) increased mutual assessment activities—expected to move from current output of 17 to 20 mutual evaluations per year, to up to 25 evaluations per year. - Bank collaborations: OECD in corporate governance; IAASB in accounting and auditing; Fund staff worked with GIFT, IBP, OECD, and World Bank on revised FTC. - Challenges arising from increased SSB activity: - Scheduling conflicts, availability of experts, avoidance of overlaps, pressures on resources. - Increased intensity of assessments with stronger emphasis on actual implementation. - Rise in self-assessments and surveys informing formal outputs may be leading to “assessment fatigue,” especially among some S29 jurisdictions, which could undermine ownership and adherence efforts. ### Prioritization and tradeoffs in standards assessments - The initiative lacks an overall framework for prioritization across standards; no mechanism ensures ROSC choice aligns with Bank and Fund priorities. - In financial sector work, prioritization is guided by the Fund Board’s 2010 decision to make financial stability assessments mandatory for countries with systemically important financial sectors (S25/S29). - Pursuant to that decision, 25 jurisdictions were determined to have systemically important financial sectors, based on 2008 data. A revision of the methodology in 2013, using updated data, expanded the list to 29 jurisdictions. - Consequences of S25/S29 prioritization: - Ensured a global, risk-based allocation of FSAP resources. - Implied a shift in financial sector S&C assessments toward S29 jurisdictions and reduced availability of FSAPs to non-systemic countries, consistent with the 2014 FSAP review anticipation. - Tradeoffs noted in the 2011 review: balancing added G20 requirements versus need for assessments of emerging markets and low-income countries. *Source: The 2017 Joint Review of the Standards and Codes Initiative (excerpt).* ### 22. The strengthening of some standards also increased their complexity, which may have ### 22. The strengthening of some standards also increased their complexity, which may have ### Changes in S&C coverage and costs - The strengthening of some standards increased their complexity, which may have further constrained non-S29 financial sector coverage under the initiative. - The increased costs of financial standards assessments for S29 jurisdictions may have crowded out S&C work in non-S29 countries. - The paper “A Macrofinancial Approach to Supervisory Standards Assessments” proposed selective assessments of a subset of principles as one way to integrate the S&C into surveillance and help offset the assessment costs. ### Financial sector TA and Financial Sector Stability Reviews (FSSRs) - Financial sector TA delivery (in person years) increased by more than 37 percent between 2011 and 2016, much of it targeting low- and lower-middle income countries. - Some TA activities are directly aimed at improving compliance with financial sector standards, especially in banking supervision and payments systems. - High unmet demand for financial sector diagnostics led to the development of Financial Sector Stability Reviews (FSSRs). - FSSRs are not part of the S&C initiative; a fully funded Financial Sector Stability Fund (FSSF) would be expected to support about 4-5 missions per year, which would amount to 15 percent of non-S29 countries over a five-year period. - With commitments from Italy and Luxembourg, funding is currently in place for just under 15 percent of the total envisaged under the FSSF. ### Bank-led S&C work and outputs - Bank-led S&C work remained focused on non-systemic and low income countries and began incorporating financial sector S&C work in FSAP development modules as requested by authorities. - Overall Bank S&C output fell as selection criteria became more restrictive and due to changes in the budgetary allocation process. - Demand from member countries fell because baseline assessments have been done in most countries. - Overall S&C outputs for EM and LIDC members declined by 37 percent between 2007–11 and 2012–16. - The decline in the relative share of total output for EM and LIDC members was less steep: to 55 percent from 69 percent. ### Impact on low-income countries (LIDCs) - Low income countries constitute around 35 percent of Fund and Bank membership but received only 16 percent of Fund/Bank-produced S&C outputs over 2012–16. - After an uptick over 2007–11 to 19 percent, the share of financial sector S&C output with LIDC members fell to 8 percent in the recent period. - By S&C policy area for LIDCs over 2012–16: greatest output was in A&A, followed by ICR and BCP. - No S&C work was undertaken with LIDCs in the recent period in the areas of data or MFPT and only one output was produced in each of the areas of IOSCO, FMI, CRDI, and AML/CFT. ### Transparency codes and recent developments - The increase in coverage under the initiative was affected by a pause in outputs based on the Fund’s transparency areas; the 2011 review envisaged a pick-up in activity pending planned revisions. - Surveys had repeatedly shown these codes were perceived as the most useful by country authorities. - Output across all three transparency areas declined, most likely because countries that had undergone initial assessments saw limited gains from further updates absent significant changes to underlying S&C. - The fiscal transparency code was revamped and activity is picking up: more than 20 such assessments have recently been completed and have been positively received by members. - The redesigned fiscal ROSC introduced graduated assessment of conformity to best international practice and strengthened links to capacity development efforts. - The data quality framework remained unchanged since 2003, with a recent IEO report highlighting that it “is more focused on statistical processes than on passing judgement on the quality of statistical output itself.” - The revision to the MFPT, unchanged since 1999, is pending; there were only seven assessments under the MFPT code and data policy area during 2012–16. ### Financial Sector Stability Reviews (Box 2 summary) - FSSRs are diagnostic instruments to build financial sector reform programs and assess country-specific risks and vulnerabilities; adequacy of institutional frameworks; capacity in financial regulation and supervision; and crisis prevention and management. - FSSRs provide recommendations for enhancing prudential frameworks and safety nets; follow-up TA would draw on Fund experience to help LIDCs pursue financial inclusion and deepening consistent with financial stability. - Training will focus on sustainably strengthening capacity, combining face-to-face training with new online tools. - Over the past two years, MCM conducted several TA missions seen as precursors to FSSRs in Mongolia, Lesotho, El Salvador, Sri Lanka, and Sudan. - The work is expected to be funded by a multi-donor trust fund; Italy and Luxembourg have become the first member countries to support the Financial Sector Stability Fund. ### Integration of S&C work into Fund surveillance - The Board’s 2010 decision to make financial stability assessments mandatory for countries with systemically important financial sectors was the most important vehicle to integrate S&C into Fund surveillance. - The 2014 FSAP review reaffirmed high satisfaction with the FSAP and that “S&C remain a valuable tool for an exhaustive and comprehensive assessment of financial supervision.” - The 2014 FSAP review noted a high rate of implementation of FSAP recommendations and increasing publication of the Financial System Stability Assessment (FSSA). - Outside the FSAP, the direct link between S&C outputs and Article IV consultation reports appears to have weakened. - ROSCs were intended to make results more accessible, but there has been a trend toward foregoing ROSCs and only publishing Detailed Assessment Reports (DARs); DARs have become longer and more complicated reflecting increased complexity and comprehensiveness of many revised standards. - Increased resource intensity of producing ROSCs and DARs has led to more frequent use of technical notes, some of which are also complex, potentially hampering integration with Fund surveillance and Bank operational work. - The increased complexity of revised standards can hinder take-up in surveillance, but post-crisis financial S&C revisions aimed to focus on outcomes and systemic stability (macroprudential focus). - Innovations and emerging best practices in some policy areas are helping to better align S&C findings with surveillance. ### Fiscal Transparency Evaluation (FTE) as a promising practice - The redesigned fiscal ROSC (FTE) features prioritized, easily accessible findings and recommendations, enhancing relevance to surveillance and operational work. - FTE findings and recommendations have fed into area departments’ policy notes and staff reports in Article IV consultations and other surveillance missions. - FTE linkages have fed directly into Fund program design, including setting of structural benchmarks. - The FTE approach could be considered a “good practice” for other policy areas to draw insights from. ### Publication, accessibility, and uptake - Publication rates of S&C outputs increased from 70 percent between 2007–11 to 81 percent between 2012 and 2016. - Publication rates increased for advanced economies (AEs), now approaching 100 percent, and rose for EMs by 14 percentage points to 76 percent; rates declined for LIDCs. - In most of the 12 policy areas, a larger share of reports is published today; an exception is ICR where publication rates declined further. - Despite higher publication rates, access to S&C findings through Fund and Bank websites appears to have deteriorated for outputs in many policy areas. - For the Bank, recent budget restructuring removed a centralized website for easy availability of reports. - Policy areas that prioritized accessibility (e.g., FTE) demonstrated improvements. - Recommendation: Policy areas should maintain their own web platforms for dissemination of S&C outputs, with links compiled for ease of reference on a central S&C initiative site. - The scope of uptake by market participants remains limited; both the 2005 and 2011 reviews questioned the realism of promoting use by market participants. - The 2011 review highlighted a tension between market participants’ needs (e.g., frequently updated quantitative ratings) and surveillance/capacity building needs. ### Efficiency reforms and targeted ROSCs - The 2011 review called for more focused and frequent updates of ROSCs, extending targeted ROSCs to all policy areas except AML/CFT and increasing the use of self-assessments. - Targeted ROSCs were envisioned as partial graded assessments focused on a subset of a standard’s principles; methodologies had been developed for three financial supervisory standards (BCP, IOSCO, ICP). - Targeted ROSCs were expected to improve resource use and enhance transparency and consistency of updates. - Ultimately, targeted ROSCs were not adopted in many cases, reflecting Fund Board guidance to balance streamlining with maintaining proper coverage of standards. - A staff-level agreement with financial supervisory SSBs addressed when to use graded assessments or focused reviews that would result in an FSAP technical note or input into the FSSA. - The data ROSC assessment already takes a modular approach with focus on one or several data domains; three of the seven data ROSCs since the 2011 review have taken a modular approach. - As a result of revisions to the FTC approved by the Fund Board in 2014, a modular structure was adopted allowing the code’s four “pillars” to be assessed individually or together with other modules. - So far, none of the 21 FTEs has employed the modular possibility; each has covered all three finalized modules. - Increased use of self-assessments was envisaged to complement ROSCs, bolster ownership, and build capacity; full overview of implementation across policy areas is not feasible. - In the financial area, self-assessments have been inputs to S&C assessments under FSAPs. - S&C assessments and self-assessments are increasingly used as verifiable indicators for reporting progress to external donors. ### Policy area reviews and overall direction - Progress since 2011 largely reflects direction provided by the IMF Board and changes were undertaken during policy area reviews to bolster underlying S&C and approaches to using them. - Direct Board engagement outside comprehensive S&C reviews established priorities and fostered innovations adapting operational approaches to better achieve objectives. - The initiative now comprises a broad array of work around the objective of promoting greater financial stability through S&C. *THE 2017 REVIEW OF THE STANDARDS AND CODES INITIATIVE INTERNATIONAL MONETARY FUND* ### 40. Gradually, the focus of the transparency S&C is shifting towards supporting policy ### pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 40. Gradually, the focus of the transparency S&C is shifting towards supporting policy making, policy dialogue, and accountability ### Transparency S&C: shift in focus - Gradual shift from ensuring disclosure of content and openness around operational processes to supporting policy making, policy dialogue, and accountability. - Increasing emphasis on frameworks that facilitate implementation of policy objectives to support effectiveness and address macroeconomic risks. - New approaches provide a baseline to assess progress over time. - The fiscal area has led this transformation and survey results indicate it is strongly welcomed by the authorities. - Early thinking on potential reforms to the data quality framework and the MFPT recognize benefits of this shift (section D). ### Data: standards, coverage, and quality assessment - 2012 and 2015 reviews focused on addressing gaps and enhancing incentives to improve compliance. - 2012 review introduced a new top tier: Special Data Dissemination Standard (SDDS) Plus for AEs, coordinated with the IMF/FSB G20 Data Gaps initiative. - 2015 review revamped the basic tier to align and promote publication of datasets used for surveillance and policy making; the basic tier now includes incentives to reach a higher data standard and monitoring is facilitated by recent technological enhancements. - "The data dissemination standards now have almost global membership coverage (Table 3)." Key membership coverage (Table 3): - Top tier (SDDS Plus): 0 (2000), 0 (2010), 13 (Mar. 2017) - Advanced (SDDS): 47 (2000), 68 (2010), 61 (Mar. 2017) - Basic tier (GDDS; e-GDDS): 22 (2000), 95 (2010), 110 (Mar. 2017) - Total: 69 (2000), 163 (2010), 184 (Mar. 2017) - 2012 introduced domain-specific data quality assessment modules while the overall data quality assessment framework (DQAF) remained unchanged. - Dataset-specific framework applies to one or several of seven key macroeconomic statistical datasets: (i) national accounts, (ii) consumer price index, (iii) producer price index, (iv) government finance statistics, (v) monetary statistics, (vi) balance of payments, and (vii) external debt statistics. - Domain-specific modules facilitated production of data quality assessments on individual datasets and enabled integration with statistical capacity development programs (Box 6). - Data ROSCs have been the vehicle to assess country practices for data compilation and dissemination relative to international standards. - A recent IEO report discussed the de-coupling between data quality and dissemination, noting the dissemination standard leaves “the responsibility for [data] accuracy and reliability with the subscribing country,” implying a subscribing country may be in full observance of dissemination standards while providing faulty data. - A task force has been established to address recommendations of the IEO report, and is expected to finalize its report by December 2017. ### Fiscal transparency: code revision, FTEs, and analytical focus - The global financial crisis underscored the importance of fiscal transparency and the need to revise the underlying code; shortcomings in fiscal analysis were highlighted in the 2011 S&C review. - The Fiscal Transparency Code (FTC) and its assessment output were dramatically transformed following stakeholder consultation and Board engagement since the 2011 review. - After a policy area-specific review in 2012, the FTC was revised in 2014. The new code has four pillars: (i) fiscal reporting, (ii) fiscal forecasting and budgeting, (iii) fiscal risk analysis and management, and (iv) resource revenue management. - Note: "The first three pillars were approved in 2014, while the fourth pillar is under development." - The revised FTC forms the basis of the new Fiscal Transparency Evaluations (FTEs), which replaced the fiscal ROSCs. - Compared to the prior code, the revised FTC focuses more on information needed for good fiscal management and decision-making. - FTEs provide more rigorous and quantified analyses of the scale and sources of fiscal vulnerabilities, include a summary of strengths and weaknesses of country practices and their relative importance, and provide the option of a sequenced fiscal transparency action plan to help define reform priorities. - Flexibility enhanced via modular assessments of the FTC’s individual pillars and an adapted approach for resource-rich countries. ### Financial sector S&C: revisions, systemic focus, and FSAP integration - Financial S&C revised to fill pre-crisis gaps, focus on outcomes, and bring a system-wide (macroprudential) perspective. - Selected revisions and additions: - BCP now requires supervisors to account for systemic risks posed by institutions. - IOSCO includes a new core principle addressing the securities’ regulator role in identifying and mitigating systemic risk. - ICP includes a new core principle on macroprudential surveillance for insurance supervisors. - KA identifies an effective framework for systemic risk identification and mitigation as a precondition for effective resolution regimes. - PFMI includes a section on systemic risks and stresses financial market infrastructures should have objectives that “explicitly support financial stability.” - Major S&C revisions and milestones: - BCP reviewed and revised (2012), ICP (2011), IOSCO (2011), PFMI (2012). - KA adopted by the FSB in 2011 and revised in 2014; assessment methodology for the banking sector completed in 2016. - DICP revised in 2014; assessment handbook completed in 2016. - Fund and Bank staff participated in SSB work; Fund carried out two trial/pilot reviews of the KA jointly with the FSB and the Bank, and a third review was conducted by Fund staff in the context of a mandatory financial stability assessment with a member. - Footnote: "All three covered bank resolution, and one also covered insurance resolution; no pilot assessment of resolution for central counterparties has been conducted to-date." - FSAP program remains an effective platform for S&C work. The 2014 FSAP review concluded key S&C are valuable for exhaustive assessment of financial supervision and recommended streamlining and targeting assessments consistent with FSAP’s focus on systemic risk and the Fund’s macrofinancial surveillance mandate. - Collaboration with financial supervisory SSBs formalized a flexible approach to S&C work in FSAPs. - In November 2016 and June 2017, the Fund Board was updated on understandings between Fund staff and financial supervisory SSBs on using supervisory standards for graded assessments and focused reviews. - The approach is being informed by sets of “base principles” as starting points for scope discussions between staff and authorities about focused reviews. - The Fund’s 2019 FSAP review will provide an opportunity to take stock of experience with this approach. - Footnote: "Use of Supervisory Standards in the Financial Sector Assessment Program—Understandings with Standard Setting Bodies, (June 9, 2017)." ### AML/CFT: risk-based, outcomes-focused reforms and capacity building - Since 2011, important changes occurred in AML/CFT with increased focus on risk-based application and outcomes. - 2012 FATF review enhanced focus on risk-based application of AML/CFT measures, strengthened parts of the previous standard, and addressed new threats including financing of proliferation of weapons of mass destruction. - 2013 assessment methodology added systematic assessment of the effectiveness of national AML/CFT systems; emphasis shifted from laws-in-place to effective implementation. - In 2014, the IMF Board endorsed the revised FATF AML/CFT standard and assessment methodology. - FATF strengthened review mechanisms in 2013 in response to concerns about varying quality of assessment reports from