Britain in a Global World by unknow

Author:unknow
Language: eng
Format: epub
Tags: economics, EU, UK, European Union, politics, global strategy, taxation, competition, trade policy, europe, Britain, euro, eurozone, political, EU membership, Global Vision, essays
ISBN: 9781845403201
Publisher: Andrews UK Limited 2011
Published: 2011-10-20T00:00:00+00:00

These arguments may have been valid at one time, but are much less true today. Electronic trading significantly reduces costs and allows international competition (see, Davis and Steil, 2001, for some discussion of this). Indeed, one of the drivers of the EU single market programme in this area is the desire to allow cross border competition although, ironically, the FSA (FSA, 2001, para 3.9) argues that pan-EU competition requires a common approach to regulation.

Competition can also take place between recognised exchanges and non-exchange trading systems. The FSA suggests (FSA, 2001) that this may require the introduction of comparable regulatory standards across exchange-based and non-exchanged-based trading systems. There seems to be no recognition that the existence of competition lessens the need for regulation.

It is certainly true that there are network effects and therefore advantages of scale economies in stock exchanges. However, it is increasingly true that workable competition, if not perfect competition, is undermining the natural monopoly argument for regulating financial markets. The existence of electronic trading, non-exchange-based trading systems and international competition undermine monopoly power. The provision of exchange services is, in fact, a very competitive business. Indeed, as one of the functions of an exchange is to provide regulation, statutory regulation institutionalises monopoly power.

Regulatory Competition

We do not know the best structure for delivering regulation, the best regulatory framework for financial markets, or the best sets of detailed rules, ex ante. We can make some educated guesses and we can use economic theory as a guide, but we do not know in advance what the best structures, frameworks and rules are. We currently have a state, monopoly provider of regulation—the FSA which, to a large extent, is answerable to EU law. Top-down, state-created structures cannot determine the optimal regulatory structure. This may seem like a glib point, an effort to use terms such as ‘optimal’ and ‘competition’ developed by economists for analysing decisions such as those relating to the number and type of bananas consumers may wish to buy in the wrong context. It is not. There are some issues relating to regulation that naturally belong with the criminal and civil law and with the statutory authorities. However, for the large part, financial regulation is, in fact, the provision of a set of services in the same way that railway through-ticketing and timetabling (including the invention of time zones), developed by private train companies in the nineteenth century, are sets of regulatory services in a different context. The notion of competition is highly relevant.

Arguments are often put forward to suggest that regulatory competition leads to a ‘race to the bottom’. There is no evidence for this. Indeed, former Chairman and CEO of the FSA, Howard Davies, said (Davies, 2002):

The argument that we hear is that regulatory competition cannot be allowed in the EU. Why not? Because, I am told, we would see regulatory arbitrage and a ‘race to the bottom’. That seems highly unlikely to me, especially at a time when investors are, not unreasonably, nervous about unconventional corporate structures and opaque accounts.

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