Guidelines for Regulatory Impact Analysis

SERVICIO NORMATIVA E POLITICHE DI VIGILANZA Circular No. 277 of July 20, 2010

GUIDELINES FOR REGULATORY IMPACT ANALYSIS

Cir. No. 277/20.07.10 p. I INDEX PART I REGULATORY IMPACT ANALYSIS IN THE LEGISLATIVE PROCESS OF THE BANK OF ITALY CHAPTER I .......................................................................................................................................1 GENERAL PRINCIPLES................................................................................................................1

1. Introduction.............................................................................................................................1
2. Objectives ...............................................................................................................................2
3. Legal Sources ..................................................................................................................3 CHAPTER II......................................................................................................................................4 SCOPE OF APPLICATION OF RIA .................................................................................4
4. General Criteria ...................................................................................................................4
5. Specific Cases.......................................................................................................................5 CHAPTER III ....................................................................................................................................7 THE CONTRIBUTION OF RIA TO THE LEGISLATIVE PROCESS...................................................7
6. Introduction.............................................................................................................................7
7. The Phases of the Legislative Process...........................................................................................8 CHAPTER IV...................................................................................................................................12 THE PRINCIPLE OF PROPORTIONALITY.....................................................................................12
8. Introduction...........................................................................................................................12
9. Simplified RIA and Complete RIA ...................................................................................12 CHAPTER V ....................................................................................................................................14 ROLES AND RESPONSIBILITIES ........................................................................................................14
10. Introduction...........................................................................................................................14
11. Simplified RIA ..............................................................................................................14
12. Complete RIA ...................................................................................................................14 PART II METHODOLOGIES AND PHASES OF IMPACT ANALYSIS CHAPTER I .......................................................................................................................................1 THEORETICAL FOUNDATIONS .........................................................................................................1
13. Brief introduction to RIA ................................................................................................1
14. Bibliographic references.....................................................................................................3 CHAPTER II......................................................................................................................................5 IDENTIFICATION AND ANALYSIS OF THE PROBLEM ......................................................................5
15. Introduction.............................................................................................................................5
16. The scope of the analysis...................................................................................5
17. Market failures ......................................................................................................6
18. Regulatory failures ...................................................................................9
19. How to distinguish between market and regulatory failures..........................10 CHAPTER III ..................................................................................................................................13 THE RELATIONSHIP BETWEEN RIA AND SUPERVISORY OBJECTIVES................................13

Cir. n. 277/20.07.10 p. II CHAPTER IV...................................................................................................................................15 DEFINITION OF REGULATORY OPTIONS.............................................................15

1. General Criteria .................................................................................................................15
2. Characteristics of the options.............................................................................................16
3. The staged analysis: macro-options and sub-options ............................................................17 CHAPTER V ....................................................................................................................................18 COST-BENEFIT ANALYSIS...........................................................................................................18
4. Introduction...........................................................................................................................18
5. Stakeholders..........................................................................................................18
6. Costs.................................................................................................................................19
7. Benefits...........................................................................................................................21 CHAPTER VI...................................................................................................................................22 COMPARATIVE ASSESSMENT ....................................................................................................22 CHAPTER VII.................................................................................................................................24 EX-POST MONITORING ..........................................................................................................24

PART I REGULATORY IMPACT ANALYSIS IN THE LEGISLATIVE PROCESS OF THE BANK OF ITALY

Cir. n. 277/20.07.10 p. I. 1 CHAPTER I GENERAL PRINCIPLES

1. Introduction Regulatory Impact Analysis (RIA) is an integral part of the legislation and regulation process in the financial sector, both in international forums and at the national level. It responds to the need to guide authorities towards a more comprehensive evaluation of available options, in order to identify those that are most effective and/or least burdensome, and to make the regulatory process more efficient and transparent. It also contributes to the simplification of legislation and the pursuit of higher quality standards in its preparation. In particular, RIA represents the set of procedures and methodologies for evaluating both the appropriateness of an intervention and the effects of specific policy choices (introduction of new legislation, variation of the existing regulatory regime or specific measures, removal of rules). In this sense, it aims to achieve the following objectives:
2. ensure correct identification of the problem to be addressed and the likely effects of any regulatory intervention, with the ultimate goal of maximizing net benefits for different stakeholders (intermediaries, users of banking and financial services, the economic system);
3. strengthen regulatory action, providing a substantial contribution to the decision-making process from an economic perspective;
4. increase the transparency of the decision-making process. RIA provides structures responsible for preparing regulation with useful indications to adopt more informed decisions, contributing – through economic analysis – to the identification of solutions that guarantee the achievement of the objectives set by the policy-maker, without however introducing inefficiencies. For all its relevance, this activity cannot replace either the phase of preparing the legislation or, even less, the decision-making phase1 .

1 In the Guide prepared by the Presidency of the Council of Ministers (2000), it is mentioned that "the correct implementation of RIA does not preconstitute the regulatory choice. Rather, it puts the responsible subject in a position to decide in a more informed manner, taking into account some fundamental data and estimates on the likely impact. Under these conditions, not only does RIA not replace decisions, but it represents an important factor in improving their quality".