some FSRBs. - 2014 IMF Board review of the Fund’s Strategy on AML/CFT encouraged integrating financial integrity issues into surveillance and Fund-supported programs; AML/CFT issues should continue to be addressed in all FSAPs on a more flexible basis. - Reports adopted by FATF and FSRBs continue to be converted into AML/CFT ROSCs following a pro forma review by staff. - International financial institutions developed advisory and capacity development (CD) packages to assist countries in establishing processes for assessing and regularly updating ML/TF risks. - FATF’s Recommendation 1 requires countries to assess and understand ML/TF risks and design AML/CFT regimes based on this assessment with broad participation of public and private stakeholders. - The Fund and the Bank have developed CD tools to assist countries in conducting National Risk Assessments through a systematic process with broad stakeholder participation. ### World Bank-led codes: advances and tailored assessment approaches - Advancements across Bank-led policy areas occurred, driven by technical-level changes and collaboration with external SSBs; operational environment affected by recent budgetary developments. Corporate Governance (CG) - A more focused and differentiated approach to CG code assessments was developed, tailored to size and sophistication of client countries and consistent with a limited resource envelope. - ROSC methodology updated to incorporate 2015 revisions to the Principles and the OECD assessment methodology, streamline Detailed Country Assessment and benchmarking to ease assessor burden and lower costs, and restructure report format to shorten reports and simplify presentation. - Benchmarking for different tiers of countries expected to lead to more impactful assessments and closer ties to other Bank activities. - Approach to improve traction: - For countries with basic regulatory framework for corporate governance, CG ROSCs will be part of ongoing World Bank/IFC capital markets/corporate governance programs; detailed policy recommendations and country action plans developed and implementation supported through follow-up advisory work; CG ROSC will serve as a monitoring and evaluation tool for long-term interventions. - For smaller countries without active equity markets (“Tier 3”), CG ROSCs will not typically be carried out; instead provide high-level recommendations to improve the basic CG framework (company and securities law reforms) and raise awareness; technical notes used for targeted, confidential advice. Insolvency and Creditor Rights (ICR) - Bank staff finalized revisions to the Principles for Insolvency and Creditor/Debtor Rights in 2015, adding focus on institutional framework for risk management and substantive aspects of formal insolvency proceedings, including more detailed provisions on director liability and a nuanced approach to treatment of financial contracts in insolvency. - Additional steps required before ICR standard finalization as anticipated in 2011 S&C review: - 2015 changes endorsed by Bank Management (Office of the General Counsel). - Next step: UNCITRAL and the Bank to jointly undertake revisions to the Unified Insolvency and Creditor Rights Standards; expected to be finalized in FY 2018 followed by Bank Management endorsement, with Bank Board informed about revisions to the Unified ICR Standards. - ICR standard contributed to other World Bank Group work: - Supported revisions to the methodology of the “Resolving Insolvency” indicator of the World Bank’s Doing Business report. - 2014 “offline” pilot used 16 aspects of ICR standard as proxy for insolvency law quality; corrected anomalies associated with original case-study methodology. - In 2015, the index was introduced to complement the case-study and represented the single largest change to the Doing Business methodology since inception. - In 2017, IFC launched a new Investment Risk Platform; its loss given default methodology relies in part on a high-level measurement of a country’s insolvency regime and consistency with the ICR standard. Accounting and Auditing (A&A) - The global financial crisis highlighted shortcomings in international financial reporting and auditing standards and their implementation; contributing factors included application of fair value standards, timeliness of asset impairment recognition, consolidation practices, and transparency of auditors' work. - IASB introduced significant changes to IFRS, including IFRS 9 (financial instruments, new expected loss model), IFRS 13 (fair value measurement), and IFRS 10 (consolidation based on control); these changes pose significant implementation challenges. - IAASB launched broad reforms to International Standards on Auditing (ISA), revising ISA 700 (auditors' report) and introducing ISA 701 (Communicating Key Audit Matters) requiring from December 2016 that auditors publicly report on "key audit matters." - A&A diagnostic tool overhauled in 2016: - Overhaul followed changes in underlying standards and lessons from 15 years of experience. - Reflected need to adapt tool to countries where A&A framework is at an early stage, incorporate modern corporate financial reporting features (e.g., quality assurance and public oversight of auditors, IFRS for SMEs), and improve consistency of assessments across countries. - Past practice of ad hoc implementation to fit a single methodology to diverse country circumstances weakened consistency of assessments. - Footnote: "The Bank’s Operations Policy and Country Services review of the A&A ROSC program in 2010 had recommended a revision of the diagnostic tool and guidelines to ensure its continued relevance." ### Membership appreciation and survey findings (figure highlights) - 2011 surveys indicated EM and LIDC members found the initiative most useful and particularly welcomed diagnostic functions S&C work could offer. - Authorities’ views summarized (by category): transparency S&C and selected financial S&C were perceived as useful in identifying vulnerabilities, strengthening institutions, and identifying/prioritizing technical assistance. - Fiscal transparency (FTC) survey of 20 countries (10 responses) showed: - Graduated practices under each principle of the FTC provide clear milestones for building fiscal transparency capacity to varying extents. - FTC viewed as sufficiently comprehensive in capturing key elements of fiscal policy transparency by many respondents to varying extents. - Authorities viewed FTC as useful in identifying institutional capacity weaknesses, capturing build-up of fiscal risks, offering well-prioritized recommendations for reforms, tailoring recommendations to country context, and identifying/prioritizing TA needs to varying extents. - A majority saw value in follow-up FTEs to help assess progress in meeting the standard. - A&A S&C survey (sent to 101 authorities in 31 countries; 37 authorities in 20 countries responded) showed: - Many respondents viewed A&A reports as clear, using language appropriate for technical and non-technical audiences, comprehensive with appropriate detail, and covering most relevant issues. - Respondents reported S&C work helped establish priorities for policy reform, establish institutional reform priorities, lead to policy actions or reforms, and that implementation support was available. - A majority saw value in follow-up A&A work, including targeted approaches (e.g., another ROSC/update or technical note in specific A&A area). *Italic: THE 2017 REVIEW OF THE STANDARDS AND CODES INITIATIVE — INTERNATIONAL MONETARY FUND* ### 64. This new tool includes three modules, and guidance to assessors seeks to sharpen the ### pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 64 ### New accounting and auditing (A&A) assessment tool: structure and intent - The new tool includes three modules and guidance to assessors seeks to sharpen the materiality of the findings while providing flexibility within the modules. - Module A (Accounting and Auditing Standards): seeks to document material differences between country and international standards. - Module B (Institutional Framework for Corporate Financial Reporting): contains nine questionnaires covering various aspects of the country’s A&A framework (including commercial enterprises; listed companies; banks; insurance; and audit regulation, quality assurance and public oversight) with implementation guidance providing room for assessors to select which questionnaires are materially relevant to country circumstance. - Module C (Observed Reporting Practices and Perceptions): seeks to corroborate the findings from Modules A and B, and to gather perceptions of the demand for and quality of financial information from users of financial statements. ### Assessing effective implementation - The methodology advances assessment of effective implementation by placing significant emphasis on the institutions underpinning a country’s A&A framework. - Support for effectiveness assessment includes: - assessors’ review of a sample of financial statements (albeit of small number); - systematic canvassing of users’ views on the quality of financial statements in the country. - Deployment status: The new methodology has already been deployed in Pakistan with positive initial feedback. ### Policy area best practices: purpose and expected benefits - Goal: identify best practices in individual policy areas that can be shared across the initiative. - Definition: “best practices” may reflect approaches particularly effective in promoting adherence with international standards and codes, supportive of strengthening economic institutions, and/or better informing other World Bank and IMF work with the member. - Potential benefits of adopting best practices: - Improve prospects of policy areas contributing to economic and financial resilience. - Gauge key weaknesses (i.e., noncompliance with S&C) and improve traction to address them. - Help authorities address weaknesses more efficiently or effectively. - Collaboration: As the initiative has reflected a partnership between the Fund and Bank and external SSBs since the outset, collaboration with external bodies will remain a core element and can be further enhanced. ### Collaboration with external bodies / standard setters - Enhanced interaction between SSBs and the Fund and/or Bank as assessor has proven beneficial by providing two-way feedback. - Strengthening this relationship can: - keep the S&C current as external conditions change; - ensure effective implementation; - align priorities, including tradeoffs between S&C complexity and assessment methodologies and capacity to meet demand within resource constraints; - reinforce focus on Bank and Fund operational priorities. - Recent experience: engagement with external SSBs in the financial sector has helped use standards in financial stability assessments, coordinate TA delivery and country prioritization, and inform development of supervisory guidance. ### Innovations to S&C and assessment modalities: rationale - Need: improve the cost-benefit tradeoff of S&C work to sustain positive contribution to economic and financial resilience. - Problem: technical compliance assessments have become increasingly lengthy and dense; institutional capacity can limit countries’ willingness or ability to participate. - For members with sufficient capacity: technical compliance assessments remain important. - For other members: compliance in some policy areas may be unrealistic in short/medium term and repeat assessments may be resource-intensive and less useful. - Common feature of best practices: specific assessment modalities that allow systematic tailoring to country circumstances; premise that progress is better promoted when country circumstances are taken into account. - Direction: adopt a risk-based approach considering implications of deviations from the standard, aligning with vulnerability-focused surveillance and prioritization of actions. - Example mechanism: FTE summary heat maps featuring analysis of the scale and sources of fiscal vulnerability and visual account of fiscal transparency strengths and reform priorities. ### Three best-practice assessment modalities identified - The review identifies three “best practice” approaches: - (i) modular (tiered) approach; - (ii) graduated approach; - (iii) effectiveness/outcome focus. - These modalities have been adopted to varying extents across policy areas and are candidates for wider adoption. ### Modular approach - Use of modules or pillars to tailor assessments to country needs and capacity (e.g., focusing on certain categories of principles or specific areas like the consumer price index). - Benefits: - Reassessments can focus on previously problematic modules, enabling cost-effective demonstration of progress without a full reassessment. - Targeted assessments facilitate deployment of S&C work when staff turnover or new risks arise. ### Graduated approach - Clarifies “distance to standard” relative to comparable country groupings or reference points rather than absolute grading alone. - Traditional scoring: “observed,” “largely observed,” or “not observed.” - Advantages: - Allows relativity by benchmarking against peers, level of development, or progress since previous assessment. - Helps inform a realistic path to compliance and measurement of progress over time. - Fiscal code implementation: countries scored for each principle as (i) basic; (ii) good; (iii) best. - Survey evidence: About 90 percent of countries agreed that the graduated approach was, to a great or large extent, valuable in assessing their scores against comparator countries; it was also perceived as helpful in setting priorities for reforms and milestones. ### Effectiveness / outcome focus - Innovation: assess actual effectiveness or “outcomes” by evaluating S&C vis-à-vis the risk profile (threat, vulnerability, potential impact). - This goes beyond technical compliance to assess whether compliance achieves risk mitigation. - Resource implications: more resource intensive and requires assessors with different skills and greater tailoring to country context and risk environment. - AML/CFT experience: methodology starts with understanding a country’s risks and context and requires assessors to use judgment to reach holistic conclusions on operational effectiveness; expectations vary by country context and risk environment. ### Direct integration with capacity development (CD) - Historical challenge: weak integration of S&C work with CD because traditional outputs were technical assessments rather than diagnostic tools. - Fund’s Results-Based Management (RBM) system: requires benchmarking against a starting point, identification, prioritization, and sequencing of reforms, and measuring progress against agreed milestones. - Data quality framework example: - Originally developed for data ROSCs, now used more widely to improve statistical basis for surveillance and program design and to enhance the effectiveness of Fund TA. - Inspired a comprehensive catalog of CD work streams, objectives, outcomes (results), and related indicators, baselines, and milestones. - Facilitates measurement of progress of CD efforts to achieve an outcome and the overall objective (e.g., better data for policy making). ### Strategic strengthening of the initiative: findings and proposed approach - Evolution: S&C work has accelerated in several areas, with most externally-set S&C revised post-crisis and some assessment methodologies updated—leading in some cases to greater complexity and resource intensity. - Bank changes: budget restructuring has impacted S&C output. - Fund S&C output decline: partly reflects revisions to transparency S&C; allocation of output has shifted across countries and income groups. - Publication and access: publication rates of S&C outputs have improved, but access to these outputs has deteriorated in many cases. - Positive signs: many policy areas demonstrating ownership and innovation, emerging best practices, and advancing linkages with surveillance and CD. - Recommended strategic approach: shift to a top-down review of gaps and weaknesses while devolving operational reviews to policy areas; forthcoming policy area reviews should address identified gaps, consider adopting best practices, and assess how new elements could improve linkages to surveillance and CD. - Key enablers: increased engagement with member countries, continued collaboration across policy areas, and continued collaboration with external SSBs. ### Specific recommendations before the next review - Proceed with updates to strengthen the MFPT and the Fund’s data policy area. - Endorse the KA and assessment methodology for the banking sector to underpin work in the CRDI policy area. - No major gaps warrant expanding or streamlining policy areas in this review; work is ongoing on areas for potential future inclusion. - Upcoming policy area reviews should consider adopting identified best practices to improve linkages to surveillance and capacity development. - Continue increased collaboration across policy areas and engagement with external SSBs and member countries to align S&C work with Bank and Fund strategic priorities and membership needs. ### Top-down priorities and specific transparency area action - Top-down weaknesses to address across the initiative: - Systematic interaction with standard setters; - Adopt best practice assessment modalities; - Direct integration with capacity development. - Strengthening mechanisms and best practices identified for uptake include: - Revised MFPT; - New data quality module; - Adoption of Key Attributes (KA); - Consideration of new areas (e.g., Islamic Banking). - Immediate priority: long-awaited revision of the MFPT should proceed without further delay, given the code’s gradual fall into disuse and incorporation of many principles into financial sector standards assessed under FSAPs. *Source: https://www.imf.org/-/media/files/publications/pp/2017/pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative.pdf* ### 88. The successful transformation of the Fiscal Transparency Code may provide useful ### THE 2017 REVIEW OF THE STANDARDS AND CODES INITIATIVE ### Transformation of the Fiscal Transparency Code - The revamped Fiscal Transparency Code filled an unmet demand under the initiative by: - Focusing on outputs rather than processes. - Systematically taking account of different levels of country capacity. - Placing greater emphasis on risks. - Aligning the code with recent advances in other standards and best practices. - The transformation was performed in the context of FSAPs and technical assistance provided by the Fund and the Bank. - Observation: The old fiscal code and the MFPT are nearly identical, including a drop in usage in recent years; yet the revamped fiscal code saw renewed uptake. ### Revision and Staging of the MFPT - Revision will be staged: - Start on the monetary side with an early update to ensure the code can serve as a guide for good monetary policy transparency practices. - Transform the MFPT into a diagnostic tool to guide policy advice. - Intended features and uses: - Provide authorities and country teams with a structured baseline assessment of key elements for effective monetary policy-making. - Facilitate tracking priority areas in surveillance and capacity-building. - Become more modular, analytical, and calibrated to evaluate member countries' progress. - Provide clarity on benchmarks for countries at different levels of economic and financial development. - Follow-up: - Assess whether and how an updated financial part of the MFPT could support diagnostic financial sector work, including transparency practices relating to powers, responsibilities, and accountability of financial regulatory and supervisory bodies. - Staff will prepare a Board Paper during FY 2019 discussing concrete proposals for the way forward. ### Modifying the Data Standards Framework - Policy area revision objectives: - Further promote transparency and support effective economic decision-making. - Continue to comprise the data standards (SDDS, SDDS Plus, and e-GDDS) and the data quality assessment framework (DQAF). - Focus revisions on data needs for effective policy making (“operational data”) to facilitate better Fund surveillance of member policies. - Continue to account for varying statistical capacity levels across the IMF membership. - Ensure overlap with the new MFPT and the FTC’s pillar one on data content. - New data quality assessment characteristics: - Direct integration with the Fund’s CD efforts and support for development of a sequenced action plan to address identified weaknesses. - Envisaged as a data quality diagnostic exercise and risk-focused, reflecting IMF macro-critical surveillance