Rethinking the Future of Self-Regulation in the Financial Industry

Abstract

This article seeks to broaden the scope of the ongoing debate on financial regulation reform by making a case for reinventing industry self-regulation on a fundamentally new normative basis. The article argues that, in the face of the increasing complexity and globalization of financial markets and activities, it is critically important to seriously consider the potential role of industry self-regulation as one of the key mechanisms of controlling and minimizing systemic risk – a task that is not adequately performed by the existing financial industry self-regulatory organizations (SROs). The article suggests a new normative approach to self-regulation in the financial services sector – “embedded self-regulation” – which focuses explicitly on prevention of systemic failure and is firmly embedded in the broader public interests and policy goals. This new self-regulatory model will seek to redefine the broader social role of the private financial sector and to impose the primary responsibility for safeguarding financial stability directly on the financial services industry whose activities threaten such stability.