Rules v. Principles as Approaches to Financial Market Regulation
5 Pages Posted: 16 Oct 2013
Date Written: 2008
As the global economic recession deepened, the structure of financial institutions and the legal principles that they apply were of primary concern to investors. One aspect of the legal debate has focused on whether financial market regulation should be based on principles (where a broad set of standards gesture in the direction of certain desired outcomes) or rules (which is based on a set of detailed rules that govern firms’ behavior). Another possibility – institution-based financial regulation – has recently been proposed by John Walsh as an alternative to rules and principles. This approach refers to offices that firms are legally mandated to establish, and provides firms with flexibility in terms of how the required structures evolve and operate within the organization.
In this comment, I challenge the idea that institution-based financial regulation is a third paradigm within the principles-rules debate. Rather, I argue that it is the principles-based approach recast in the practicalities of a regulatory regime in which guidance and interpretive statements are common elements. Further, I contend that when we think of the substance of financial market regulation, the rules versus principles categorization does not take us far. Without further analysis regarding the impact of information deficiencies and costs, choosing one or the other does not necessarily lead to better regulation.
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