and program needs. - Adoption of the FTC’s graduated approach (basic, good, best). - Introduction of a heat map to present assessment results. - Based on and complementary to other standards and diagnostics, such as the FTC and the new MFPT. - Testing and reporting: - New data quality assessment to be tested through pilot exercises; lessons applied to refine the module in close collaboration with country teams and other Fund departments. - Outcome to be reported in the 10th review of the Fund’s data standards, scheduled for 2019/20. ### Endorsement of Key Attributes (KA) for Crisis Resolution - Background and rationale: - Progress since the 2011 S&C review has established a standard for crisis resolution and operationalized its assessment methodology. - The Key Attributes (KA) set out core elements the FSB considers necessary for an effective resolution regime; the G20 Heads of State and Government have endorsed the KA as an international standard. - KA objectives and essential features: - Enable national authorities to resolve financial institutions in an orderly manner without taxpayer exposure to loss while maintaining continuity of vital economic functions. - Essential features include designating an administrative resolution authority and vesting it with a range of resolution powers (sale or transfer of assets and liabilities, write down and/or conversion of liabilities, or orderly wind down to protect insured creditors). - Foster international cooperation through coordinated recovery and resolution planning across borders. - Assessment methodology and scope: - The FSB’s Key Attributes Assessment Methodology for the Banking Sector guides assessments of compliance. - The Bank and the Fund intend to use the new KA as a benchmark for assessments of bank resolution frameworks in FSAPs or stand-alone ROSCs. - ROSCs using the KA will remain voluntary in the context of FSAs; the new standard will be used as benchmark for both voluntary and mandatory FSAPs. - Initially use KA only for banking sector assessments; assessments in other sectors (insurance, central counterparties) to become possible after completion of sector modules. - Staff expects the insurance sector assessment methodology to be completed by end 2018 and will present other sector methodologies to the Board for endorsement once finalized. - Resource implications: - KA assessments are large in scope and depth; banking sector methodology is exhaustive and requires deeper review than typical technical notes on crisis preparedness and management. - Deposit insurance and crisis management arrangements will still need coverage under FSAPs. - Careful prioritization and allocation of resources needed to ensure KA assessments are appropriately resourced and maintain quality. ### Islamic Finance - Rationale for consideration: - Islamic banking continues to grow rapidly in size and complexity, posing challenges to central banks and supervisory authorities. - The BCP generally applies to Islamic banking, but gaps exist reflecting specific features and associated risks. - Standards and progress: - The Core Principles for Islamic Finance Regulations (CPIFR) have been developed to complement international standards, inter alia, on capital adequacy and the supervisory process. - The CPIFR can be used for self-assessment of Islamic banking regulatory and supervisory frameworks. - Adoption of these standards into legal and regulatory frameworks has progressed at different speeds across jurisdictions. - Planned action: - Staff plans to prepare a Board paper by April 2018 on S&C work related to Islamic banking. - The paper is expected to ask for formal endorsement of the "Core Principles for Islamic Finance Regulation for Banking," prepared by the Islamic Financial Services Board, as a standard under the Fund/Bank S&C initiative. ### Bottom-Up: Adopting Best Practices in Upcoming Policy Area Reviews - Evolution and engagement: - Since the 2011 review, S&C work evolution accelerated; direct Board engagement channels have been important for promoting relevance and usefulness. - For all Fund-led areas, the next round of individual policy area reviews has already been scheduled. - The Bank lacks formal review mechanisms and has typically handled modifications on a technical level; it has identified an effective modality for engagement going forward. - Proposed improvements for upcoming reviews: - Devolve responsibility for operational and effectiveness reviews to individual policy areas, building on emerging best practices. - Reviews should report on allocation of outputs across the membership and consider scope for modifying standards assessments to improve linkages to surveillance and integration with capacity development efforts. - Reviews should be informed by surveys of area departments and periodic surveys of members on a frequency deemed appropriate for individual policy areas. - Reviews should consider accessibility of standards assessments and recommend improvements where necessary. - Leverage existing Fund mechanisms to draw in perspectives of staff working most closely with members to provide effective input into policy area reviews. - Expectation: - Each area will assess relevance and prospective implementation of increased collaboration with standard setters/assessors, best practice assessment modalities, and direct integration with CD, reporting findings in reviews planned for 2018–20. ### Strengthening Mechanisms to Sustain Momentum - Rationale: - Individual policy area reviews should be complemented by a mechanism to sustain momentum between quinquennial S&C reviews and preserve alignment with strategic priorities and member needs. - The 2011 review highlighted risk of inconsistency between demand-driven S&C work and alignment with Bank and Fund priorities; uneven follow-through emerged, and challenges arose in select areas following the Bank’s budget restructuring. - Proposed loose framework (two fronts): - Enhanced collaboration across policy areas to promote internal alignment over the five-year period between S&C reviews. - Increased engagement with members to present the initiative holistically and help members determine the most relevant areas (considering the 12 areas as a menu for strengthening institutions and identifying vulnerabilities). - Expected role of S&C: - Continue to identify vulnerabilities that could negatively impact a member’s stability and lead to spillovers for other members. ### Continued Collaboration Across Policy Areas and Engagement Mechanisms - Need for continuous collaboration: - Closer, more continuous collaboration among the 12 policy areas is needed; engagement currently occurs mainly at the time of quinquennial reviews. - Delayed identification of emerging gaps and slower adoption of good practices risk reducing timeliness and relevance. - Planned mechanisms to promote alignment and follow-through: - Utilize existing mechanisms such as departmental surveillance contacts and the Committee on Capacity Development to seek ongoing feedback on S&C work. - Promote usefulness of S&C work and increase country team awareness of policy area innovations that could benefit surveillance and improve linkage to follow-up TA. - Draw in perspectives of staff working closely with members to enable effective input into policy area reviews. - For Bank-led ROSC areas, ensure emerging issues with bearing on other ROSCs are brought for information and discussion within the IMF-World Bank Financial Sector Liaison Committee (FSLC). - Targeted outcomes: - Promote cross-fertilization of innovative approaches. - Ensure ongoing consideration of how to strengthen linkages with surveillance and capacity development activities. *Source: THE 2017 REVIEW OF THE STANDARDS AND CODES INITIATIVE (excerpts).* ### 110. Periodic fora should be established to bring together policy areas and members, ### THE 2017 REVIEW OF THE STANDARDS AND CODES INITIATIVE ### Periodic fora and member engagement - Periodic fora should be established to bring together policy areas and members, and facilitate an exchange of information that can further enhance S&C work under the initiative. - For a demand-driven initiative, accessibility and relevance are decisive factors determining the extent to which members request S&C work. - Fund/Bank S&C work should be promoted as a menu of tools for strengthening institutions, policy dialogue, and capacity development. - A new forum, potentially launched on the margins of the IMF/World Bank Annual Meetings, would: - Familiarize members with what the initiative offers and recent developments in individual policy areas. - Share members’ experiences incorporating S&C work in policy development strategies. - Give participating SSBs more direct exposure to the practical side of Bank/Fund S&C work, potentially strengthening alignment of priorities. - Provide an informal opportunity for more frequent, direct feedback from members to keep the initiative current. - To best inform participants, policy areas could provide fact sheets outlining: - Latest developments in member coverage of their S&C work. - Updates on the evolution of the underlying standards and their assessment methodologies. - Recent S&C work with members by external SSBs/assessors. ### Annual Meeting outreach and B-ROSCs for AEs - The Annual Meeting offers a venue for Bank staff to reach out and engage with member countries and SSBs. - The IMF Board encouraged AEs to undergo B-ROSC assessments, but none have been undertaken since the last review of the initiative. - The Bank could: - Showcase the rigor of these assessments and the applicability of the standards for AEs to dispel misperceptions. - Showcase frameworks and how they have helped several countries analyze and address development challenges in a fairly wide range of country circumstances. ### Resource implications - The recommendations in this review may result in higher costs. - Expected drivers of cost: - Continued evolution of the initiative. - Plans to adopt best practices across policy areas. - Addressing weaknesses and conducting reviews. - Developing and implementing assessment programs in new areas (may require additional resources or crowd out existing priorities). - Tradeoffs between competing priorities should be done at the policy area level. - Adoption of best practices, modifications to the data policy area and MFPT code, and other changes in policy areas with resource implications will be considered as part of individual policy area reviews or proposals. - Implementation will require: - Closer engagement with member authorities and country teams to ensure decisions do not simply reflect supply-side considerations. - Close engagement with SSBs to ensure Fund and Bank priorities are well-aligned with SSB perspectives. ### Issues for discussion (questions for Directors) - Do Directors agree with the proposed strategic approach to devolve operational responsibilities to individual policy areas, while maintaining strategic oversight? - Do Directors agree with the proposed approach to modify the data policy area and the MFPT? - Do Directors agree that forthcoming policy area reviews should report on actions taken in line with recommendations of this review to improve the links between S&C work and surveillance and capacity development, including on the prospects for adoption of best practices developed in the initiative? - Do Directors have further guidance on how to align the initiative with the priorities of the Fund and the membership? Are there additional modalities that should be considered to help strengthen the involvement of member countries to set priorities in the initiative? ### Proposed decision (summary) - The Fund takes note of the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (the “Key Attributes”) and the Key Attributes Assessment Methodology for the Banking Sector. - The Fund endorses the Key Attributes as they apply to bank resolution regimes and the related assessment methodology for the purposes of undertaking assessments and preparing Reports on the Observance of Standards and Codes (ROSCs). *THE 2017 REVIEW OF THE STANDARDS AND CODES INITIATIVE — INTERNATIONAL MONETARY FUND* ### Annex II. Profile of S&C Outputs ### Annex II. Profile of S&C Outputs ### Annual Totals (1999–2016) - 1999: 43 - 2000: 49 - 2001: 135 - 2002: 169 - 2003: 204 - 2004: 149 - 2005: 110 - 2006: 128 - 2007: 80 - 2008: 83 - 2009: 73 - 2010: 73 - 2011: 85 - 2012: 70 - 2013: 60 - 2014: 66 - 2015: 47 - 2016: 52 - Total (1999–2016): 1676 ### Cumulative Outputs by Policy Area (1999–2016) - Transparency — Data: 133 - Transparency — Fiscal: 171 - Transparency — MFPT: 115 - Financial Sector — Banking supervision: 325 - Financial Sector — Securities regulation: 145 - Financial Sector — Insurance supervision: 152 - Financial Sector — Financial market infrastructure: 161 - Financial Sector — Crisis resolution & deposit insurance: 27 - Institutional & Market Infrastructure — Accounting & auditing: 157 - Institutional & Market Infrastructure — Corporate governance: 84 - Institutional & Market Infrastructure — Insolvency & creditor rights: 83 - Institutional & Market Infrastructure — AML/CFT: 123 ### Regional Distribution and Thematic Coverage - Regions identified in the profile: Africa; Asia Pacific; Europe; Middle East & Central Asia; Western Hemisphere. - Policy-area topics highlighted in the regional distribution figure: - AML/CFT - Banking supervision - Corporate Governance - Crisis Resolution and Deposit Insurance - Data dissemination/quality - Fiscal policy transparency - Financial market infrastructures - Insurance supervision - Insolvency and creditor rights - Accounting and auditing - Securities regulation - Monetary and financial policy transparency ### Notes on Source and Presentation - Source: IMF and World Bank S&C database and staff calculations. - The Annex presents a year-by-year count of S&C outputs (1999–2016), cumulative totals by policy area for the same period, and a regional distribution visualization of S&C outputs across the 12 policy-area topics. *Source: Annex II. Profile of S&C Outputs — IMF and World Bank S&C database and staff calculations.* ### Introduction __________________________________________________________________________________ 34 ### I. DATA TRANSPARENCY—STANDARDS AND QUALITY FRAMEWORK ### Background - This paper is a background reference to the 2017 Joint Review of the Standards and Codes Initiative (the Initiative). - Data transparency is described as an essential element of effective policy making, underpinning policy credibility and market confidence, facilitating surveillance, mitigating spillover risks, and enhancing economic and financial resilience. - The Data Standards Initiative was launched after the crises of the mid-1990s to promote timely publication of quality data. - The data module of the Reports on Observance of Standards and Codes (ROSC) assessed data dissemination practices against: - the Special Data Dissemination Standard (SDDS) established in 1996, and - the General Data Dissemination System (GDDS) established in 1997. - In 2001, the Fund introduced a comprehensive data quality framework (DQAF) to provide a common structure for the assessment of data quality and to recognize the multi-dimensional nature of data quality. - The generic DQAF reflects best practices and internationally accepted concepts and definitions, and the United Nations Fundamental Principles of Official Statistics. ### 2011 Review Recommendations (endorsed by the IMF Executive Board) - Adapt the coverage of the initiative to better safeguard financial stability, including targeted assessments when other analysis indicates weaknesses or larger systemic repercussions. - Promote efforts to meet standards in the context of overall surveillance; improve the link between ROSC assessments and capacity building, including more systematic integration into area departments’ Regional Strategy Notes (RSNs). - Better integrate ROSC findings into Fund surveillance, improve public access to ROSCs, and encourage ROSC publication. - Enhance efficiency through broader application of targeted ROSCs. ### Developments Since 2011 — Modifications to the Data Quality Framework - Seven domain-specific DQAF modules and the generic DQAF were updated in 2012. The seven domain-specific DQAFs are: - (1) national accounts, - (2) consumer price index, - (3) producer price index, - (4) government finance statistics, - (5) monetary statistics, - (6) balance of payments and international investment position statistics, - (7) external debt statistics. - Revisions reflect experience from ROSC applications and international statistical developments, including implementation of 2008 SNA and BPM6 and expanded coverage of monetary statistics to include Other Financial Corporations (OFCs). - Publication items and methodological updates cited include: - Public Sector Debt Statistics Guide for Compilers and Users (2011); - International Reserves and Foreign Currency Liquidity Guidelines for a Data Template (2013); - External Debt Statistics Guide (2013); - BPM6 Compilation Guide (2014); - Government Finance Statistics Manual 2014 (GFSM 2014); - Enhancements to Data Standards Initiatives. ### Enhancements to Data Standards Initiatives - SDDS enhancements approved by the Board in 2010 and 2012 included: - additional data categories such as sectoral balance sheet, general government gross debt at nominal value, and financial soundness indicators on encouraged basis; - made international investment position (IIP) and the reserve data template required categories. - SDDS Plus approved by the Board in February 2012: - aimed at economies with systemically important financial sectors; - required nine additional data categories; - closely linked with the IMF/FSB G-20 Data Gaps Initiative (DGI). - Enhanced GDDS (e-GDDS) endorsed by the Board in May 2015 to: - align GDDS data categories with common indicators used by the Fund for surveillance; - promote publication of data in addition to metadata through the National Summary Data Page (NSDP); - set a path to achieving higher dissemination standards by the introduction of dissemination thresholds. - SDMX technology was introduced for data dissemination under SDDS Plus and e-GDDS to allow machine-readable, time-series dissemination via NSDP, improving timeliness, coverage, and reducing reporting and monitoring costs. ### Recent Experience and Prospects — Application of DQAF in Data Module ROSC Missions - Since DQAF integration into the data ROSC in 2001, over 100 data ROSC missions were conducted for 88 countries in different regions and at different stages of development. - As of end-2016, 111 Data ROSC reports have been published. - Most data ROSC missions were conducted between 2002 and 2006. ### Findings and Feedback on Data Module ROSCs and DQAF - Main conclusions and lessons from ROSC missions and standards developments: - Data ROSC findings and recommendations continue to provide a useful framework for TA planning and prioritization for STA and other TA providers. - Country authorities value the DQAF-based extensive and detailed documentation in data ROSCs and have used it to improve statistical operations; publication of data ROSCs include authorities’ intent to redress shortcomings. - The current data ROSC places more weight on statistical processes affecting data quality rather than assessing data quality per se, as highlighted by the 2016 IEO report “Behind the Scenes with Data at the IMF”. - STA has used the DQAF to guide metadata standardization for GDDS/e-GDDS, SDDS, SDDS Plus, and to guide single-topic and multi-topic diagnostic missions. - The DQAF is a tool for self-assessment to: (i) guide countries’ efforts to strengthen statistical systems and donor support, and (ii) help data users assess data adequacy for their needs. - Data standards initiatives increasingly focus on promoting publication of data needed to support surveillance and reduce data gaps, with e-GDDS and SDDS Plus emphasizing SDMX-based standardized dissemination. - The e-GDDS facilitates identification of capacity development needs by bringing together STA experts, area department country teams, and data producing agencies to identify data gaps critical for surveillance and set priorities. ### Data ROSC Missions Conducted Since 2011 (Table I.1 summary) - Russia — 2011 — Comprehensive assessment — Significant improvements since 2004 ROSC, including adoption of new Statistical Law and SDDS subscription. - Georgia — 2012 — Comprehensive assessment — Improvements since 2003 ROSC, leading to participation in GDDS and subscription to SDDS. - Mexico — 2013 — Modular assessment (CPI and PPI) — Previous ROSC in 2010 did not cover CPI and PPI. - Paraguay — 2014 — Comprehensive reassessment — Improvements since 2006 ROSC, notably quarterly national accounts, new CPI and PPI series, and data access and advance release calendars. - Uruguay — 2014 — Modular reassessment (National Accounts, CPI, and PPI) — Improvements since 2001 ROSC, leading to SDDS subscription. - Mexico — 2015 — Modular reassessment (National Accounts) — Improvements since 2010 ROSC, including new standard classification system, implementation of 2008 SNA, and base year updating. - Oman — 2015 — Comprehensive reassessment — Improvements since 2005 ROSC, including introduction of PPI, setup of autonomous National Center for Statistics and Information, and interest to graduate to SDDS. - Note: Comprehensive assessments cover all seven statistical areas under the DQAF as applicable; modular assessments cover selected statistical areas. ### Resource and Efficiency Considerations - The number of data ROSCs in recent years has been small, mostly due to resource constraints. Since 2011, only seven data ROSCs have been prepared. - Data ROSCs are perceived by authorities as the most useful among ROSCs but are also among the costliest. - The current data ROSC is being reviewed to produce a successor instrument aimed at improving cost efficiency and effectiveness. ### Concluding Observations and the Way Forward - The 2017 review provides an opportunity to reform the Fund’s data policy transparency framework to focus on data needed for effective policy making (“operational data”) and to facilitate better Fund surveillance. - The current tiered approach differentiating countries by capacity levels will continue, but content may be updated to reflect member countries’ operational needs and guided by the Fund’s forthcoming strategy for data and statistics. - A new data ROSC will be developed to assess data adequacy for surveillance and guide statistical capacity development; it is expected to be partly based on the DQAF and to address the IEO recommendation for closer integration with IMF and UFR program work. - The successor instrument will be, as relevant, based on and complement other standards and diagnostics such as Module I of the Fiscal Transparency Codes and the new monetary and financial policy transparency code. - The new instrument will identify weaknesses in statistical capacity to be addressed through sequenced action plans and supported by statistical capacity development as needed. - Once developed, the new data ROSC will be piloted; lessons from pilots will refine the module and the outcome will be reported in the 11th review of the Fund’s data standards, scheduled for 2019/20. - The 11th review will report on allocation of outputs across the membership, consider further modifications to improve linkages to surveillance and integration with capacity development, and assess accessibility of assessments and recommend improvements if necessary. *Source: https://www.imf.org/-/media/files/publications/pp/2017/pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative.pdf* ### Annex I.1. Data Standards Initiatives ### Annex I.1. Data Standards Initiatives ### Overview - The IMF’s Data Standards Initiatives are designed to promote the dissemination of timely and comprehensive statistics. - The initiatives have nearly universal coverage and are intended to contribute to the formulation of sound macroeconomic policies and the efficient functioning of financial markets. - There are three tiers under the Initiatives. ### SDDS (Special Data Dissemination Standard) - Established in 1996 to guide members that have or that might seek access to international capital markets in providing their economic and financial data to the public. - SDDS identifies four dimensions of data dissemination: - (i) data coverage, periodicity, and timeliness, - (ii) access by the pubic, - (iii) integrity of the disseminated data, and - (iv) quality of the disseminated data (http://dsbb.imf.org/pages/sdds/home.aspx). - As of January 2017, 62 jurisdictions are participants in the SDDS. ### GDDS / e‑GDDS (General Data Dissemination System / enhanced GDDS) - GDDS was created in 1997 to guide countries in providing to the public comprehensive, accessible, timely, and reliable economic, financial, and socio-demographic data. - Beginning from May 2015, an enhanced GDDS (e-GDDS) superseded the GDDS (http://dsbb.imf.org/pages/gdds/home.aspx). - The e-GDDS aligned the data categories more closely with surveillance needs, placing a stronger focus on dissemination of data in addition to metadata. - As of January 2017, 110 countries are participants in the e-GDDS. ### SDDS Plus - Created in 2012 as the third and highest tier of the IMF’s Data Standards Initiatives with a view to helping address data gaps identified during the global financial crisis, including in the context of the G-20 Data Gaps Initiative (DGI). - As of January 2017, 12 countries are participants in the SDDS Plus. *Annex I.1. Data Standards Initiatives — source document excerpt.* ### 4.2 Fiscal ### 4.2 Fiscal ### Revised Fiscal Transparency Code — Key Features - Places greater emphasis on fiscal risk; the 2007 Code devoted relatively little attention to disclosure and management of fiscal risks, whereas the revised Code devotes a full pillar (with 12 principles) to the analysis and management of fiscal risks. These include risks arising from: macroeconomic shocks, guarantees and other contingent liabilities, fiscal pressures from demographic and other long-term trends, budgetary contingencies, changes in asset and liability values, public-private partnerships, the financial sector, natural resources, environmental factors, sub-national governments, and public corporations. - Consolidates transparency principles for natural resource-rich countries into a unified framework (Pillar IV) addressing: legal and fiscal regimes for extraction, allocation of resource rights holdings, reporting by companies engaged in resource extraction activity, and governance and operation of natural resource funds. - Captures recent advances in fiscal management and international standards, including: - Alignment of principles relating to fiscal statistics and presentation/classification of data in fiscal reports with the IMF’s Government Finance Statistics Manual (GFSM) 2014. - Inclusion of a new principle on public participation in budget deliberations. - Notes other relevant international standards referenced: International Public Sector Accounting Standards (IPSAS), International Standards of Supreme Audit Institutions (ISSAI), and OECD Best Practices for Budget Transparency. ### Box II.2 — Highlights of the Revised Fiscal Transparency Code - Emphasizes the consolidated public sector as the broadest unit of fiscal analysis. - Encourages publication of a full set of accounts, including comprehensive balance sheets covering the full range of financial and, eventually, nonfinancial assets and liabilities. - Incorporates new standards for fiscal forecasting, budgeting, and fiscal risks reporting. - Promotes monthly reporting on general government finances, especially for countries with a general government fiscal rule, and the publication of audited year-end financial statements within six months. - Promotes alignment of reporting standards used in budgets, statistics, and accounts with any remaining discrepancies explained in reconciliation tables. - Ensures that external oversight institutions and citizens have the information they need to hold governments to account. ### New Fiscal Transparency Evaluations (FTEs) — Design and Improvements - The revised Code forms the basis of new fiscal transparency evaluations (FTEs), which have replaced fiscal ROSCs as the Fund’s tool for assessing country fiscal transparency practices. - FTEs provide a comprehensive assessment of country practices against differentiated standards set by the revised Code. - Improvements over fiscal ROSCs: - Provide rigorous and quantified analyses of the scale and sources of fiscal vulnerabilities (e.g., measures of coverage of fiscal reports, quality of fiscal forecasts, size of unreported contingent liabilities). - Include an accessible summary of strengths and weaknesses through heat maps to facilitate benchmarking and prioritization of recommendations. - Offer an option to specify a sequenced fiscal transparency action plan to define reform priorities and identify TA follow-up. - Allow modular assessments of individual pillars to target the most pressing transparency issues. - Offer a flexible approach for resource-rich countries: Pillar IV may be included in broader FTEs or conducted as a standalone exercise. ### Some Findings of the Fiscal Transparency Evaluations (as of February 2017) - FTEs conducted: - 21 FTEs have been conducted. - 15 have been published. - Geographic distribution of the 21 FTEs: ten in Europe, four in Africa, five in Latin America, one in Asia, and one in the Middle-East. - Income-level distribution: five in advanced economies, 11 in emerging markets, and five in low-income countries. - Of the six FTEs not yet published, most are being finalized and only one country to date has not consented to publication. - General patterns: - Fiscal transparency levels vary across and within countries and are positively correlated with the level of income. - Across income levels, scope exists to improve practices, particularly in fiscal reporting and fiscal risk analysis and management, which remain institutional weaknesses in many countries. - Fiscal reporting findings: - Fiscal reporting is not as comprehensive as expected; many countries have only basic ratings in coverage of fiscal activity. - Common gaps: - Liabilities of large public corporations sometimes not included in published fiscal reports. - Tax expenditures frequently absent or incomplete, complicating assessment of revenue foregone through exemptions and other reliefs. - Systematic reporting or explanation of revisions to historical fiscal data is often missing or limited. - Significant shares of government assets and liabilities are often not disclosed; examples include exclusion of large oil and gas assets and public pension liabilities from government balance sheets. - Some countries produce little or no balance sheet information in fiscal accounts. - Fiscal forecasting and budgeting findings: - Mixed practices: stronger institutional frameworks and processes (e.g., comprehensive fiscal legislation, agencies for independent evaluation of fiscal policy), especially in EU member States. - Weaknesses in transparency of public investment projects (lack of full lifetime cost information, weaknesses in appraisal/selection/implementation), public participation in the budget, and allowing adequate time for scrutiny of the budget before approval. - Fiscal risk analysis and management findings: - Disclosure of contingent liabilities and other fiscal risks is improving but remains incomplete. - Of the 15 countries with published FTEs, only two produced a comprehensive fiscal risk statement at end-2016. - Few countries analyze and disclose implicit contingent liabilities to the financial sector. - Most countries have only made basic-level progress in oversight of risks from PPPs, public corporations, and natural resources. - Few countries conduct significant analysis of long-term fiscal sustainability despite concerns about ageing populations and climate change. - FTE scores against the fiscal risk pillar have been the lowest ranking among pillars. - Natural resource pillar (Pillar IV) early experience: - Pilot assessments in three countries demonstrate relevance and usefulness of the pillar across varying degrees of resource development and dependence. - Pilots showed the Code’s flexibility to adapt to different categories of resource-rich countries; a pilot in the UK provided calibration inputs. ### Linkages with Fund Activities and with Other Agencies - FTEs inform Fund surveillance by exposing weaknesses in institutional public finance management frameworks; FTE findings and recommendations have fed into area departments’ policy notes in the context of Article IV or other surveillance-related missions. - Direct linkages to program design: - PRGT lending program in one member included a structural benchmark on producing a fiscal risk statement in its budget document as a direct result of an FTE finding. - In another member, structural benchmarks to improve coverage of fiscal reports, quantify sub-national assets and liabilities, and improve debt management capacity were informed by FTE findings. - In one case, an FTE was directly informed by TA during a program to assist the government in managing payment arrears, developing budget capacity, and improving controls over sub-national finances. - Clear linkage between FTEs and demand for Fund TA: - Demand for TA from FAD to implement FTE recommendations has been noticeable. - Examples of TA requested/provided following FTEs include: development of medium-term budget frameworks, credible fiscal rules, enhancement of independent evaluation of fiscal policy, government accounting, fiscal risk management, development of fiscal risk statements, budget preparation, and strengthening of financial oversight of SOEs. - FTE indicators are being increasingly used to monitor progress in reforms supported through Fund TA; several indicators drawn from the Fiscal Transparency Code and FTE are included in the Fund’s Results Based Management (RBM) framework. ### Country Examples — Selected Issues Identified by FTEs and Areas Supported by Fund TA - Albania - Issues identified: Enhancing transparency and management of public investment projects, including PPPs. - Areas supported by Fund TA: Medium-term budget framework, fiscal rules, and independent evaluation of fiscal policy. - Costa Rica - Issues identified: Managing fiscal risks from contingent liabilities arising from off-budget investments, and strengthening the financial position of the pension system. - Areas supported by Fund TA: Fiscal risk management, government accounting, and medium-term expenditure framework. - Guatemala - Issues identified: Improving fiscal reporting, identifying and monitoring fiscal risks, and improving control and audit of fiscal spending. - Areas supported by Fund TA: Fiscal risk management. - Kenya - Issues identified: Enhanced fiscal reporting and management of fiscal risks. - Areas supported by Fund TA: Intergovernmental fiscal relations. - Mozambique - Issues identified: Fiscal risks disclosure, financial oversight of public enterprises, and fiscal rules related to revenue from natural resources. - Areas supported by Fund TA: Fiscal risk management, fiscal risk statement, and fiscal reporting. - Peru - Issues identified: Multiannual commitments on investment projects (SIP 2016), contingent liabilities, sustainability of pensions, and assignment of natural resource revenues through more transparent and equitable transfer mechanisms. - Areas supported by Fund TA: Multiannual macroeconomic and budget frameworks, credibility of the annual budget, and medium-term budget framework. - Philippines - Issues identified: Strengthening medium-term fiscal framework, and managing fiscal risks arising from PPPs. - Areas supported by Fund TA: Fiscal risk management (especially related to PPPs), and medium-term budget framework. - Portugal - Issues identified: Implementation of the Budget Framework Law. - Areas supported by Fund TA: Fiscal reporting and accounting, and revisions to the Budget Framework Law. - Romania - Issues identified: Integration of public investment planning into the budget process, and fiscal coordination across different levels of government. - Areas supported by Fund TA: Budget management, and fiscal reporting framework. - Tunisia - Issues identified: Improving the sustainability of the pension system, financial monitoring/performance contracts for large state owned enterprises (SOEs), and organic budget law. - Areas supported by Fund TA: Fiscal risks disclosure and management, preparation of a fiscal risk statement, and strengthening financial oversight of SOEs. *Source: pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 4.2 Fiscal* ### 22. There has been a sustained effort to ensure coordination and complementarity ### pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 22. There has been a sustained effort to ensure coordination and complementarity ### Coordination and complementarity with other agencies - Fund staff have worked closely with other organizations, in particular the Global Initiative for Fiscal Transparency (GIFT), International Budget Partnership (IBP), OECD and the World Bank, to ensure that the revised fiscal transparency code helps to anchor their work and better complements other fiscal standards and evaluation tools, e.g., the Public Expenditure and Financial Accountability (PEFA) framework and the Open Budget Index. - At the request of the G20 Anti-Corruption Working Group, Fund staff contributed to the OECD and GIFT’s work, and at the request of the G7 helped develop a “Practical Toolkit on Budget Transparency”, which provides a gateway to main diagnostic tools on budget and fiscal transparency including the FTE. ### Feedback from the Survey - A survey questionnaire on the revised Code and FTE was sent to the authorities of 20 countries who have conducted FTEs of which 11 countries responded to the survey. - Survey findings and perceptions: - The majority of respondents value the revamped Code and FTE. - Authorities believe the new Code and FTE have been instrumental in identifying relative strengths and weaknesses in ensuring transparency of public finances and prioritizing reform agendas. - Key themes from survey findings: - The fiscal risks pillar of the revised Code is regarded as the most important of the four pillars. - The fiscal forecasting and budgeting pillar was ranked as the second-most important pillar. - The fiscal reporting pillar was ranked in third place. - The Resource Revenue Pillar was ranked as the least relevant of the four, reflecting its recency and that many surveyed countries are not resource rich and did not conduct a Pillar IV module. - About 90 percent of countries agreed that the graduated approach (basic, good, advanced) was, to a great or large extent, valuable in assessing scores against comparator countries and setting milestones as they implement reforms. - All countries agreed, to a great or large extent, that the revised Code captured the main elements of fiscal policy transparency. - FTEs were viewed as extremely useful in: - Identifying key fiscal institutional strengths and weaknesses. - Shaping reform programs. - Prioritizing technical assistance needs. - All respondents believe, at least to a certain extent, that FTEs provide new information that was not previously available to policy makers. - Over 80 percent of respondents believed that, at least to some extent, the FTE could usefully contribute to Fund surveillance. - Most respondents (80 percent) believe that repeat FTEs should be considered to help assess progress in meeting Code standards. - On average, respondents believed that a three-year timeframe for a repeat assessment would be appropriate. ### Concluding observations and the way forward - Next steps in the Fund’s fiscal transparency initiative: - Completing the Code’s fourth pillar on natural resource transparency and submitting it for Board approval (Q3 FY 2018). The final draft of Pillar IV is expected to be submitted to the Board in Q2/Q3 FY 2018. - Finalizing a two-volume Fiscal Transparency Manual (Q4 FY 2018): - Volume I will cover Pillars I, II, and III. - Volume II will focus on Pillar IV and integrate the previously separate Guide on Resource Revenue Transparency. - The Manual will set out why each principle in the Code is important, describe recent trends in implementation, note relevant international standards, and cite selected country examples for each level of practice. - The Manual aims to inform: country authorities; Fund staff assigned to undertake FTEs and country surveillance work in the fiscal area; civil society organizations engaged in promoting fiscal transparency; and academia. - Carrying out additional FTEs on the basis of the revised Code, at the request of countries (ongoing). The current FAD resource allocation plan provides for five FTEs per year. A further scaling up is not contemplated at this stage and would require additional resources. - Developing and maintaining a database of FTE findings, including selected fiscal transparency indicators, for countries (ongoing) to inform future research and benchmarking. - Role in anti-corruption and periodic review: - Fiscal transparency is recognized as a powerful tool in the fight against corruption. - The FT Code and FTEs, while not a complete corruption diagnostic, help