An institutional account of responsiveness in financial regulation- Examining the fallacy and limits of ‘same activity, same risks, same rules’ as the answer to financial innovation and regulatory arbitrage

Abstract

Financial regulators face the persistent issue of being challenged by financial innovations and regulatory arbitrage. This article argues that a functional approach of ‘same activity, same risks, same rules’ is potentially vague and insufficient, and does not provide clear guidance for regulators. By critically discussing the US Securities Exchange Commission's and UK Financial Conduct Authority's approaches to cryptoasset offers, the paper argues that whether and how regulators respond to financial innovation crucially depends on regulators’ institutional structures. These structural limitations provide empowering as well as constraining aspects in relation to regulatory objectives and mandates, shaping financial regulators’ responsiveness in different ways. The paper argues that an institutional account of regulatory responsiveness more accurately explains policy responses. The benefits and drawbacks of such policy responsiveness are also crucially shaped by these institutional structures.