Inaugural Regulation workshop opened by former Head of NAO

15 November 2010

Sir John Bourn, former Head of the NAO
The Foundation for Law, Justice and Society's new programme entitled 'Regulation, Regulators, and the Crisis of Law and Government' was launched by Sir John Bourn, fomer Head of the National Audit Office and Comptroller and Auditor General of the United Kingdom, whose introductory remarks opened the inaugural workshop on Financial Regulation on Friday 12 November.
The workshop, held at St Hugh's College, Oxford, served as a response to Bank of England Governor Mervyn King's call for a radical reassessment of the financial sector, by evaluating the current state of financial regulation and identifying guidelines for future reforms. Sir John was joined by experts from law, academia, business, and policymaking, including Lance Cassak, Special Counsel for the Office of Thrift Supervision (OTS), and John W. Adams, former President of Management investment firm and Adjunct Professor at Rutgers University. 

The regulatory framework and appropriate behaviourSir John opened proceedings by asking how the regulatory framework should be reformed to make banking safer, and posited that, without the opportunity for discretion, any regulatory framework merely provides "a ladder up which criminals can climb". He identified the behaviour of individuals within the system as crucial, and questioned how the system might be devised to encourage apropriate behaviour. In conclusion, Sir John identified areas of particular vulnerability in financial markets, perhaps the most significant being the potential threat of cyber crime attacks on the major financial institutions.

Lance Cassak drew on his extensive experience of fighting cases for the OTS in the US, charting the largely forgotten savings and loans crisis of the late '80s and early '90s in order to provide the necessary perspective from which to draw lessons for the more recent financial crisis.

"the 1983 Nolan Bill [was] the ultimate 'race to the bottom' regulatory system

He described how the deregulatory response to the interest rate crunch saw the introduction of such reforms as the Garn St-Germain Act of 1982 (described as the Emancipation Proclamation for US savings institutions' by Ronald Reagan) and the 1983 Nolan Bill, which Mr Cassak identified as "the ultimate 'race to the bottom' regulatory system".
Mr Cassak vividly portrayed how all the actors involved - regulators, financiers, lawyers, and politicians - had a vested interest in perpetuating this highly deregulated system that lead to widespread corruption. He noted that the complexity of the crimes and financial instruments involved meant that prosecuting cases was particularly difficult, and was exacerbated by the fact that it is much more difficult to regulate aggressively in boom times, when financial misdealing is most rampant and resistance to regulation most strident.
In the ensuing discussion, Dr Guiliano Castellano questioned whether the existing  regulatory framework, which was characterised by several agencies competing over regulatory duties, actually incentivised unscrupulous behaviour. Mr Cassak's response identified the regulatory problem to be less structural and more one of funding and credibility, an idea that was picked up by Sir John Bourn, who suggested that we should be looking how we might convey the respect bestowed on judges, for instance, to regulators, in order to better oppose the powerful and wealthy players they are ask to regulate.
Rules vs principlesJohn Adams opened his presentation with the observation that we have moved from a system dependent on understandings of customs and principles to a rule-based system which is open to abuse by lawyers who, instead of advising how corporations should behave, now act as hired guns, paid handsomely to find loopholes in the system and advise on what their client can get away with.
Citing his experience on the trading desk of Bear Stearns, he argued that much regulation discourages the efficiency of the market, whilst acknowledging that there is no such thing as a free market, since freedom of contract presupposes the existence of non-neutral laws that favour some actors over others. The purpose of regulatory agencies, Mr Adams contested, was to moderate open, fair, and transparent markets to create a level playing field and moderate the risks of uncertainty.
Mr Adams critiqued the role of regulators in stepping back and delegating powers to unaccountable credit agencies, who awarded AAA ratings to institutions engaged in disreputable practices. He argued that regulators did not take into consideration the moral hazards and unintended consequences of rule-based regulations, nor were they subject to sufficient scrutiny themselves, given the level of judicial deference shown to regulatory bodies.
The workshop was attended by a number of observers from a broad spectrum of professions and disciplines. The next workshop in this programme is planned for 16th March, details of which will be announced on the Regulation programme page of the FLJS website.
A workshop programme and participant details can be downloaded from the links on the right. A policy brief relating to the issues discussed in the workshop will be published in Spring 2011. To receive updates about future events in the programme, click on the button below to subscribe to our RSS events newsfeed: