Terry Arthur & Philip Booth, Does Britain Need a Financial Regulator? Statutory Regulation, Private Regulation and Financial Markets (Hobart Paper 169, London: IEA, 2010)
Foreword by Martin Ricketts. 167 pp. ISBN: 978-0-255-36993-2.
No recent proposition seems to have been more easily and uncritically accepted than that the recent banking crisis and related widespread disruption in financial markets were the result of the excesses of ‘unregulated financial capitalism’. In an era notable for regulatory growth in almost every sphere of economic and social life, it is interesting in itself that the instinctive response of many people to evidence of market discoordination is to assume that regulators must have been insufficiently intrusive. Hayek’s ‘fatal conceit’ that conscious human design must always result in better economic organisation than incremental decentralised and evolutionary systems is indeed deeply rooted. Market processes, in the popular view, are very likely to descend into chaos unless they are subjected to oversight from powerful regulatory agencies.
Only a generation ago, UK investment markets were regulated by self-governing exchanges. Though independent exchanges still exist, investment markets have become regulated in ever more detailed ways by statutory bodies such as the Financial Services Authority. These bodies have no clear lines of accountability, nor do they have incentives to develop appropriate systems of regulation.
This monograph shows that the arguments in favour of statutory regulation are unconvincing and have weakened as the potential for international competition between exchanges has developed. The history of sophisticated self-regulating investment markets is an astonishing success story. Experience shows that statutory regulation of investment markets is unnecessary and has the potential to violate important principles of the ‘rule of law’. Consequently, independent statutory financial regulators should be abolished. Some of their functions could be given to other government bodies, but one of their most important functions – that of regulating investment markets – should be handled by private bodies.
Read more about the book on the IEA website, where a copy can be downloaded (external link).
Terry Arthur is a Visiting Fellow at the University of Buckingham, and the author of Crap: A Guide to Politics (London: Continuum, 2007). Martin Ricketts is Professor of Economic Organisation at Buckingham, Head of the Department of International Studies and Dean of Humanities.