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:
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.
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 government institutions and the coming EU Directives on alternative investment funds will be deeply damaging.
7. The forthcoming EU Solvency II insurance regulations should be scrapped. In their present form they will be damaging for insurance companies and for the wider economy. Even worse, Solvency II may lead to financial contagion and sow the seeds of future crises.
8. The current approach to developing the Single European Market in both insurance and banking is flawed. Instead, regulation should be returned to member states so that those states that wish to liberalise regulation can do so. Banks and insurance companies should, if member states desire, be required to set up subsidiaries in different EU countries. This will require a strengthening of the European Court of Justice’s oversight to ensure that individual government regulation does not prove an impediment to trade. It will also require radical reform of single market regulation.
· Professor Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs and professor of insurance and risk management at Cass Business School, City University
· Ivan Chen – Researcher at George Mason University