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Philosophy of Regulation: Rules vs. Principles, Soft Law vs. Statutory Regulation

The purpose of this topic is to explore what regulation and regulatory reform is seeking to achieve, now that the world has moved beyond the “emergency outcome-based” phase of the regulatory response. The underlying hypothesis is that the success of achieving effective regulation is conditioned by common views on the purpose and goals of regulation from those countries involved in financial intermediation. To the extent that the history of regulation and intervention in markets differs dramatically by, amongst other things, geography and political philosophy, a better understanding of the varying perspectives on the subject may be a critical first step.

Furthermore, G20 leaders have come to the table prepared to forge regulation at an international level.  This requirement for international harmonisation seems to suggest that it must be possible to put aside national preferences in times of perceived necessity, and that no matter what the method, the end goals of regulation must be agreed to be broadly the same. Given this objective, the different methods of regulation – both in the G20 nations and beyond – must be looked at.  There has long been a question over whether rules work better than principles in terms of regulating corporations, and it would appear that neither worked as hoped in the financial crisis, with both the US and the UK faring badly, despite their opposing methods of regulation.  How then should regulation work in the future – is there an argument that rules or principles or a combination of the two should prevail?  Or should the method of regulation be left to national discretion, provided the end goal is more-or-less the same? And should the answer be the same no matter what the country?

Potential questions for analysis include:
 
Objectives of financial regulation

• How much of the differences in approach are a function of different historical or legal traditions; how much a difference in economic philosophy?
• Is it worthwhile to raise the issue of ‘socially-useful’ financial intermediation – how can this be measured?
• How much of regulation is about removing information asymmetries. If this is the case, is focusing on regulatory structures missing the point?
 

Regulatory and supervisory structure

• How much does ‘optimal’ regulatory structure depend on the answers to the questions above?
• Does ‘optimal’ regulatory structure depend on who is asking the question? (the regulator, the central bank, the government, the tax payer, the consumer, the financial intermediary, by borrower or lender)
• How dependent is an ‘optimal’ regulatory structure on the political and economic structure, and the level of economic and financial market development in a country? Do priorities change with economic and social development so that what is needed is a flexible and adaptive regulatory approach? If so, how can national and international approaches be harmonised?
• Should and how can policy makers ‘regulate’ for behaviour?
 

Regulation and politics

• Given the economic consequences and taxpayer burden resulting from the crisis, can or should the regulatory response be divorced from political ‘interference’? What can be done to ensure that regulatory actions are not a substitute for political blame-shifting and retribution?
• Are all financial crises necessarily followed by bouts of ‘this must never happen again’ so that regulation is doomed to address the last problem and not the next one?


These are only a few of the issues which may be looked at under the heading of the philosophy of regulation. The ICFR encourages people interested in this subject to get in touch both to express their interest and also to suggest other, fruitful areas for discussion. This topic is of course closely interlinked with another of our research themes, that of the status of the G20 process. The ICFR is especially keen to engage with researchers in the emerging world in order that the increased importance of these economies is fully reflected in the ICFR’s research agenda. 


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