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SEC v. FSA: Rules v. Principles

The Wall Street Journal carried a story today about the Financial Service Authority, Britain's version of the SEC.  The article noted that the FSA emphasizes broad principles based system while the SEC emphasizes specific rules.  It also noted that "the FSA typically looks to resolve cases through compromise and negotiation. Much of its sanctioning happens behind closed doors, an approach the FSA says can encourage offenders to look for a quicker settlement."  The specifics?  During the four year period between 2002 and 2006, the FSA averaged 77 enforcement cases (that resulted in action) while the SEC averaged 3,624.  

Needless to say, the FSA has been criticized for not being active enough in protecting investors.  The Authority itself has complained that it lacks the regulatory tools to prosecute much of the insider trading that takes place on the London market.  But it has also been praised as evidencing an approach to regulation more likely to facilitate growth in the London financial markets. 

In comparing the two regulatory bodies, it is not about really about rules v. principles.  For one thing, principles build into the system a high degree of uncertainty.  Having to deal with specific rules may be more cumbersome but they also provide a higher degree of certainty.  Instead, the comparison of the two regulators is about the method by which each market is trying to attract business.  The SEC takes a pro-investor approach and telegraphs that shenanigans in the market will not be tolerated.  Investors generally trust the markets, at the recent climb in the Dow Jones suggests.  Businesses who come to the US may have to incur greater regulatory costs but they also get the benefits that come with greater investor confidence.

The FSA essentially takes a more pro-industry approach, willing to tolerate behavior harmful to investors rather than scare off business through increased regulatory costs.  In other words, it is seeking to attract those businesses that are trying to avoid the regulatory oversight, with some harm to investors therefore inevitable.  This can also be seen in connection with AIM, the Alternative Investment Market.  We've written about that market here.  But what London and the FSA will gradually learn is that there will be plenty of other exchanges that will compete by lowering the regulatory bar.  To maintain its position, the FSA will have to engage in even less regulation and protection of investors.

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  • Response
    Great Post! I am planning to write sometihng like this on my blog! I want emphatize this to Latin American Market! Keep it up! PS: Already Bookmarked!

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