Cir. n. 277/20.07.10 p. I. 2 Regarding the transparency of the decision-making process, the use of RIA – accompanied by consultation with different stakeholders – also contributes to making the regulatory process more transparent, increasing the degree of accountability of the authorities. In drafting and reading the RIA, it must be taken into account that it is configured as:

• an iterative process;
• in which the qualitative component is central;
• inspired by the principle of proportionality. Under the first profile, the interaction between the units responsible for regulation and those tasked with conducting the impact analysis must be based on continuous comparison. For example, the evaluation of costs and benefits requires the prior definition of a range of reasonable options, identified by the policy-makers; these latter, in turn, can benefit from a preliminary analysis of the possible effects of the proposed regulations from the phase of defining the options. Regarding the second aspect, RIA – both in its component of examining market and regulatory failures and in that of evaluating costs and benefits – is based on qualitative assessments that, depending on the type of phenomenon and available data, can be supported and/or integrated by quantitative indications. Although quantitative information can be extremely useful to reach a definitive assessment, it is often difficult to obtain or the result of estimates that present a considerable level of uncertainty. As for the principle of proportionality, it informs the entire RIA activity, with reference to both the content of the regulation and the characteristics of the legislative process. Regarding the content, the need for the regulatory intervention to be proportional is implicit in the very objective of RIA, aimed – as mentioned – at identifying the most economically efficient regulatory options. With reference to the legislative process, the very conduct of the impact analysis – in particular the evaluation of costs and benefits – implies implementation costs both for the authorities and for the intermediaries potentially involved (through consultations, questionnaires, or meetings). Therefore, it must be carried out following a pragmatic approach, with the awareness that a complete assessment of the likely effects of a regulation is complex and not always necessary.

2. Objectives Part I of this circular regulates the organization of the RIA process within the Bank of Italy and its interaction with the

Cir. n. 277/20.07.10 p. I. 3 process of producing new rules in the banking and financial sector. It identifies the practical methods for carrying out RIA, but does not determine further obligations beyond those provided for in the Regulation of the Bank of Italy implementing Article 23 of the Savings Law. The aspects treated constitute, on the one hand, a more detailed elaboration of the general principles contained in the aforementioned Regulation; on the other hand, they provide an operational perspective on the phases of impact analysis, described in more detail in the second part. In Part II, in fact, the analysis methodology to be followed in the different phases of impact analysis is illustrated in detail, accompanying operational indications and examples on the most relevant aspects. The indications provided are consistent with those contained in the guidelines published by other authorities (in particular, the European Commission and the European Committees of the 3rd level provided for by the Lamfalussy procedure). 3. Legal Sources

• Article 23 of Law No. 262 of December 28, 2005 (so-called "Savings Law"), which introduced specific obligations for supervisory authorities in the financial sector2 .
• Regulation implementing Article 23 of the Savings Law (hereinafter "Regulation"), published in the Official Gazette of the Italian Republic No. 102 of May 4, 2010, which regulates the adoption of acts of a regulatory nature or of general content by the Bank of Italy in the exercise of its supervisory functions.

2 In particular, Article 23, paragraph 2, provides that acts having a regulatory nature or of general content by supervisory authorities "are accompanied by a report illustrating their consequences on regulation, on the activity of companies and operators, and on the interests of investors and savers. In defining the content of general regulation acts, the Authorities shall always take into account the principle of proportionality, understood as a criterion for exercising power adequate to achieve the goal, with the least sacrifice of the interests of the recipients".

Cir. n. 277/20.07.10 p. I. 4 CHAPTER II SCOPE OF APPLICATION OF RIA

1. General Criteria The Regulation defines the scope of application of RIA and outlines the phases of the legislative process conducted at the Bank of Italy, including among these the impact analysis. In particular, pursuant to Article 1, all measures having a regulatory nature or of general content, adopted by the Bank of Italy in the exercise of its banking and financial supervisory functions, fall within the scope of application of RIA. The following cases are excluded:

• normative acts or of general content adopted in the exercise of functions other than those indicated;
• opinions and other assessments formulated by the Bank of Italy in relation to normative acts or of general content under the competence of other Authorities;
• acts having exclusively interpretative or applicative purposes and therefore not having the character of innovation of the legal system, including circular letters;
• acts of internal organization and those not having external relevance;
• regulations adopted pursuant to Law No. 241 of August 7, 1990, and subsequent amendments, regarding administrative proceedings. Similarly, RIA does not apply to normative acts for which agreement, concert, or joint adoption with other Authorities is provided for; these cases are regulated by Article 9 of the Regulation, which refers to specific memoranda of understanding to be agreed upon between the Authorities mentioned in Article 23 of the Savings Law. Finally, the following may be excluded:
• regulatory interventions that consist in the transposition of superior legislation with restricted margins of discretion;
• measures that, although formally falling within the perimeter described above, presumably present marginal additional costs for the recipients of the rules, and more generally for the different stakeholders (Article 3, paragraph 3 of the Regulation). [omitted - internal organizational details]