target improvements in disclosure of fiscal information and contribute to tackling corruption and improving public financial management. - The Code and FTE will be periodically reviewed and updated as necessary; the next review could be undertaken in FY2020/FY2021 to take stock of country feedback and identify scope for further improvement or innovation. - The review would consider: practical experience applying the revised Code; progress in implementing fiscal transparency standards; the Code’s relevance for fiscal policy makers; work of other stakeholders and standard setters; and the relevance of FTE as a diagnostic tool. It will report on allocation of outputs across the membership and identify scope for modifying assessments to improve linkages to surveillance and integration with capacity development efforts, and assess accessibility of assessments. - Leveraging FTE for capacity building and surveillance: - The FTE framework will be further leveraged to support FAD’s capacity building efforts and prioritization and delivery of technical assistance. - Several FTE indicators will be included in the Fund’s RBM framework. - Countries and the international donor community will be encouraged to use the FTE as an overarching diagnostic tool to identify fiscal vulnerabilities and set reform priorities that could be supported through TA. - Opportunities for closer links between FTE and Fund surveillance will be explored; FTE results could be used more systematically to guide policy dialogue and area department country teams could encourage countries to undertake FTEs to identify key fiscal risks and vulnerabilities. - Outreach, coverage, and engagement: - Enhanced outreach by FAD and RTACs to foster greater understanding of the revised Code’s principles and practices is recommended, targeting national oversight and accountability institutions (parliaments/legislatures, supreme audit institutions (SAIs), parliamentary budget offices, national statistics agencies, and independent fiscal agencies). - Relevant TA missions and regional seminars/workshops, including those organized by RTACs, would provide useful fora for outreach and raise awareness for effective monitoring of compliance with fiscal transparency standards. - Resources permitting, efforts will be made to increase diversity of FTE coverage across the Fund membership; uptake has been difficult in some regions. - FAD will consider expanding institutional relationships and engagement with other international standard setters and professional bodies on fiscal transparency (for example, the IPSASB). - FAD staff will continue active engagement in multi-stakeholder initiatives and civil society groups on fiscal transparency (for example, the GIFT and IBP). - The aim of such engagement is to promote alignment of international reporting standards; identify and address gaps in the normative architecture for fiscal transparency; review implementation progress; and identify priorities for technical assistance and opportunities for mutual assistance. *STANDARDS AND CODES—POLICY AREA BACKGROUND PAPER, INTERNATIONAL MONETARY FUND* ### 8. The 2012 BCP strengthen the financial stability focus of bank regulation and ### 8. The 2012 BCP strengthen the financial stability focus of bank regulation and supervision, which is significant for the Fund’s mandate. ### Changes to the BCP and supervisory focus - The updated BCP includes a greater focus on risk-based supervision and the capacity for early intervention and timely supervisory actions. - Supervisors are required to assess banks in terms of: - their risks and the efficacy of risk management, and - the threats they may pose to banking and the financial systems. - Supervisors must consider how the macroeconomic environment, business trends, and the build-up and concentration of risk inside and outside the banking sector may affect risks faced by individual banks. - The BCP sets out the powers supervisors should have to address safety and soundness concerns, with a heightened focus on the actual use of these powers in a forward-looking approach through early intervention. ### Role and engagement with Standard Setting Bodies (SSBs) - Fund and World Bank staff: - participate on main committees and subcommittees for developing and implementing financial sector standards, - were involved in development of the 2010 revised IOSCO Principles, the 2011 revised ICP, the 2011 FSB-KA, the 2012 revised BCP, the 2012 revised PFMI, the 2014 revised DICP, and related assessment methodologies/handbook. - SSB activity and monitoring: - SSBs have increased implementation monitoring and peer reviews (examples: FSB peer reviews, BCBS Regulatory Consistency Assessment Program on Basel III). - Enhanced self-monitoring by SSBs is complementary to, not a duplication of, the Fund’s independent assessments. - FSB increased country peer review cycle from five years to eight years to address assessment fatigue. ### Changes across standards and scope of revisions - Table III.1. (changes in principles and sub-principles in numbers) highlights: - BCP: Principles 25 -> 29; Sub-Principles 196 -> 231 - ICP: Principles 28 -> 26; Sub-Principles not applicable - IOSCO: Principles 30 -> 38; Sub-Principles not applicable - IADI: Principles 18 -> 16; Sub-Principles 98 - Key Attributes: Principles not applicable -> 12; Sub-Principles not applicable -> 64 - Insurance Core Principles (ICP): - 2011 ICP update added an enhanced risk-based solvency regime and principles on macro-prudential surveillance and cross-border crisis management. - Scope expanded to assess insurers at legal entity and group level with more rigorous group-wide regulatory requirements. - Of the 26 principles, 8 principles have been partially amended since 2011. - Frequent revisions pose challenges to country authorities and assessment teams; comparability across assessments has become problematic. - IOSCO Principles: - Revised in 2010; assessment methodology published in 2011. - Enhanced role for securities regulators in managing systemic risk and expanded scope (including hedge funds/managers, credit rating agencies, strengthened auditor oversight). - Assessment methodology updated recently to incorporate policies developed in past six years, particularly CIS and derivatives markets. - Principles for Financial Market Infrastructures (PFMI): - New and revised standards published in April 2012, replacing three existing sets with PFMI to reflect lessons from the GFC and G20/FSB recommendations. - PFMI strengthens standards in risk management (credit and liquidity risk), recovery and orderly winding-down, and interdependencies/interoperability. - Deposit Insurance Core Principles (DICP) and Key Attributes (KA): - "Crisis Resolution and Deposit Insurance" added as a policy area in 2011. - FSB adopted Key Attributes of Effective Resolution Regimes in 2011; KA revised in 2014. - DICP revised in 2014 to enhance guidance on governance, coverage, funding, and payouts. - KA assessment methodology is modular by sector; banking sector module finalized in October 2016. - Assessment methodology for insurance tentatively to be completed by end-2017, subject to pilot work; FMIs expected to take longer. ### Use of financial sector standards in Fund and Bank work - Financial sector standards are used across FSAPs, TA, Article IV surveillance, and Fund and Bank supported programs. - Detailed Assessment Reports (DARs): - DARs typically produced in FSAPs; decision to undertake a DAR agreed between Fund/Bank staff and national authorities. - BCP DARs are commonly done; ICP, IOSCO, and PFMI DARs are done where the sub-sectors are critical to systemic risks. - DICP DARs conducted where deposit insurance strengthening is a high priority. - Examples of standards use in country work: - BCP used to substantiate FSAP recommendations and underpin TA; examples include Ukraine, Iceland, Ireland, Myanmar, Moldova, Sao Tome and Principe. - Bank examples in loan and TA operations: Mozambique, Papua New Guinea, Colombia. - Since 2012, seven full DICP DARs have been conducted and six Technical Notes produced on deposit insurance. - Three pilot assessments/reviews of the KA were carried out—two jointly with the FSB and World Bank. - Flexible approach: - Flexibility in the Fund’s use of standards is beneficial and appropriate when FSAPs focus on jurisdiction-specific risks or high-priority topics. - Technical notes: - Technical notes on supervision, crisis management and resolution, and financial market infrastructure are frequently produced and draw on standards. - Since 2012, financial sector oversight has been covered via 122 DARs and 54 TNs. ### Resource implications and assessment workload - Resource intensity of full, graded DARs has increased for both member countries and assessors due to enhanced standards and greater implementation focus. - Examples of increased resource requirements: - The BCP Principles increased from 25 to 29; the BCP Principles document grew from 48 pages to 85 pages. - The number of essential criteria that assessors review expanded from 196 to 231. - Before the GFC, a BCP DAR was around 60 pages; now, even in mid-sized countries, a full graded assessment is typically more than 200 hundred pages. - Self-assessment documents prepared by authorities increased from around 50 pages historically to on average 200 pages, and for large financial systems run into several hundreds of pages. - Figure III.1 note: - Days spent on mission by assessors have increased (figure provided for illustrative purposes and limited sample); general conclusions should not be drawn from this chart alone. *Source: STANDARDS AND CODES—POLICY AREA BACKGROUND PAPER, INTERNATIONAL MONETARY FUND (excerpt).* ### 20. Technical notes allow staff to delve more deeply into issues where important ### 20. Technical notes allow staff to delve more deeply into issues where important vulnerabilities exist. ### Role and use of Technical Notes (TNs) versus Detailed Assessment Reports (DARs) - Technical notes (TNs) are used for focused, deeper coverage where specific areas of systemic risk warrant attention, even when overall compliance has been established based on earlier DARs. - Examples: - A recent FSAP for one member evaluated conglomerate supervision, resulting in a TN. - Another member’s recent FSAP included a deep-dive on oversight of asset management companies drawing on the IOSCO standard but not leading to another full, graded DAR. - Trends: - “Although the use of DARs has steadily decreased since 2011 to pre-crisis levels (the peak in 2011 was due to strong demand for reassessment of frameworks after the GFC and has abated since), the use of TNs has increased in recent years.” - Distribution by standard (Number of DARs Completed 2005-2016): - BCP: 49% - ICP: 20% - IOSCO: 17% - PFMI: 14% - Distribution by standard (Number of TNs Completed 2005-2016): - BCP: 26% - ICP: 38% - IOSCO: 16% - PFMI: 20% ### Use in nascent or developing financial systems - In nascent or developing systems and oversight functions, a focused approach through TNs is often more suitable to: - Discuss priority areas for reform. - Suggest plans for capacity development. - Recent examples include TNs on banking supervision in FSAPs for one low income member and another emerging market member. - In all cases, the work draws heavily on the financial sector standards as internationally agreed benchmarks, but focuses on a subset of relevant standards. ### Technical assistance (TA), assisted self-assessments, and capacity building - Assisted self-assessments of financial sector standards are becoming a useful platform for developing TA action plans. - Standards offer essential guidance in particularly technical areas of financial oversight, the largest individual component of the extensive TA provided on financial sector issues. - Examples of TA areas include: - Capital and liquidity for banks - Governance of banks - Regulation of collective investment schemes - Legal powers and the independence of supervisors - Quantitative TA details: - “TA on regulation and supervision forms around 40 percent of the TA on financial sector issues.” - “The Fund employs 18 full-time long term experts in these areas on the ground, across the globe in regional technical assistance centers as well as some member jurisdictions.” ### Standards assessments as verifiable indicators and platforms for donor reporting - Standard assessments and self-assessments are increasingly used as sources of verifiable indicators for reporting progress to external donors. - Many recent requests have been for technical assistance in the form of a full detailed BCP to serve as the basis for a medium or long term action plan for supervisory agencies. - For other financial sector standards (such as PFMI, KA, and DICP), regional workshops are often used to build capacity at central banks and other implementing authorities. - Fund staff benefit from the credibility of agreed international financial sector standards in both diagnosis and recommendation generation. ### Interaction with FSAP stress testing and risk analysis - Financial sector standard assessments inform bank and insurance stress testing done in FSAPs. - The risks addressed in the BCP or the ICP are closely connected to the risk analysis in stress tests. - Combining observations from standard assessments and stress tests helps FSAP teams form a holistic view of the extent of risks in a jurisdiction. - Example: Non-compliance with the BCP on credit risk (CP 17) can improve risk identification and vulnerability analysis used in stress testing; both exercises inform each other and enhance financial stability risk analysis in FSAPs. ### Survey feedback and streamlining - Survey results (2014 IMF FSAP Review context): - About 75 percent of respondents either strongly agreed or agreed that standards assessments adequately identify the main risks to the financial system, provide robust evaluations of the regulatory and supervisory framework, and are well aligned with other parts of the FSAP. - More than 50 percent of respondents saw room for streamlining standards assessments and focusing on those principles most relevant to the country. ### Cross-country experience with compliance (Box III.3) - Basel Core Principles (BCP): - Common strengths: cooperation and collaboration between domestic and foreign authorities; high degree of compliance in some areas. - Key weaknesses: inadequate supervisory independence due to weak governance and institutional arrangements and insufficient legal safeguards; exposures to related parties (supervisors failing to set appropriate definitions and upper limits or failing to obtain necessary information such as ultimate beneficial ownership); country and transfer risk remains challenging in many jurisdictions despite high compliance in some risk categories like credit and liquidity risk. - Insurance Core Principles (ICP): - Compliance with the ICP has improved over time. - Material shortcomings persist in key prudential requirements such as group supervision, capital adequacy, disclosure, and crisis management. - Compliance is generally stronger in advanced countries, but home supervisors of large and globally active insurers have been found materially non-compliant against key prudential requirements. - Emerging market supervisors face greater challenges, with concerns about oversight of rapidly growing markets. - Common concerns: lack of supervisory independence, resource constraints, and difficulty attracting and retaining staff with specialized skills such as actuarial experience. *Source: pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 20. Technical notes allow staff to delve more deeply into issues where important vulnerabilities exist.* ### Box 3. Cross-Country Experience with Compliance in Standards and Codes (continued) ### Box 3. Cross-Country Experience with Compliance in Standards and Codes (continued) ### International Organization of Securities Commissions (IOSCO) Principles - Overall assessment: the level of implementation of the IOSCO Principles is reasonably good when assessing the content of regulatory requirements and powers available to the regulator. - Notable gaps identified in both emerging and advanced economies: - supervisory independence - adequacy of resources - effectiveness of supervisory and enforcement programs - Low income countries fare significantly worse in the implementation of many of the Principles when compared to high and upper middle income jurisdictions. - IOSCO Compliance — Average across 19 countries (2012-2016) - Chart categories shown in source (labels preserved): 0% 20% 40% 60% 80% 100% - Specific chart items (as presented): - Inspection - Powers - Info Sharing Mechanism - Independence - Resources - Supervisory & Enforcement Effectiveness - CIS regulation and supervision - Intermediary regulation and supervision - Implementation status legend (as presented): Implemented / Broadly Implemented / Partly and Not Implemented ### Principles for Financial Market Infrastructures (PFMI) - Findings: - Broad compliance with the PFMI. - Weaker compliance often found in newer areas of the PFMI: - recovery planning of FMIs - management of interdependencies - adoption of a holistic approach to risk management - Supervision and oversight of FMIs: FSAP findings indicate authorities could improve cooperation and coordination with foreign authorities in supervision and crisis management of FMIs operating internationally. - Most FSAP reports recommend authorities increase staff resources dedicated to FMI supervision and oversight. ### Survey Results from the 2014 FSAP Review (Figure III.3) - Country authorities regard standards assessments favorably while acknowledging possible improvements. - Assessment of Selected Principles from an International Standard — response breakdowns (as presented in chart): - The assessments were adequately guided by concerns about the main risks faced by the financial system: - Strongly Agree: 9% - Agree: 68% - Neutral: 15% - Disagree: 7% - Strongly Disagree: 1% (implicitly small; chart shows distribution—preserve shown values) - Don't know: 0% - The assessments were sufficient to provide a robust evaluation of the regulatory and supervisory framework: - Strongly Agree: 17% - Agree: 59% - Neutral: 13% - Disagree: 8% - Strongly Disagree: 3% (chart shows small values) - Don't know: 0% - The assessments were well integrated with other parts of the FSAP: - Strongly Agree: 13% - Agree: 60% - Neutral: 23% - Disagree: 6% - Strongly Disagree: 2% (small) - Don't know: 0% - The assessment was tailored to country-specific circumstances: - Strongly Agree: 7% - Agree: 57% - Neutral: 24% - Disagree: 8% - Strongly Disagree: 3% (small) - Don't know: 0% - Preferred option for assessments of supervisory principles in future FSAPs (survey results as presented): - Streamline the standards assessments to focus on those principles of most relevance to the country: 50% - Continue with assessments of all principles for each ROSC: 33% - Continue with assessments of all principles but focus on a reduced number of ROSCs: 11% - Streamline the standards assessments to focus on a subset of principles applied to all countries: 6% ### Concluding Observations on Financial Sector Standards - Financial sector standards: - Integral to Fund’s financial stability surveillance and technical assistance. - Used extensively to evaluate and guide enhancements to financial sector institutional and oversight frameworks. - Developed by Standard Setting Bodies (SSBs) and enjoy strong support among country authorities. - Post-Global Financial Crisis: - Standards have been enhanced in coverage and depth; technical complexity has increased. - Implementation and assessment now require greater specialized skills, resources, and time. - Fund staff usage: - Continue full, detailed assessments and focused analytical reviews. - Focused reviews allow deeper analysis of selected elements and add flexibility to prioritize risks. - Forward actions: - Staff will continue to keep standards up to date via cooperation with SSBs. - Staff will continue to promote implementation of financial sector standards. - Develop more formalized ways to integrate standards outcomes with Fund analysis of risks and vulnerabilities. - Staff plans to assess the use of financial sector standards in the context of the FSAP Review planned for 2019: - Review will report on allocation of outputs across the membership. - Will consider whether modifications to standards assessments could improve linkages to surveillance and capacity development. - Will assess accessibility of standards assessments and make recommendations if necessary. --- ### IV. Anti‑Money Laundering and Countering the Financing of Terrorism (AML/CFT) — Background - Purpose of the note: - Background reference to the 2017 joint review of the standards and codes initiative. - Focuses on the AML/CFT international standard and associated assessment methodology. - Provides background on AML/CFT and the Fund’s role, unique burden sharing arrangement, changes since 2011, Fund work streams addressing AML/CFT, preliminary findings of the current assessment methodology, and issues for the next review of the Fund’s AML/CFT strategy. - Nature of the crimes: - Money laundering and terrorist financing are both financial crimes with economic effects that can threaten financial sector integrity and stability. - Effective AML/CFT regimes mitigate factors that facilitate financial abuse. - Fund engagement: - The Fund expanded AML work in 2000 and CFT in 2001 and provides advice across multiple work streams. - The Executive Board reviewed and reiterated AML/CFT strategic direction, most recently in March 2014. - In May 2014 the Fund started the second five-year phase of a donor-supported trust fund complementing existing accounts financing AML/CFT capacity development. ### The FATF and the AML/CFT Standard - FATF overview: - Inter-governmental body established in 1989 by the Ministers of the G7. - Objectives: set standards on AML/CFT and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing, and related threats. - FATF currently comprises 37 members. - The FATF Recommendations (the AML/CFT standard) first issued in 1990 and revised in 1996, 2001, 2003, and 2012; intended for universal application and cover a range of authorities and private sector professionals. - Key elements include prevention of ML/TF, inclusion of measures to combat financing of proliferation of weapons of mass destruction, and ensuring authorities possess necessary tools. - FATF monitoring: - Membership commitment to undergo regular assessments against the Recommendations. - FATF monitors progress via mutual evaluations and follow-up processes, reviews trends and typologies, and promotes global adoption and implementation (notably through the International Cooperation Review Group (ICRG)). ### The FATF Network and Coverage - FATF-style regional bodies (FSRBs): - Nine FSRBs established: APG; CFATF; MONEYVAL; EAG; ESAAMLG; GAFILAT; GIABA; MENAFATF; GABAC. - Coverage: - Together FATF and FSRBs membership includes some 198 countries. - Vast majority of the Fund’s membership committed to implementing the FATF standard and undergoing regular mutual evaluations. ### A Unique Burden Sharing Arrangement - Assessor bodies: - Total number of AML/CFT assessor bodies is 12 (FATF, 9 FSRBs, the Fund, and the World Bank). - All assess on basis of the same assessment methodology. - Arrangements to avoid duplication: - Assessments by FATF/FSRBs may generate IMF AML/CFT ROSCs. - Assessments by Fund/World Bank may be adopted as FATF/FSRB mutual evaluations. - AML/CFT ROSCs consist of the executive summary of the detailed assessment report or mutual evaluation report, supplemented by authorities’ response where relevant. - ROSCs produced by other assessor bodies are subject to a pro forma review by Fund staff. - Burden sharing agreements in place since July 2002 (start of Fund’s 12-month pilot AML/CFT assessments). - Fund assessment capacity and volumes: - Since 2014, Fund has mandate to conduct two to three AML/CFT assessments per year; in practice Fund staff conducts one to two assessments per year due to resource constraints. - FATF and FSRBs conduct a total of 17 to 20 mutual evaluations per year; anticipated increase up to 25 evaluations per year. - All evaluations may result in an IMF AML/CFT ROSC if the assessed country requests it. - Challenges: - Multiplicity of assessor bodies raised issues of quality and consistency and coordination challenges due to differing planning horizons and priorities. - March 2014: mandatory link between FSAPs and comprehensive AML/CFT assessments replaced by a more flexible approach allowing Fund staff to derive key findings from other available sources. ### Changes Since 2011 - Important changes in 2012 and 2013 in content and modalities of AML/CFT assessments. #### The 2012 FATF Recommendations - 2012 review drivers and changes: - Ensured standard remained up-to-date and addressed relevant threats. - Introduced enhanced focus on the risk-based approach (risk-based application of AML/CFT measures). - Strengthened parts of previous standard: - transparency of legal persons and arrangements - inclusion of tax crimes as predicate offenses to ML - strong anti-corruption tools - Included measures to combat financing of proliferation of weapons of mass destruction. #### The 2013 Methodology for Assessing Compliance and Effectiveness - Shift in focus: - Introduced focus on effectiveness of AML/CFT measures, not just technical compliance. - Prior rounds focused on laws and compliance; 2013 added systematic assessment of effectiveness to establish how well countries achieve defined objectives. - Two inter-linked components of the 2013 methodology: - Technical compliance component: - Addresses specific requirements of the FATF Recommendations relating to legal and institutional framework and powers and procedures of competent authorities. - Ratings: Compliant / Largely Compliant / Partially Compliant / Non-compliant (technical). - Effectiveness component: - Addresses extent to which a country achieves a defined set of 11 outcomes central to a robust AML/CFT system. - Ratings: High level of effectiveness / Substantial / Moderate / Low (level of effectiveness). - Now the main focus of AML/CFT assessments. - Implications: - Assessing effectiveness requires deeper understanding of country-specific ML/TF risks and context. - Effectiveness assessment entails greater subjectivity than technical compliance assessment. - Assessments are resource intensive given combined technical and effectiveness components. - FATF members recently decided to increase minimum contribution of assessors; similar discussions may be needed in FSRBs. ### Quality and Consistency Review - Past concerns: - IMF Executive Board and FATF raised concerns about varying quality of assessment reports, especially some FSRB reports. - FATF responses (under 2013 methodology): - Strengthened review mechanisms via universal procedures requiring: - mandatory involvement of external reviewers during the assessment (including at least one reviewer from another assessor body) - ex-post Global Quality and Consistency Review immediately following adoption of a mutual evaluation report to raise major quality/consistency issues - Fund participation: - Fund staff actively participates in review mechanisms, as resources permit. - Fund draft assessment reports are reviewed by external reviewers and by delegations to FATF or relevant FSRB prior to discussion and adoption. ### 2014 Review of the Fund’s AML/CFT Strategy - Board actions in March 2014: - Endorsed the revised FATF AML/CFT standard and assessment methodology. - Encouraged staff to continue integrating financial integrity issues into surveillance and Fund-supported programs. - Decided AML/CFT issues should continue to be addressed in all FSAPs on a more flexible basis. - Agreed reports adopted by FATF and FSRBs would continue to be converted into AML/CFT ROSCs following a pro forma review by staff. - Directors reaffirmed usefulness of AML/CFT ROSCs and membership interest in issuance of ROSCs in addition to publication of assessment reports. ### AML/CFT in Other Work Streams - Assessments: - Fund staff conducts one to two AML/CFT assessments per year, focusing on jurisdictions with systemically important financial sectors or unique ML/TF risks. - Through May 2017, Fund staff completed assessments under the new methodology of Italy and Canada, and is in process for Mexico and Colombia. - Upcoming Fund-led assessments include China (2018) and Iran (2018/2019). - Fund policies allow targeted AML/CFT ROSCs based on FATF/FSRB fifth year follow-up assessments; first follow-ups planned in 2019. - FSAPs: - Every FSAP must include an update on AML/CFT. - Since April 2014, depth varies: comprehensive or targeted assessments preferred; otherwise staff may derive key findings from other available material. - No longer necessary for every FSAP to be accompanied by a comprehensive AML/CFT assessment. - Surveillance (Article IV consultations): - Staff addresses financial integrity issues on a mandatory basis when they threaten balance of payments, domestic stability, or the international monetary system. - AML/CFT policy recommendations have been provided in recent Article IV discussions. - Where not mandatory, staff and member may agree to voluntary discussion (examples: 2016 Article IVs with United States and United Kingdom on correspondent banking and transparency of legal persons and arrangements). - Fund-Supported Programs: - AML/CFT issues addressed when critical to financing assurances or program objectives. - AML/CFT measures included as conditionality in recent programs on corruption, terrorism financing, and AML/CFT compliance. - Capacity Development (CD): - Fund provides technical assistance and training on AML/CFT, largely donor-funded via the AML/CFT Topical Trust Fund (TTF). - New five-year phase of TTF started May 2014; donors (France, Japan, Luxembourg, the Netherlands, Norway, Qatar, Saudi Arabia, Switzerland, and the UK) pledged more than $27 million to support this second phase. - TTF complements existing accounts, bringing number of countries assisted each year to over 30 and totaling over $6.5 million annually in direct technical assistance and training. - Recently completed projects include enhancement of financial intelligence and risk-based supervisory capacity in Afghanistan (2013–2017), Nepal (2014–2017), and Mongolia (2014–2017). - Policy work: - Staff addresses AML/CFT issues relevant to key topics (examples cited: withdrawal of correspondent banking relationships, Islamic financing, virtual currencies). ### Concluding Observations and the Way Forward (AML/CFT) - Next review: - Next review of the AML/CFT program expected in 2018; staff will report on AML/CFT program across all work streams including assessments. - Review will report on allocation of outputs across membership, consider modifications to standards assessments to improve linkages to surveillance and capacity development, and assess accessibility of standards assessments. - Review will delve into experience with the 2013 methodology and report on number of assessments by Fund, Bank, and FATF network, main challenges faced by countries and assessors, and resource implications of current methodology and enhanced review mechanisms. - Preliminary conclusions (as of early rounds): - The focus on effectiveness is challenging but necessary; it ensures assessments focus on results in protecting financial systems and preventing ML/TF. - New standard introduces challenges regarding transparency of legal persons and arrangements. - AML/CFT assessments are more useful but more resource intensive due to effectiveness component requiring in-depth understanding of ML/TF risks and evidence of mitigation results. - Assessed countries must provide appropriate information; assessors must use expert judgement considering specific risks and context. - Burden sharing among assessors enables the Fund to leverage assessment resources and avoid duplication (FATF/FSRB reports may result in AML/CFT ROSCs; Fund-led assessments adopted by FATF/FSRBs). - Strengthened review mechanisms appear to work, generating discussion prior to adoption; in two cases publication of an FSRB report was delayed to address significant quality and consistency issues raised in ex-post review. - AML/CFT assessment reports (Fund-led or by other assessors) continue to play an important role in Fund work: FSAPs, surveillance, programs, and CD. - Experience with a modular approach is forthcoming; FATF guidance suggests a comprehensive assessment using the new methodology should precede targeted approaches. Staff expect the second round of assessments to start in 2020. *Source: STANDARDS AND CODES—POLICY AREA BACKGROUND PAPER, INTERNATIONAL MONETARY FUND* ### Introduction ### pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - Introduction ### Overview - Describes the World Bank’s Accounting and Auditing (A&A) ROSC program led by teams from the Governance Global Practice within the Equitable Growth, Finance, and Institutions Vice-Presidency (EFI) of the World Bank Group. - Reviews: standards used in the assessment program; key changes following the global financial crisis (GFC); recent developments including the overhaul of the assessment methodology; and results of a survey of authorities. ### Standards and Scope of the A&A ROSC Program - 2016 Assessment Methodology Module A benchmarks: International Financial Reporting Standards (IFRS) and IFRS for SMEs. - 2016 Assessment Methodology Module B benchmarks: Code of Ethics for Professional Accountants (IESBA), Education Standards for Professional Accountants (IAESB), and Core Principles for Independent Audit Regulators (IFIAR). - The A&A program initially focused on public interest entities (PIE) and benchmarked against IFRS and ISA; subsequently widened to include small and medium enterprises (SMEs) and state-owned enterprises (SOEs). - As of September 2015: - Number of jurisdictions that require listed companies and financial institutions to prepare IFRS-based financial statements: 116. - Number of jurisdictions that permit the use of IFRS: 14. - As of December 2016: - IFRS for SMEs was required or permitted in 84 jurisdictions. - Rationale: High quality corporate financial reporting and robust A&A frameworks underpin corporate governance, financial market stability, private sector development, cross-border market integration, and risk management. ### Changes Following the Global Financial Crisis (GFC) - GFC highlighted shortcomings with fair value accounting and its application; example noted under U.S. accounting standards relating to subprime mortgage market reporting. - Responses by standard setters: - IASB: improvements to accounting and reporting on financial instruments, off-balance sheet items, insurance contracts; revised standards on fair-value measurement, financial instruments, consolidated financial statements, revenue recognition, and leases; revamped international consultation process. - Revised accounting standard for SMEs effective in 2017 (simplified disclosures relative to IFRS). - IAASB: revised auditor reporting standards and introduced new standard on communicating key audit matters (KAM) for PIEs. ### A&A Assessments — Objectives and Methodology - Primary objectives: - Analyze robustness of a country’s legal and institutional framework in accounting and auditing, including differences between national and international standards, implementation/enforcement quality, and enabling environment (education, audit quality assurance). - Assist countries in developing and implementing reform plans based on ROSC recommendations and improve institutional capacity. - Presumptions: - IFRS should be mandatory for PIEs. - A simplified financial reporting regime should be in place for SMEs. - Institutional framework components assessed: (i) legislative framework, (ii) accounting profession, (iii) accounting education and training, (iv) A&A standard setting process, (v) arrangements for ensuring compliance. - A&A ROSCs target a wide range of stakeholders including policymakers, regulators, professional bodies, educational institutions, investment professionals, credit rating agencies, and World Bank country management units. ### Country Participation and Program Outputs - Since launch in 2000: - Assessment reports prepared: 155 covering 119 countries. - Initial assessments: 118. - Reassessments: 37. - Published reports: 141 of the 155 assessment reports. - Annual assessment trend: - Peak of 16 assessments in 2009; thereafter a declining trend. - World Bank follow-up technical assistance (TA) focused on: - Institutional capacity strengthening; A&A legislative frameworks; mappings of standards gaps and support to IFRS/ISA adoption; strengthening professional accountancy organizations; aligning academic curricula; capacity building in IFRS for regulators; developing audit quality assurance and public oversight systems. - Regional initiatives seeded by ROSCs: CReCER (Latin America and Caribbean), REPARIS (Europe and Central Asia), support for 17 Francophone-area countries in Sub-Saharan Africa in the OHADA context. ### Survey of Authorities — Scope and Key Findings - Survey outreach: 101 authorities in 31 countries asked to participate (including most countries assessed since the 2011 Review). - Response rates: two-thirds of the countries and one third of the authorities responded. - Quality of reports: - Almost all respondents: A&A ROSC reports were clear, well-structured, comprehensive, and appropriate for technical and non-technical audiences. - Most respondents: ROSCs and Technical Notes (TNs) highlighted the most relevant issues and presented them accurately and balanced. - Most respondents: satisfied with overall assessment, conclusions, and components. - All respondents: satisfied with results in general. - Majority: willing to undertake reassessment or update; even higher share saw benefit in TNs covering specific topics. Primary reason for declining reassessment: ongoing implementation of reforms. - Process: - Large majority: key stakeholders actively engaged and participation broad. - Majority: communication with World Bank team adequate; sufficient time for comments; assessment completed in a timely manner. - Minority: more time needed; a few raised concerns about resource demands of the assessment. - Impact: - Large majority: priorities and recommendations were relevant and tailored; most reported implementation support availability. - Less enthusiastic on ROSC impact regarding establishment of policy priorities and reforms, and enhancement of education, audit quality systems, and oversight. - Satisfaction shares: between 75 and 90 percent for quality/presentation aspects; falls to between 60 and 70 percent for impact-related issues. - Dissent drivers: inadequate follow-up resource support, inaction by professional bodies, and reforms already ongoing at time of assessment. ### Recent Reforms to the A&A ROSC Program (2016 Assessment Methodology) - Motivations: - Prior AM became ad-hoc, rigid, and did not assess some modern elements (e.g., public oversight of audit profession, IFRS for SMEs). - World Bank budget restructuring shifted ROSC funding to country engagement budgets, affecting resource certainty. - 2016 AM objectives: sharpen materiality of findings, provide flexibility within modules, ensure consistency and comparability. - 2016 AM structure — three modules: - Module A (Accounting and Auditing Standards): document significant differences between IFRS/ISA and national standards; focus assessors on key standards/areas. - Module B (Institutional Framework for Corporate Financial Reporting): nine thematic sub-modules covering key components (commercial enterprises including SMEs; listed companies; PSCs; banks; insurance; accountancy profession; accountancy education; audit regulation, quality assurance and public oversight; accounting standard-setting; auditing standard-setting). - Module C (Observed Reporting Practices and Perceptions): gauge quality of corporate financial information produced; three sub-modules — review of financial statements; review of regulatory findings; survey of perceptions. - Expected benefits of modular approach: - Sharpened focus on most relevant areas; concrete suggestions for improvements. - Right-sizing assessments to country circumstances and enabling selective updates. - Systematic focus on implementation (Module C) with complementary evidence sources. - Reduced costs and burden for stakeholders and World Bank; foster consistency among teams. ### Concluding Observations and Way Forward - World Bank actions planned: - Develop a suite of performance indicators to complement the revised A&A diagnostic tool to provide snapshots of country positions and measure progress. - Continue supporting implementation of the 2016 AM and update/introduce new modules as funding permits (example: financial reporting for Islamic Finance). - Adopt a new mechanism to review developments for standards it assesses, including A&A, reporting on allocation of outputs and potential modifications to strengthen links to surveillance and capacity development. - Possible future review topics: - Overview of future changes in standards. - Progress reporting based on summary of scores, key weaknesses, and areas of improvement. - Integration of results with FSAPs and other ROSC modules; evaluation of A&A ROSCs via stakeholder and Bank staff surveys. - Design and implementation of a stand-alone diagnostic toolkit for “mini” or “quick” ROSCs, including for low income countries. *Prepared by the World Bank’s Financial Markets Global Practice (F&M GP) unit under the supervision of Aurora Ferrari by an F&M GP team led by Mariano Cortes and comprising Henry Fortin, and Jael Billy (both Governance GP), and with contribution from Zsuzsa Munkacsi (IMF).