Bill Mayer and Clive just had a very interesting exchange on the topic of the American versus the British approach to financial regulation. American regulation is extremely rules focused--everything not compulsory is forbidden. Britain is nominally looser, with the caveat that you can't get away by saying that "the rules didn't say I couldn't!" You are expected to run a sound institution, and if the regulator decides you haven't . . . start practicing saying "I retired to spend more time with my family. In the waiting room at the courthouse."
Bill Mayer is in favor of this approach, though Clive points out that Britain has had its own problems. ([cough]Northern Rock[cough]). I am broadly in agreement with the notion that American regulation is far too reliant on detailed rules. These are sought by the companies to provide them safe harbor from litigation, but the result is often severe dysfunction. My old accounting professor, Roman Weil, made a similar argument about American accounting standards to Congress in the wake of the Enron debacle, which lays out why these attempts to solve problems with exponentially multiplying rules is ultimately foolish.
Speaking from a position of unalloyed ignorance, I'd suspect that detailed rules are taken as a recipe for how to sail very close to the wind but stay just inside the law - is that correct?
If so, I call it the "minefield scenario." If you know for sure exactly where the minefield is, you can walk right next to it. But if you only know generally speaking, but not exactly, prudence demands staying well away from anywhere it might be.
In the geopolitical context, this is why I oppose telling other countries that if they do X, we'll do Y. They can then make the calculation of whether X is worth Y to them (and/or mititgate the effects of Y).
Much better to say, in essence, that if they do something we don't like, we'll do something that they really won't like, and let their imaginations run wild with what that might be (1984 style), and which of their actions might trigger that reaction from us.
I find discussions like this one....."American" vs "British" approaches to anything particularly interesting at this point in my life (given that I am currently residing in the UK).....as if either system will ever convert the other to their approach. (We barely speak the same language, for cryin' out loud....)
The best anyone can hope for is that the two differing perspectives can have a better understanding of where the other is coming from (and the associated pros & cons of each approach), and, by implication, further their own understanding of their own approach.....and if the only people paying attention to this discussion were a bunch of Americans, it must've been a total waste of time......
There was empirical work done on Australian vs. Californian approaches to regulating nursing homes. Apparently, California had a large number of detailed rules. Australia basically just had a standard -- the operator should provide a "home-like environment" -- and discretion in the hands of the regulator, which in turn could be reviewed in court. Australian outcomes were better.
Rules have their place -- when certainty is critical. But standards and discretion work better when there are enormous incentives to game the rules.
Isn't this a special case of the old adage that Britain is (or was) run on the assumption that almost everyone is at least middlin' honest, and the USA on the assumption that almost everyone is a crook?
Too bad Pithlord didn't mention where this "empirical work" on government schemes of nursing home regulation was published.
"A large number of detailed rules" is virtually inevitable when one imposes a welfare state or a regulatory state system onto a nation with a bedrock principle of all men are equal under the law. "Discretion" on the part of the government's regulators is much less controversial in nations with a heritage of class differences in which one may not casually question the decisions rendered by ones betters.
That being the case, Americans won't escape the vexations of "detailed rules" imposed by its welfare regulatory industrial complex until most Americans give up their 19th-century acquired fantasies of government as a benevolent Uncle Sam.
"Discretion" on the part of the government's regulators is much less controversial in nations with a heritage of class differences in which one may not casually question the decisions rendered by ones betters.
You don't know much about Australia if you think it's one of those countries, mate.
Unnecessary regulation is bad -- precisely because it leads to this dilemma between detailed rules that are bureaucratic and easy to game versus discretion in some agent of the state. But the customer in a nursing home doesn't really have the ability to keep the producer honest through market mechanisms. You hope people's families look out for them, but they don't always. And you can't really bail out financial institutions without having some way of controlling moral hazard.
"American regulation is extremely rules focused--everything not compulsory is forbidden."
I defer to your greater knowledge in the financial sector, but this does not seem to be the case with the areas of (fed) govt regulation with which I have a familiarity.
There are clearly quite a few important variables in determining the quality of an investing environment, so comparison is tricky, but is it really the case that the British approach to regulation achieves superior results? So why don't Americans want to invest in British exchanges more than the other way around?
I also wonder if it's actually the case that Britain is only "nominally" looser. Who exactly is going to jail?
The rules versus principles debate is a red herring. Key elements of American financial regulation (Rule 10b-5, for example) are the height of principles-based regulation. The critical element is enforcement. In the United States, you screw up, and you will indeed be spending a lot of time in the courthouse waiting room -- both because the Feds will come after you, but also because you'll be sued by your shareholders. Screw up in the UK and -- well, according to the UK FSA's own reports, they bring about a dozen enforcement cases per year. And class action lawsuits are unknown. If you live in an environment where the penalties for messing up are severe (i.e., not just losing your job, but also your fortune and possibly your freedom), then you want rules as a way to constrain the discretion of the police power (whether government or private). If you have an environment where the regulator is toothless, you'll want principles -- because otherwise the toothless nature of the regulator soon becomes apparent, and then you've got chaos.
The far more interesting question is the focus of the regulation itself. The UK system is predicated on the idea that most people access the market through pension funds or other institutions -- funds and institutions found within a few square miles within the City of London or Canary Wharf. The U.S. system is predicated on the idea that most people access the market directly, through direct stock ownership. That used to be true, but now it's not. And if that's the case, then the focus of U.S. regulation should shift away from issuers and their financial disclosures, to conduct of business regulation for institutions.