Cir. n. 277/20.07.10 p. I. 5 2. Specific Cases a) Decisions of the CICR Although Article 23 of the Savings Law does not mention the Interministerial Committee for Credit and Savings (CICR), within the scope of application of RIA also fall the proposal for decision-making of this Authority, "if and insofar as the identified regulatory options are sufficiently detailed" (Article 1, paragraph 2 of the Regulation). In these cases, therefore, the appropriateness of initiating or not RIA is evaluated on a case-by-case basis according to the characteristics of the proposals, as well as the urgency with which they must be presented. In the choice, particular attention is paid to two factors:

• the greater the ability of the proposal to influence fundamental choices of future supervisory legislation (providing, for example, guidelines for the preparation of implementing legislation), the greater the usefulness of conducting the impact analysis already on the proposal for the decision;
• the greater the degree of detail of the proposal, the greater the need to define, with sufficient advance notice, its impact on different stakeholders. [omitted - internal organizational details] b) Other Cases If deemed appropriate, impact analysis can also be conducted in cases other than those provided for by the Savings Law, in accordance with Article 1, paragraph 5 of the Regulation, pursuant to which the Bank of Italy takes into account the principles of the Regulation in its institutional activity of collaboration and cooperation, also in the international arena, due to its banking and financial supervisory functions. It remains clear that, in such cases, the carrying out of RIA constitutes a faculty to be exercised according to the criterion of proportionality, for the effective and efficient pursuit of supervisory objectives. In such cases, the procedures and methodologies described in these guidelines can be applied. A relevant example is represented by international regulation, within which an assessment of the likely impact of proposals under definition can provide a high added value. The Bank of Italy is increasingly involved in the preparation of financial regulation in international forums (both through the role of its experts within the European Commission, and within the technical committees of the Lamfalussy procedure and the Basel Committee). If compatible with international deadlines,

Cir. n. 277/20.07.10 p. I. 6 the carrying out of impact analyses on proposals under discussion can improve the quality of the contribution offered by the Bank, strengthen the position assumed in negotiations with authorities of other countries, provide greater awareness regarding the effects of the intervention on the Italian financial system. In the case of measures deriving from the transposition of European directives with maximum harmonization, RIA may be omitted. [omitted - internal organizational details]

Cir. n. 277/20.07.10 p. I. 7 CHAPTER III THE CONTRIBUTION OF RIA TO THE LEGISLATIVE PROCESS

1. Introduction The regulatory action of the Bank of Italy is directed towards the pursuit of the objectives identified by the law. The Regulation defines in general terms the role of RIA in the legislative process of the Bank of Italy. This role can be schematically reduced to two main functions (see Fig. 1):

• first, RIA responds to the need to evaluate the effects of regulatory interventions that are necessary to implement primary legislation, Community legislation, or other commitments assumed in international cooperation forums3 (“exogenous” legislation). These are situations in which the Bank of Italy does not have the power to decide whether to intervene or not, but in which it may still maintain margins of discretion in defining the options or the content of the intervention. As highlighted in the previous paragraph, RIA, if conducted in the phases of negotiation of directives or international agreements, can make the positions of the Bank of Italy more robust, contributing to the adoption of choices more adequate to the characteristics of the financial system and Italian users;
• secondly, RIA contributes, especially through the analysis of market or regulatory failures or in the phase of revision of legislation, to the identification of regulatory interventions that the Bank of Italy decides to adopt autonomously (“endogenous” legislation). In this hypothesis, it intervenes in a very preliminary phase, in fact at the moment when the Bank of Italy decides whether to intervene or not, and can therefore provide a high added value to the improvement of the quality of the legislation. In both cases, once the set of regulatory options is defined, the cost-benefit analysis allows the policy-maker to identify the alternatives that, from an economic perspective, are more efficient.

3 In particular, European Committees of the 3rd level and the Basel Committee for banking supervision.

Cir. n. 277/20.07.10 p. I. 8 Fig. 1 – The functions of RIA in the legislative process Interventions identified by policy makers Ex post RIA Intervention legislative within the year? RIA in negotiation phase Possible analysis of market/regulatory failures Annual Program Cost-benefit analysis Legislative intervention Triennial revision of legislation Regulatory options International commitments External legal sources YES Exogenous legislation Endogenous legislation Consultative panels 2. The Phases of the Legislative Process The legislative process at the Bank of Italy is articulated in the following phases (see Fig. 2):

1. The first consists in the decision regarding the need to introduce, modify, or eliminate regulation. As described in the previous paragraph, in some cases the need for intervention is exogenous as it derives from obligations imposed by superior sources, national or Community, or by other obligations assumed at the international level. In other cases, the decision is endogenous and is made based on proposals, comments, or requests from stakeholders (for example through consultative panels), of

Cir. n. 277/20.07.10 p. I. 9 analyses conducted within the Institute (including RIA), the need for periodic revision of legislation. 2. The decision to intervene, whether exogenous or endogenous, flows into the annual planning activity for the production of legislation. This is the phase in which the Bank of Italy formalizes and makes known its commitment to intervene in the following year with regulatory measures. Already in this phase, an indication is provided on which dossiers will also have RIA conducted. It must in fact be initiated on all interventions included in the program taking into account the principle of proportionality and the cases of derogation provided for in the