A Critical Analysis of the Rationale for Financial Regulation Part I: Theories of Regulation

Abstract

The aim of this paper is to critically examine and comment on the continued validity of the theories and the generally accepted objectives of financial regulation in the light of the policy response to the financial crisis and the regulatory activism of the last decade in the EU and US. The main position of this paper is that the post-crisis policy response and the current state of affairs may be explained as a combination of factors that surface from past theories of regulation and that the causes of the financial crisis and subsequent regulatory measures, such as the Dodd Frank Act in the US and the establishment of the European Supervisory Authorities (‘ESAs’) in the EU, sustain the continued validity of the objectives of financial regulation. However, recent measures, such as, the Financial Choice Act in the US, and the European Market Infrastructure Regulation (‘EMIR’) Refit in the EU, seem to have objectives which go beyond existing and internationally accepted objectives of regulation. It is also argued that regulatory and supervisory action to realise a specific objective of financial regulation could, at times, generate tensions with and weaken the realisation of other regulatory and economic objectives. This paper also demonstrates the difficulties that could surface in finding the right balance between achieving the objectives of financial regulation, while avoiding instances of over-regulation by respecting the principles of proportionality, subsidiarity and the fundamental rights of members of society such as the promotion of fair competition and consumer choice.