Principles-Based Securities Regulation in the Wake of the Global Financial Crisis
50 Pages Posted: 2 Dec 2009 Last revised: 18 Oct 2010
Date Written: December 1, 2009
This paper seeks to re-examine, and ultimately to restate the case for, principles-based securities regulation in light of the global financial crisis and related developments. Prior to the onset of the crisis, the concept of more principles-based financial regulation was gaining traction in regulatory practice and policy circles, particularly in the United Kingdom and Canada. The crisis of course cast financial regulatory systems internationally, including more principles-based approaches, into severe doubt. This paper argues that principles-based securities regulation as properly understood remains a viable and even necessary policy option, which offers solutions to the real-life and theoretical challenge that the GFC presents to contemporary financial markets regulation. That said, the global financial crisis illustrates how such outcome-oriented and devolved models can slide into self-regulation in the absence of meaningful regulatory oversight and engagement, and regulatory commitment to its publicly and systemically oriented role. Our response to the crisis should not be to re-embrace more rules-based regulatory approaches. Financial markets are too fast-moving and complex to be regulated in a command-and-control manner, and the risk of Enron-style “loophole behavior” associated with rules is too great. Instead, the paper draws on the lessons of the financial crisis to identify three critical success factors for effective principles-based securities regulation: considerable regulatory capacity (along four main parameters); an effective strategy for dealing with complexity (including the possibility of incorporating “prophlylactic rules” at strategic junctures); and adequate independence of mind and diversity of perspectives among regulators (meaning potentially a move away from an expertise-based, technocratic model toward a more broadly participatory one).
Keywords: securities regulation, principles-based, financial crisis, regulatory design, regulatory capacity, complexity, diversity
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