The Effect of Financial Regulation on Reputation

Abstract

Recent high profile breaches of regulation by prominent UK financial institutions suggest that self-regulation is ineffective. Intuitively, regulatory breaches should result in a tarnished reputation, but that conjecture is unsubstantiated. With objective measurement of reputation, we demonstrate that reputational damage is not a significant deterrent against regulatory breaches. Imposing regulatory fines is also no deterrent. We speculate that customers are prepared to tolerate large regulatory breaches: retail customers provided they are not affected personally, and corporate customers as long as investments do not devalue. Regulation has not previously been linked to reputation, and this result is significant because it adds to the argument that external regulation remains necessary. Note is also made of recent unsuccessful initiatives on self-regulation.