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Regulation: a measured international solution


10 March 2009

This is one in a series of articles exploring the theme of financial regulation and reform, written by Allen & Overy's legal experts.  

Allen & Overy believes that the London summit offers a key opportunity to deliver an internationally agreed agenda which can inform the G20 and global responses to the crisis. These in turn can reshape the worldwide financial system to make it more stable, fairer and better regulated.

There is developing recognition among politicians, as well as the financial community, that international problems need international solutions. There is no doubt that consensus is needed: nationalistic responses risk clogging up the wheels of international commerce, which would be detrimental to all concerned. We are positive about the likelihood of international agreement on the big picture issues.

For our clients (and therefore for us as lawyers), however, the key issue is getting the right balance between idealism and workability. There is an understandable desire for politicians to grandstand – for big problems to attract big ideas.

But if the big ideas do not stand up to more detailed scrutiny, then they risk deepening the downturn and hindering future growth by stifling innovation, entrenching bureaucracy and creating barriers to economic progress. For this reason, as indicated by responses from over 700 business leaders around the world to our survey on The Future Direction of Global Financial Regulation (PDF) ahead of the last G20 Summit, a measured response is essential.

It is tempting, but too simplistic, to make scapegoats of the perceived villains of the piece. An example is securitisation: it would be easy to penalise (or even do away with) securitisation. Its abolition would have little or no benefit to the wider global economy, however. Indeed, a deeper analysis of the role of securitisation – and indeed many other areas of perceived market failure in recent years, such as over the counter derivatives or the activities of hedge funds – would reveal a practice that is at its core economically useful, but which needs appropriate controls. The question is then what are the right controls for these activities. Principles should be agreed as to these controls.

It is here, once the principles are agreed, that the hard work needs to be done. It is easy in times of crisis to ignore past practice or regard it as toothless. The fact that we are in the midst of a crisis does not mean that the key tenets of good regulation – analysis, identification of market failures, proportionality and justification on cost-benefit grounds – should be thrown out, however. Rather, those tenets are more important than ever.

Ultimately the prize – creation of global consensus for dealing with the crisis and regulating the financial markets in the future – is a massive one. As a global law firm, dealing with global clients, we believe that there can be a substantial dividend from international harmonisation of regulatory standards. The hope is that that harmonisation is delivered quickly, but also efficiently and thoughtfully, to create better (rather than more) regulation.

G20: Exploring the consequemnces of financial reform  

View the webcast: Philip Wood on what really caused the financial crisis and what needs to happen now.

Read a range of articles written by Allen & Overy's legal experts in response to the meeting of the G20 at the London Summit:

G20 London summit: Reform and regulation of the financial system


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