* ### 1. From the beginning of the standards and codes initiative, it was recognized that ### THE 2017 JOINT REVIEW OF THE STANDARDS AND CODES INITIATIVE — BACKGROUND PAPER (ICR SECTION) ### Background and scope - The World Bank was mandated by the G20 (through the Financial Stability Board) to be standard setter and assessor for Insolvency and Creditor/Debtor Rights (ICR). - The ICR assessment framework is the Unified Insolvency and Creditor Rights Standard, combining: - Principles for Effective Insolvency and Creditor/Debtor Regimes (The Principles), and - UNCITRAL’s Legislative Guide on Insolvency Law. - The Principles are organized into four Parts: - Part A: The relationship between the cost and flow of credit (including secured credit) and the laws and institutions that recognize and enforce credit agreements; - Part B: Key features related to the legal framework for risk management and informal corporate workout systems; - Part C: Formal commercial insolvency law frameworks; - Part D: Implementation through sound institutional and regulatory frameworks. - Assessment outputs: - Full assessments (standalone or as part of FSAPs) result in a full ROSC (Report on Standards & Codes). - Focused reviews result in a Technical Note (TN). - Assessments require a detailed due diligence report by a local legal expert and one or more Bank-led missions, followed by peer review. - Assessments remain confidential unless the recipient country waives confidentiality; most reports remain confidential (publication rate: 19 percent). - As of December 2016: - 70 full ICR ROSCs had been completed; - 11 TNs had been completed; - These covered 67 countries. ### Recent developments and revisions to the ICR standard - Timeline of notable revisions: - 2005: Amendments adopted to streamline the Principles. - 2011: Principles revised to incorporate updates to the Legislative Guide; two Principles added on insolvency of enterprise groups (domestic and international). - 2015: Further amendments covering credit registries, enforcement of claims, institutional framework for risk management, substantive aspects of formal insolvency proceedings, more detail on director liability, and a more nuanced approach to treatment of financial contracts in insolvency. - Next steps (as described in the source): - UNCITRAL to undertake revisions to its Legislative Guide on Insolvency Law; - UNCITRAL and the World Bank will jointly revise the Unified Insolvency and Creditor Rights Standards; - This joint revision was expected to be finalized in FY 2018, followed by Bank Management endorsement and Bank Board notification. ### Applications to other World Bank/IFC activities - IFC’s Investment Risk Platform (IRP) (launched in 2017): - Uses a loss-given-default methodology that includes a high-level measurement of a country’s insolvency regime and its consistency with the ICR standard. - This measurement is less robust than an ICR ROSC or TN but influences IFC country risk ratings and loan pricing to the private sector. - World Bank Doing Business Report: - Benchmarks 10 dimensions across 187 countries; the “Resolving Insolvency” indicator surveys practitioners on time and cost. - 2014: An “offline” pilot used 16 aspects of the ICR standard as a proxy for insolvency law quality. - 2015: The legal index from the pilot was introduced to complement the case-study methodology and represented the single largest change to Doing Business methodology since inception. ### Challenges affecting ICR assessments - Budget and organizational changes: - 2014 World Bank budget restructuring transferred ROSC budgets to World Bank regional groups and co-mingled ROSC budgets with Country Engagement (CE) funds. - ROSCs must now compete with other country priorities, contributing to a significant reduction in the number of ICR ROSCs. - The de facto transfer of standard-setting budget to CE reduced centrally financed standard-setting activities. - Increased complexity and cost: - As the ICR Standard expanded, assessments became more complicated, lengthy, and costly. - Authorities perceive ROSCs as sometimes too academic, repetitive, and offering impractical recommendations, reducing their usefulness for policy dialogue and reform. ### MSMEs and insolvency: findings and priorities - Relevance of MSMEs: - An IFC study of 132 countries found, on average, 31 MSMEs per 1,000 people. - Between 2000 and 2009, the number of MSMEs per 1,000 people grew at 6 percent per annum. - An estimated 60 percent of private sector employment, or one-third of the world’s labor force, is attributable to MSMEs. - Challenges for MSME insolvency regimes: - Many insolvency regimes are designed for large corporate insolvencies and are underdeveloped for MSME-specific issues. - MSME-specific characteristics that complicate insolvency include: - Personal nature and varying formality of businesses; - Mixed personal and corporate debt financing; - Severe consequences for entrepreneurs and families when enterprise fails, especially where personal insolvency laws or timely discharge are absent; - Limited liquidity making temporary problems lead to liquidation; - Poor record keeping, reducing efficiency and fairness. - Recommended features for MSME insolvency procedures: - Rapid and simple processes (e.g., easy-to-use forms); - Minimal court involvement; - Improved debt recovery mechanisms; - Mechanisms to enable entrepreneurs to re-enter productive activities more quickly. - Institutional response: - An ICR Task Force of insolvency law experts issued a Report on the Treatment of MSME Insolvency in January 2017. ### Improving ROSCs and the assessment process - Suggested improvements to ICR ROSCs: - Streamline content, format, and structure to emphasize country-specific issues. - Provide practical and actionable recommendations while maintaining technical rigor. - Center ROSCs on commercial insolvency law (Part C) and avoid lengthy theoretical analysis and repetitive compliance checks. - Planned reviews and agenda items: - The planned 2019 FSAP review will: - Report on allocation of CG outputs across membership; - Consider whether modifications to standard assessments could improve links to surveillance and integration with capacity development; - Assess accessibility of standards assessments and recommend improvements if necessary. - Other issues for consideration include: - (i) amending ICR standards to address MSME insolvency; - (ii) taking stock of recent experience with ROSCs and TNs; - (iii) developing a strategy to revise the assessment methodology; - (iv) reducing the length of, and repetition in, ROSCs and making findings more user-friendly; - (v) refocusing ICR ROSCs on practical issues. - Notable outreach and procedural references: - The World Bank presented a preliminary background paper at the 51st session of UNCITRAL Working Group V on May 10, 2017. *Source: THE 2017 JOINT REVIEW OF THE STANDARDS AND CODES INITIATIVE — Background paper (ICR section).* ### 1. The World Bank and the International Monetary Fund jointly launched the standards ### pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 1. The World Bank and the International Monetary Fund jointly launched the standards ### Background and purpose of the initiative - Launched in 1999 in the wake of the Asian crisis to enhance economic and financial stability by strengthening domestic economic and financial institutions through encouraging implementation of internationally agreed standards. - Covers the application of internationally recognized S&C in twelve policy areas assessed by the IMF/World Bank. - Key assessment outputs: Detailed Assessment Reports (DARs) and Reports on the Observance of Standards and Codes (ROSCs). - Uses of assessments and findings: - Detect potential weaknesses posing risks to the economy. - Provide focused and prioritized lists of recommendations for country action. - Feed into IMF surveillance, World Bank and IMF technical assistance, focused technical notes (TNs), and Financial System Stability Assessments (FSSAs). ### Objective and scope of the study - Main objective: identify cross-cutting issues since the last review in 2011. - Focus areas of the background paper: - (i) Revisions to the 12 S&C and their assessment methodologies (AM) since the 2011 review. - (ii) Approaches to assessment and review of the individual S&C based on an extensive sample of published assessments and reviews since 2011. - Explicitly does not assess the quality of assessments or their use by the IMF & World Bank, national authorities, or the private sector. ### Standards and codes covered (grouping and responsible bodies) - S&C grouped into three broad categories: transparency; financial sector; institutional and market infrastructure. - Areas and issuing/assessor bodies (as listed): - Transparency - 1.1 Monetary & financial policy transparency — Code of Good Practices on Transparency in Monetary and Financial Policies (MFPT) — Issuer: IMF — Assessor: IMF - 1.2 Fiscal policy transparency — Code of Good Practices on Fiscal Transparency (FTC) and Guide on Resource Revenue Transparency — Issuer: IMF — Assessor: IMF - 1.3 Data — Data Quality Assessment Framework (DQAF) and Data Dissemination Standards (e-GDDS, SDDS, and SDDS Plus) — Issuer: IMF — Assessor: IMF - Financial Sector - 2.1 Banking supervision — Core Principles for Effective Banking Supervision (BCP) — Issuer: BCBS — Assessor: WB/IMF - 2.2 Securities regulation — Objectives and Principles of Securities Regulation (IOSCO) — Issuer: IOSCO — Assessor: WB/IMF - 2.3 Insurance supervision — Insurance Core Principles (IAIS) — Issuer: IAIS — Assessor: WB/IMF - 2.4 Crisis Resolution and Deposit Insurance (CRDI) — Core Principles for Effective Deposit Insurance Systems (IADI); Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) — Issuers: IADI, FSB — Assessor: WB/IMF - 2.5 Financial Market Infrastructure — Principles for Financial Market Infrastructures (PFMI) — Issuers: CPMI/IOSCO — Assessor: WB/IMF - Institutional and Market Infrastructure - 3.1 Insolvency — Insolvency and Creditor Rights (ICR) — Issuers: WB/UNCITRAL — Assessor: WB - 3.2 Corporate Governance — Principles of Corporate Governance (CG) — Issuer: OECD — Assessor: WB - 3.3 Accounting and Auditing — International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) — Issuers: IASB, IAASB — Assessor: WB - 3.4 Anti-Money Laundering/Combating the Financing of Terrorism — International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (AML/CFT) — Issuer: FATF — Assessor: WB/IMF/FATF/FSRBs ### Revisions to the S&C — thematic overview - Five broad categories of revisions since the 2011 review: 1. Lessons from the Global Financial Crisis (GFC) 2. Experience with and approaches to the assessments 3. Changes in best practices 4. Consistency across the S&C 5. Other changes, mainly in structure and organization - Revisions include changes to S&C themselves and to the related assessment methodologies (AM). ### Revisions to reflect lessons from the GFC — summarized lessons (Table 2) - Need for increased attention to (as listed in Table 2): 1. Systemic risk by incorporating a system wide perspective — Standard revised: BCP, IOSCO, IAIS, CRDI, PFMI 2. The risks posed by SIFIs — Standard revised: BCPs, IOSCO, IAIS, CRDI, PFMI 3. Effective contingency planning and crisis management — Standard revised: BCP, IAIS, CRDI, PFMI, IFRS/ISA, KA 4. The perimeter of regulation and the risks posed by unregulated entities — Standard revised: BCP, IOSCO, IAIS 5. Avoidance of perverse incentives that create excessive risk taking — Standard revised: IOSCO, CRDI, CG, IAIS 6. Enhancing market discipline through increased transparency — Standard revised: BCP, IOSCO, IAIS, PFMI 7. Corporate governance arrangements — Standard revised: CG, BCP, IAIS, CRDI, PFMI, ISA 8. Domestic and cross border collaboration — Standard revised: BCP, IAIS, KA, PFMI, ICR 9. Oversight of key market participants – auditors, credit rating agencies, hedge funds, central counterparties, institutional investors — Standard revised: IOSCO, PFMI, CG, IAIS 10. Timely reporting of credit risk build-up — Standard revised: IFRS, BCP 11. Independence and resources of regulatory authorities — Standard revised: BCP, CRDI 12. Regulation and supervision of complex groups — Standard revised: BCP, IAIS ### Specific GFC-driven changes and implications - Systemic risk and SIFIs - BCP: systemic risks required to be considered as part of existing Core Principles (CPs); supervisors must account for institution risk profiles and systemic risks. - IOSCO: new CP (CP 6) identifies securities regulator role in systemic risk identification and mitigation. - IAIS: new CP (CP 24) on macro-prudential surveillance for insurance supervision. - KA: provide framework for systemic risk identification/mitigation as precondition for effective resolution regimes; central rationale for KA creation. - PFMI: includes systemic risks in introductory chapter; Principle 2 stresses FMI objectives explicitly support financial stability; separate assessments for Central Securities Depositories and additional guidance for CCPs and trade repositories. - Contingency planning and crisis management - KA: specifically designed for legal/institutional framework for orderly resolution; reason for adoption of KA as new S&C. - IADI CPs: new principle (CP 6) on deposit insurer’s role in contingency planning and crisis management; CP 13 addresses early detection/intervention; CPs 9, 14 elaborate deposit insurer’s role in resolution. - IAIS: new CP (CP 26) on cross border cooperation and collaboration on crisis management. - BCP: introduced new criteria on crisis arrangements and resolvability. - PFMI: emphasizes recovery or orderly wind down; winding down addressed explicitly in Principle 3 and implicitly across risk-handling principles. - Perimeter of regulation and shadow banking - IOSCO: new CP (CP 7) requires regular reviews of the perimeter of regulation to address regulatory arbitrage. - BCP: perimeter addressed in CP 8 (Supervisory Approach) — supervisors to flag shadow banking to responsible authority; assess importance of non-banking entities. - IAIS: ICP23 requires comprehensive group-wide supervision (reporting, inspections, capital adequacy, investment, market conduct) to address arbitrage (e.g., AIG example). - Avoidance of perverse incentives and moral hazard - IOSCO: new CP (CP 8) to avoid conflicts of interest and misaligned incentives. - BCP: CP 20 deals with related party transactions; stricter requirements for risk and control functions in CPs 14, 15, 26, 27. - CG: stricter rules on related party transactions (Chapter III). - KA: framework to resolve SIFIs without public funds while maintaining critical functions, addressing “too-big-to-fail”. - IADI CPs: moral hazard concerns elevated across relevant CPs. - ISA: recognizes role of incentives for auditors; IAIS: new risk management CP (ICP 16) including risk appetite and own risk solvency frameworks. - Enhanced disclosures and market discipline - BCP: new CP (CP 28) on disclosure and transparency in bank reporting and publications. - IOSCO: CPs 16 and 18 on quality of accounts. - IAIS: new CP (CP 20) on Public Disclosure for insurers. - IADI: CP 10 on public awareness for deposit insurance benefits/limitations. - ISA 701: auditors required to report to shareholders and boards on key audit matters. - IFRS 9: enhanced regulation for loan loss provisioning responding to prior shortcomings. - PFMI: strengthened transparency provisions in Principles 23 and 24. - Corporate governance - CG code significantly strengthened in 2015 with enhanced attention to Board role in risk management. - BCP: new principle (CP 14) enhancing corporate governance requirements. - IAIS: CP 7 introduces oversight requirement for insurance supervisor on corporate governance. - IADI: CP 3 requires deposit insurer to be operationally independent, well governed, transparent, accountable, and insulated from external influence. - PFMI: corporate governance provisions strengthened in Principle 2. - Domestic and cross-border collaboration - BCP: revised CP 3 enhances cooperation and collaboration with domestic and foreign supervisors. - IAIS: revised CP 25 on supervisory cooperation and coordination; new CP 26 on cross border crisis management cooperation. - KA: standards for collaboration in recovery and resolution of G-SIFIs with international presence, including cross border crisis management groups (CMGs) and cooperation/information-sharing arrangements (COAGs). - PFMI: Responsibility E explicitly addresses cooperation and coordination among supervisors/overseers of FMIs. - ICR: revised to include a new principle on insolvency of international enterprise groups. ### Revisions to reflect lessons from and approaches to assessments - Two assessment-related issues have received greater attention: 1. How to ensure assessments are proportionate to country circumstances and sectoral risks? 2. What role should assessment of effectiveness of application of S&C in achieving objectives play in evaluating compliance? - Greater focus on “proportionality” and “effectiveness” increases policy relevance of assessments for national policies, IMF surveillance, and World Bank development objectives. ### Proportionality of assessments — approaches and examples - Core challenge: S&C are presented as minimum standards applicable across countries, but country circumstances vary widely (development stage, complexity, sophistication, national/international importance); assessments must reflect these differences while maintaining benchmark applicability. - IOSCO approach: - Recognizes diversity among securities markets; accepts that “there is often no single correct approach to a regulatory issue.” - CPs acknowledge varying legislative/regulatory structures; assessors require a complete, clear description of the jurisdiction’s capital markets to identify applicable topics. - Jurisdictions can demonstrate that alternative approaches meet objectives or explain non-applicability of a principle. - AML/CFT approach: - Significant increase in focus on the “risk-based approach” and country circumstances. - New CP, Recommendation 1, requires countries to identify, assess, understand and mitigate their ML/TF risks and to apply a risk-based approach to ensure measures are commensurate with identified risks. - Allows simplified measures or exemptions for low-risk sectors/activities in certain circumstances. - AM notes that understanding country risks and context is the starting point for every assessment and is critical for evaluating technical compliance with Recommendation 1 and the effectiveness of the AML/CFT system. - BCP approach: - BCPs remain minimums for all jurisdictions, but assessments must consider context of supervisory practice application. - Proportionality considered in terms of risks posed by banks, the banking system, and stage of financial system development. - All CPs are assessed and rated in all countries (except exceptional use of a not applicable (NA) designation); proportionality permeates all principles. - Higher risks/complexity lead to higher supervisory expectations (risk management, prudential requirements, transparency, resolvability) and greater supervisory intensity/techniques. - Country circumstances considered when assessing materiality of findings; a principle may be non-applicable or deficiencies in essential criteria may be considered non-material given country/financial system characteristics. *Source: pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative (selected excerpts).