Trust has lost all of its value in our state-regulated financial markets

The spotlight in the Libor rate-fixing scandal has moved. Questions are being asked about the culpability of the FSA, which may well have ignored repeated warnings about Libor calculations from market participants. The role of the Bank of England and the Treasury is also being questioned.

Of course, regulators are not to blame for the actions of those at Barclays and elsewhere. However, we need to question the narrative that this problem all began with “deregulation” and then the development of “light-touch regulation” under Gordon Brown.

Given the millions of paragraphs of financial regulation and the existence of more than 3,000 compliance officers at large banks such as HSBC, we can dismiss the idea that we have light-touch regulation. But, those who suggest that there has been deregulation are not wholly wrong. More things are permitted these days – but those things that are permitted are more highly regulated.

The key question though is not how much regulation there is, but “who regulates?” Perhaps the most important change in the 1980s was not deregulation, but a move from regulatory institutions that emerged within the marketplace to statutory regulation.

When Elinor Ostrom, the late Nobel Laureate, visited the Institute of Economic Affairs last March, she was interested in the analogy between financial regulation emerging in the market and community management of environmental resources. She was fascinated by the fact that, when the stock exchange first started in a coffee shop, those who did not settle their accounts were put on a board under the heading “lame duck”; the exchange expelled people for bad behaviour; and it made the rules for companies that wanted a listing and for individuals and companies involved in trading. In order to prevent conflicts of interest, on the London exchange, companies could not trade on their own book and also give advice to clients. The motto became “my word is my bond” and the untrustworthy would not get business. This all ended with a transfer of regulatory authority to the state.

This article originally appeared in City AM. You can continue reading here.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

2 thoughts on “Trust has lost all of its value in our state-regulated financial markets”

  1. Posted 06/07/2012 at 11:32 | Permalink

    I am a compliance officer dealing with regulation every day, a lot of it. Half is rubbish. The other half ill-conceive. But the trust in state-regulated financial markets will be lost mainly when people realise that regulators apply double standards when it comes to accountability (, that the real crony capitalism is deep-rooted in government control of the financial sector through regulation ( and that the whole system of regulation is flawed ( . Thanks

  2. Posted 07/07/2012 at 08:37 | Permalink

    thanks, Big Fish, very interesting posts.

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