Leading academics call for a revolution in financial regulation

IEA launches new Economic Affairs

Several leading academics are calling for a new approach to financial regulation based on simple legal frameworks, rather than the current obsession with complex, detailed specifications. They set out their arguments in detail in the latest edition of the IEA’s journal Economic Affairs “Financial Regulation: the need for a revolution” (vol. 32, No.3).

Writing in today’s edition of The Times the same authors argue:

Preamble

The public's objective is for a sustainable financial services industry. There is currently no debate on available ways to achieve that objective other than through massive regulatory intervention. There is little evidence that this is the only or best way to achieve this objective. Indeed, there is substantial evidence available that this approach will not be successful and that alternative routes may be preferable.

Statement

1.     Financial regulation has run riot in recent years to the detriment of the industry and its customers. For example, last year alone there were 14,200 new banking regulations worldwide and the US Dodd Frank Act will contain around 30,000 pages of regulations.

2.     We need an entirely new approach to regulation across the financial sector which is based on transparency, market discipline and simple and stable legal frameworks within which financial institutions can operate. This approach was successful historically in the UK. 

3.     The approach to banking regulation being followed by governments worldwide is too complex, as well as being dangerous and unnecessary. Instead, a legal framework should be created whereby banks can fail safely and deposit insurance should be abolished.

4.     Accounting standards regulations have become extraordinarily complex and have replaced professional judgement with damaging consequences – including during the financial crash.

5.     The inflexible regulation of company pension schemes has contributed significantly to their widespread closure as well as to short-termism and herding behaviour amongst investors. Perversely, regulation designed to protect members has led to the replacement of relatively safe defined benefit schemes by much more risky arrangements.

6.     Securities markets do not need to be closely regulated by gover