By Charles Hastie

The 2017 G20 Priorities document, published last December, champions a cooperative approach to globalization and financial market regulation.  In the introduction, German Chancellor Angela Merkel comments that “Strong international organizations are indispensable,” and asks, “How can we cooperate better?” Compare this to United States President Donald Trump’s remarks, following his decision to pull out a global climate agreement that he was elected to represent “Pittsburgh, not Paris.” We are clearly seeing a collision of philosophies that threatens to disrupt the global financial regulatory collaboration and upend major policy initiatives already underway. With the twenty largest economies preparing to meet in Hamburg, Germany, in July, are we moving towards renewed harmonization or further entrenched protectionism? The latter could have serious consequences for businesses and regulators across the globe.

The tone of the G20 priorities document reinforces continued liberalism and globalization. It applauds the results the G20’s post-financial crisis coordination of economic strategies, international trade and financial regulation, stating that people benefit from global action and the increasing integration of economies. Aptly responding to the surprising elections and referendums of 2016, Angela Merkel cautions that global economic challenges “…will certainly not be mastered by countries plotting a lone course, or with isolationism or protectionism” and states that “…there can be no return to a pre-globalization world.”

The Globalization Debate 

It hardly seems like the US and the United Kingdom are heeding the advice. The G20’s expressed mission no longer neatly aligns with political agendas in these countries, which are uprooting trade agreements and looking to slash financial regulation.  A prioritization of national interests over international cooperation seems to be gaining popularity as voters in the US and Europe respond to the effects of a burdensome and increasingly complex regulatory environment.  In a campaign speech “declaring America’s economic independence” President Trump continued with his “America First” theme and vilified globalization, saying it has “made the financial elite who donate to politicians very wealthy” whilst leaving “…. millions of … workers with nothing but poverty and heartache.” 

Last year’s Brexit referendum seemed to represent a similar mentality, with UK voters deciding against the increasing integration of economies and societies, at least within the European Union. UK Prime Minister Theresa May has echoed the sentiments of President Trump, referring to the “… the tensions and differences between those who are gaining from globalization and those who feel they are losing out have been exposed.” 

The globalization debate has continued to unfold throughout 2017. After tense discussions with the Trump Administration in March, the G20 appeared to soften its anti-protectionist stance, excluding a previously used statement that the G20 “… will resist all forms of protectionism” from a recent Communiqué.  

Despite this apparent detente, the May G7 Summit in Sicily, Italy, continued along the collision course. Following the summit, President Trump announced the US withdrawal from the Paris Agreement, which was signed by virtually every other country in the world. The Trump Administration has also challenged the rules of the World Trade Organization stating that it will “aggressively defend American sovereignty over matters of trade policy.” 

What is at Stake 

Politicians, central bankers, regulators and businesses are left to wonder, will this trend continue at the next G20 meeting? If it does, a lot could be at stake for financial regulation and supervision.  

For one, the G20 has been working to develop a strategy to monitor and support economic innovation. During last year’s meeting in China, the G20 finalized its Blueprint on Innovative Growth, implementing a collective strategy to enhance cooperation to foster innovation, support industrial advancement, monitor the digital economy and continue to advance structural reforms in the financial system. As many countries update capital requirements, the G20 Agenda Towards a More Stable and Resilient International Financial Architecture seeks to improve oversight of capital flow volatility.  

G20 members have been adamantly supportive of the Basel Committee on Banking Supervision efforts to improve the resilience of the financial system, as their home countries implement Basel III and other related reforms. The G20 is also working on OTC derivatives reform, the Action Plan on SME Financing, the High-level Principles for Digital Financial Inclusion and the Insurance Capital Standard. The international forum lends its support to other regulatory alliances, including the International Monetary Fund, the World Bank, the Bank for International Settlements, the Financial Stability Board and the Financial Action Task Force. 

The G20 arguably serves as a rubber stamp on some of the most important global financial regulatory initiatives, maintaining a policy agenda for nearly every area of financial regulation and offering common guidelines to regulators and businesses. If the meeting in Hamburg is a repeat of the G7 meeting, with a breakdown of international alignment, it could seriously disrupt the status quo of coordinated regulation and supervision of the financial system.  

A lack of support from key members, such as the US, could cast doubt on global regulatory initiatives. This could lead to a fragmented regulatory environment for global financial institutions, where compliance officers must manage disparate compliance regimes and piecemeal implementation of international rules. On the other side, isolated domestic regulators would no longer benefit from shared insights and coordinated policy implementation.

Reprinted with permission from the June 26, 2017 issue of Inside Counsel. © 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

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