The Role of Gatekeepers

Abstract

Gatekeepers are financial intermediaries that operate between issuers and investors and have a potentially valuable role to play in the financial market. This paper, which has been written for the Oxford Handbook on Financial Regulation (Moloney, Ferran and Payne (eds) OUP, 2014), considers the role of gatekeepers, examines gatekeeper failure and analyses recent attempts at regulation. There are a number of limitations on the effectiveness of gatekeepers as an investor protection device, largely concerning the conflict of interest arising from the funding model for gatekeepers, but exacerbated by factors which reduce a gatekeeper’s incentive to perform its role well, including a lack of competition in the market, a lack of litigation risk and, in relation to Credit Rating Agencies, the development of a regulatory licence. This paper assesses the likely success of the regulatory measures that have been put in place to address these issues to date. It concludes that, despite the raft of measures that have been introduced, regulators have largely failed to tackle the core issues that lead to gatekeeper failure. As a result, although many measures that have been implemented are valuable, the overall effectiveness of the regulatory response may be doubted.