* ### 19. IAIS adopts a similar approach to BCPs. The IAIS CPs are to apply to insurance supervision ### pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 19. IAIS adopts a similar approach to BCPs. The IAIS CPs are to apply to insurance supervision ### Scope and flexibility of IAIS CPs and KAs - "IAIS adopts a similar approach to BCPs. The IAIS CPs are to apply to insurance supervision in all jurisdictions regardless of the level of development and sophistication of the insurance market." - "Individual CPs gives supervisors flexibility to tailor certain supervisory requirements to be commensurate with the complexity and risks posed by individual insurers." - "It also emphasizes the importance of considering the domestic context, industry structure, and stage of development of the financial system." - "The KA are intended to be minimum requirements that apply to systemic financial institutions in all jurisdictions, though the AM recognizes that the resolution regime should be proportionate to the complexity and systemic importance of the firms." - "Certain of the KAs are aimed specifically at G-SIFIs and jurisdictions that are home or hosts to G-SIFIs." ### Grading, applicability, and limited non-applicability - "Grading of the KAs should consider the structure and complexity of the financial system." - "Jurisdictions may also seek to demonstrate that certain KAs or essential criteria are not applicable but as with BCP assessments, the use is strictly limited." - Footnote content preserved in context: - "KAs 8 and 9 on Crisis Management Groups and institutions specific cooperation arrangements, and KA 10 which requires resolvability assessments for at a minimum G-SIFIs." - "The rational is that even if a criterion is not applicable at the time of the assessment, it may become so in the future as the system evolves. This rational is somewhat at odds with the general approach in the assessments which is to assess the system as it exists at the time of the assessment." ### World Bank-led codes and tiered assessment approach - "The revisions to the World Bank-led codes (CG, ICR, and A&A) have not changed the basic approach that the principles are minimum criteria intended to apply to all jurisdictions." - "IASB, however in 2007 took the approach of developing a new set of IFRS for small and medium sized enterprises." - "The CG code only applies to listed companies, which in many jurisdictions is a limited number." - "To reflect this, the World Bank has divided countries into three tiers depending on the size of their capital markets." - "Tier 3, which has poorly developed equity markets and regulatory frameworks will no longer be subject to full detailed assessments." - "Conditioned by the availability of resources, in Tier 1 countries will always receive full assessments, and tier 2 will do so under certain circumstances." ### Minimum required approach and differentiation by capacity - "The PFMI, MFPT and DQAF use the minimum required approach, in that all countries should comply with the minimum standards." - "For PFMI the minimum approach is consistent with the nature of the risks in FMIs that are uniform across jurisdictions." - "The approach to data quality takes account of country circumstances in the SDDS and GDDS initiatives." - "The MFPT has not been updated." - "In contrast to the standards discussed above, the revised FTC explicitly differentiates based on different levels of country capacity and development." - "Whereas the old 2007 code provided a single best practice standard for each principle, the new code distinguishes between basic, good, and advanced practice..." - "Basic practice is viewed as a minimum standard that should be achievable by all countries, good practice provides an intermediate goal post, and advanced practice reflects best international standards and is the standard that should be achieved in advanced economies." - "Moreover, in assessing compliance the FTC now benchmarks against peer groups as an indicator of relative performance." ### Assessing effectiveness (de jure vs de facto) - "Another issue highlighted in assessments is how the S&C should consider the effectiveness in the application of the S&C in terms of outcomes." - "Historically, most of the S&C focused on the institutional, organizational, and legal and regulatory arrangements that form the framework for the application of the S&C. Less attention was paid to examining outcomes..." - "It is the capacity of the S&C to deliver the actual outcomes that matters from the perspective of assessing the adequacy of the policy framework." - "An assessment of the de jure elements may not provide a good indicator of how the regime performs in practice and assessments of compliance based on the de jure elements may provide unwarranted confidence in the risk mitigation framework." - "The focus of assessments on the de jure elements may explain why compliance ratings against S&C are poor predictors of financial crises as the compliance ratings may over-estimate the extent to which risks are mitigated by the regulatory regime." ### Changes made to specific codes to assess effectiveness and outputs - "The importance of properly assessing risk and outputs was a major factor behind the complete reworking of the FTC." - "Focusing on the information required for effective fiscal management and surveillance, the Code was redrawn into four pillars, with the third pillar focusing on fiscal risk analysis and management." - "Its 12 principles are grouped under three categories, risk disclosure and analysis, risk management, and fiscal coordination." - "The code was changed to address quality and adequacy of output, rather than procedures." - "The AML/CFT AM has been fundamentally revised so that assessors must assess the effectiveness of the AML/CFT regime as well as technical compliance." - "Under the revised approach, assessments include two sets of ratings, one for technical compliance and another for effectiveness." - "The AML/CFT AM sets out detailed criteria for assessing technical compliance under the 40 recommendations, specifies the core issues for conducting assessments of effectiveness under eleven immediate outcomes..." - "For A&A, assessors review a sample (20-30) of financial statements to assess the extent to which official standards are being implemented." - "Assessments of the BCPs are expected to assess effectiveness of regulators/supervisors in supervising banks." - "Assessments are not intended to audit the banks’ portfolios and practices, but examine the quality of the supervisor’s assessments of these practices and their capacity to challenge banks..." - "The new BCP are divided in two parts: requirements on supervisors, and requirements on banks." - "IAIS requires the implementation of the standards to achieve the objectives of insurance regulation and supervision." - "The AM notes that the possession of legal authority is not sufficient to demonstrate compliance with the CPs; the supervisor has also to demonstrate that the powers can be exercised in practice and that it can ensure that supervisory requirements are implemented." ### Revisions to incorporate emerging best practices - "In most cases, the updates expand the scope and length of the S&C and the number of criteria to be assessed." - BCP specifics: - "In revising the BCP, 34 additional criteria in the earlier standard were upgraded to essential criteria and 34 new assessment criteria were added reflecting the changes international standards." - "The 16 additional criteria reflect best practices and be aspirational for most supervisors." - "The BCP includes references to standards, best practices, and guidance documents issued by the BCBS." - "The revised BCP also merged the AM and the CPs into a single document." - IAIS grouping: - "The IAIS CPs have been grouped into three levels, statements, standards and guidance material." - AML/CFT: - "The AML/CFT Recommendations have been updated, notably to include a greater focus on ML/TF risks, strengthen certain parts of the standard (e.g. on transparency of legal persons and arrangements), and to incorporate tax crimes as predicate offenses to ML." - IADI updates: - "The IADI CPs have been updated to reflect emerging best practices including governance, depositor reimbursements, use of insurance funds in resolution, role in crisis preparedness and incorporating considerations related to the operation of Islamic deposit insurance systems." - "The IADI CPs also now include the role of deposit insurance in promoting financial inclusion in the preamble." - FTC advances: - "Some examples are the publication on fiscal activities of the entire public sector, full balance sheets, monthly fiscal reporting of general government, and publication of audited financial statements." - World Bank-led S&C: - "ICR revisions incorporate updates of best practice in insolvency law reflected in the continued work of UNCITRAL published as Columns 3 and 4 of their model law." - "A&A are adapted by ongoing work to refine individual IFRS and to add new ones." ### Cross-referencing among S&C - "Some of the revisions to the S&C and AM are intended to improve cross referencing within the various policy areas." - Selected examples: - "The BCP AM recognizes that where a recent AML/CFT assessment has been conducted, assessors may rely on that evaluation in assessing CP 29 on abuse of financial services." - "IAIS AM makes extensive reference to FATF documents as part of the assessment of CP 22, on AML/CFT, but does not specifically state that assessors can rely on recent AML/CFT assessments." - "IOSCO includes a number of principles dealing with accounting and auditing (CP 19 on auditor oversight, CP 20 on auditor independence, and CP 21 on audit standards) and where there is a potential for cross reference assessments against A&A." - "When assessing a resolution regime for FMI the KAs requires assessors to have regard to any assessments against the CPSS-IOSCO FMI and the explanatory note on use of deposit insurance funds in resolution cross references the IADI CPs." - "The IADI CPs has been updated to ensure consistency with the KAs." - "AML/CFT Recommendation 26 on Regulation and Supervision of Financial Institutions explicitly mentions that, for financial institutions subject to the BCPs, the regulatory and supervisory measures that apply to prudential supervision and are relevant to money laundering and terrorist financing should also apply for AML/CFT purposes." - "The PFMI does cross-reference the KA, but does not contain explicit cross referencing to other S&C." ### Reorganization of S&C and AM documents - "The BCP were given a more logical structure: the first 13 CPs deal with the powers, responsibilities and functions of the supervisors, while the remaining 26 CPs deal with the supervisor’s expectations for banks." - "The CPs and AM were merged into a single document." - "The IAIS was revamped: the CPs have been reorganized into a more logical structure, and the assessment criteria grouped into three levels: statements, standards and guidance." - "The CRDI was expanded by combining the KA with the IADI CPs." - "IADI was revamped: the CPs and AM were merged into a single document and the CPs reorganized into a more logical structure." - "The FATF 40 Recommendations on AML +9 Special Recommendations on CFT have been merged into 40 Recommendations on AML/CFT." - "PFMI was merging, harmonizing and expanding three earlier codes" - "FTC was significantly reorganized to reflect increased emphasis on risks and to focus on outcomes rather than procedures." - "CG was reorganized and strengthened in line with the observed need for stronger corporate governance." ### Implications of changes to S&C and AMs - Revisions "strengthened the relevance of S&C to member countries, for IMF surveillance and for identifying critical areas for follow up technical assistance." - Key changes include heightened attention to: - "Identifying the main risks (fiscal, financial, ML/TF) and the adequacy of measures to address the risks;" - "Systemic risk (and SIFIs) in the regulatory standards." - "Crisis resolution is an important new area that fills a gap in the regulatory architecture and provides a benchmark for reviews of crisis preparedness and crisis management in FSAPs and for identifying areas for follow up assistance;" - "Cross border collaboration and cooperation, which supports the multilateral surveillance of the Fund;" - "Public disclosure and transparency in the regulatory standards, and the revisions to the World Bank-led standards, that enhance market discipline;" - "Perverse incentives that are sources of underlying vulnerabilities in economies and financial systems, and to identifying risks in shadow banks." - "Revisions to the approaches to assessments make them more relevant to countries’ policy discussions and complement IMF surveillance and WB development objectives." - AM revisions give greater attention to "(i) jurisdictions’ circumstances and risks when preparing the assessment; and (ii) the effectiveness of the S&C in achieving their objectives." - "Recommendations can then be prioritized toward addressing significant shortcomings of direct policy relevance." - "These advances in the S&C are relatively recent and it will take time to assess their effectiveness." *Source: pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative (extracted content provided)* ### 40. The new approaches to assessments have not been the same across the standards. ### pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative - 40. The new approaches to assessments have not been the same across the standards. ### New approaches and differentiation across standards - Some S&C have not been updated (monetary and overall statistical framework). - Different standards take different approaches to: - treating country circumstances; and - assessing effectiveness. - BCPs and IAIS are characterized as "the minimum that should apply in all countries." - Revisions to the FTC have sought to differentiate standards applied depending on the stage of country development. ### Resource impact and trends in assessments - The addition of new assessment areas increased the number of CPs and essential criteria that must be reviewed, raising resource cost and requiring new assessment skills. - A total of 380 DARs, ROSCs, and TNs were produced during 2011–16. - Of the total, 295 (or 78 percent) were published. - The number of assessments has declined somewhat over the last six years, and for some S&C quite significantly, particularly for data, monetary, and corporate governance. - Factors contributing to the decline include completion of initial assessments, increased resource costs, absence of dedicated budget allocations (notably for World Bank-assessed standards), and revisions causing temporary slowdowns (e.g., AML/CFT). ### Structure, formats, and publication practices - Outputs take several forms: formal assessments resulting in ROSCs or DARs, focused reviews resulting in technical notes (TNs), or inputs to FSSA reports. - There is no official definition of ROSC. Observed practice: - For regulatory standards (BCP, IOSCO, IAIS, PFMI) and MFPT, the ROSC is a summary of the DAR and includes key findings, recommendations, and a prioritized action plan. - AML/CFT peer reviews by FATF and FSRBs are presented as Mutual Evaluation Reports (MER), which can generate an AML/CFT ROSC. - Some regulatory ROSCs include ratings of compliance, but not all. - For several S&C (e.g., CG, ICR, A&A) and the Data ROSC, the ROSC includes the DAR. - For the Fiscal Code, the title ROSC has been eliminated and the published assessment is now called a fiscal transparency evaluation. - A&A assessments are the only ones that do not include ratings for compliance as part of the ROSCs or DARs. - Most assessments of regulatory standards and codes were prepared in the context of FSAPs; the bulk of assessments have been conducted in the context of FSAPs. - Significantly more assessments were published as standalone DARs than as standalone ROSCs. - TNs have increased relative to ROSCs and DARs; a significant number of reviews were published as technical notes. ### Evidence of rising resource intensity (length, staff, complexity) - Revisions to regulatory standards generally increased resource costs; inferred from staff assigned and length/complexity of DARs. - BCPs: Example comparison of UK detailed assessments: - 2016 DAR (updated BCPs) length: 293 pages. - 2011 DAR (earlier methodology) length: 131 pages. - Other DAR lengths cited: - Georgia (2014 BCP DAR): 216 pages. - Canada (2014 BCP DAR): 240 pages. - Hong Kong (SAR) (2013 BCP DAR): 361 pages. - IAIS: - Revised AM is 397 pages. - DARs have increased to up to 150 pages in length. - IOSCO DARs: - Malaysia DAR: 187 pages. - Switzerland DAR: 175 pages. - Reviews of the KA piloting the detailed AM involved 5-6 assessors. - PFMI (2012 issued) significantly increased scope: now includes Systemically Important payments systems, central securities depositories, securities settlement systems and central counter parties—developed markets may have 6-8 such systems. - World Bank-assessed S&C are described as very resource intensive; changes to budgetary procedures within the Bank have highlighted resource costs and contributed to slowdowns. ### Assessment quality, required skills, and limits on expert pool - The quality of assessments reflects the background and experience of assessors; increased emphasis on implementation and enforcement raises the need for assessors with practical operational experience. - New skills may be needed to assess underlying effectiveness (e.g., capacity to assess statistical indicators of performance). - Where TNs replace DARs, assessor expertise is critical in designing TN topics. - The pool of experts with the requisite skills for more complex standards is quite limited, introducing an additional resource constraint. - Experts evaluated a broad sample including 15 DARs, 7 ROSCs, 2 FTEs and 21 TNs. ### Focused reviews, voluntariness, and coverage decisions - Two-pronged approach for financial standards: - (i) Formal, graded assessments covering all principles, providing ratings, resulting in DARs. - (ii) Focused reviews benchmarking against a standard without ratings, resulting in TNs or FSAP inputs. - IMF agreed with standard setters on sets of base principles to serve as starting points for focused reviews. - For non-financial standards, streamlining is being considered: - Corporate governance: World Bank proposed focusing on a subset of questions (115 versus the full set of 727) and making benchmarking optional. - Accounting and auditing: consideration of lessons from "quick ROSCs" and modular approaches in A&A and FTE. - Assessments are voluntary for country authorities and should be based on a joint decision with Bank/Fund staff considering factors such as sector importance, vulnerability magnitude, country priorities, and extent of changes since last assessment. - For non-financial standards allowing subset assessments, coverage selection could reflect a country’s level of development. ### Accessibility of findings and communication - DARs have become longer and more complex; analysis of a single principle can run several pages and be highly technical. - In a few recent cases, DARs were published without accompanying summary ROSCs. - Where DARs are prepared, accompanying ROSCs provide succinct summaries and prioritized recommendations; preparation of ROSCs becomes more important as complexity rises. - TNs often lack a separate summary; financial regulatory TNs are usually prepared in FSAP context where FSAP can summarize findings. - Some TNs can be nearly as complex as DARs; for some standards (e.g., ICR) many TNs are not published. - Recommendation to give greater attention to accessibility: non-technical summaries could improve traction for policy makers and market participants. ### Conclusions and policy considerations - Main changes to S&C since last review include: - greater attention to identifying risks; - incorporation of lessons from the GFC (focus on systemic risk, transparency, corporate governance, crisis management and incentives); and - increased attention to country circumstances and emphasis on assessing effectiveness. - These revisions enhanced the richness value for country authorities and the Fund and the Bank. - Growing complexity of S&C has resource implications: post-crisis assessments require more staff with deeper experience; assessments have become longer and more complex, which may reduce clarity and uptake. - Increased complexity places a premium on ensuring DARs and/or TNs contain a high-quality summary of findings and key recommendations. - Possible approaches to address tensions between comprehensiveness and resource constraints: - Follow the Fiscal Transparency Code approach allowing basic, good, and advanced practices and benchmarking by stage of development. - Consider a modular approach to IMF and World Bank standards. - The role of focused reviews in alleviating tensions remains unclear; use will continue to be voluntary and decided jointly between staff and authorities. As experience develops, IMF and World Bank could draw lessons on resource implications. *International Monetary Fund — STANDARDS AND CODES—REVIEW OF CASE STUDIES (excerpt)* --- _Source: https://www.imf.org/-/media/files/publications/pp/2017/pp080317-the-2017-joint-review-of-the-standards-and-codes-initiative.pdf_