A Global Deregulation Agenda

Part I. Remembering the History of Simplifying Regulation to Liberate Growth

Deregulation and simplification of rules pertaining to financial markets appears to be on the agenda in the most important capital markets around the world. What this ultimately means for investor protection remains to be seen, but the effort is now spreading into a global exercise of deregulation in the name of global competitiveness.

In the United States, regulation overbearing has been explicitly linked to a perceived state of economic underperformance. Deregulatory efforts are therefore driven by an attempt to shore up innovation, economic growth, and competitive advantage. CFA Institute, however, sees a clear risk that such endeavors may be sought at the expense of fundamental principles of financial regulation focusing on investor protection and financial stability. A real dichotomy seems to be at play regarding the role of regulation. On the deregulatory side of the argument, authorities are believed to have been too cautious for too long, resulting in a stifling framework of bureaucracy, complexity, and regulatory overreach.

Regulators and policymakers do have a long track-record of adding, expanding, and increasing regulatory requirements, and it is true there is ample room to make regulation more cost effective and efficient as markets evolve. Yet, viewed through the lens of investor protection and market integrity, there is an obvious risk that deregulation is fast becoming an ominous tradeoff for weaker oversight, fewer protections, poor ethics, increased fraud, and much less transparency in markets.

Several of the deregulatory moves are targeting financial market rules going back as far as the Great Depression and the market crash of 1927. And now we are taking on the selective dismantling of more recent market protection stalwarts. Included in the current deregulation crosshairs are the Sarbanes–Oxley Act of 2002 (SOX), which dealt with dot.com era accounting frauds, and the Dodd–Frank Wall Street Reform Act of 2010 (DFA), which included critical reforms needed for economic stability and orderly markets resulting from the Great Financial Crisis (GFC).

A clear example is the downgrade of several functions of the Public Company Accounting Oversight Board (PCAOB), the audit regulator for the world’s largest public markets. Recall the Enron Corporation scandal in 2001, when several high-profile companies issued fraudulent financial statements that company auditors had signed off on. The audit firms involved failed to observe professional practice standards and conduct proper audits, and the market reaction was swift. Distrust of the financial reporting system for public companies in the United States was then at a low point. The result was the creation of the PCAOB and a string of regulations under SOX that addressed serious regulatory shortcomings, which are now facing rollbacks. A similar rollback fate seems in store for many of the key DFA reforms, including stronger bank capital, better plans for handling bank failures, and avoidance of taxpayer-funded bailouts.

Perhaps most concerning for US markets and investor protection are moves by the SEC to suspend implementation of a series of market transparency, cybersecurity, and cryptoasset/digital asset protections previously approved (see a forthcoming blog for details). The SEC has also declared it would have a much less active investigation and enforcement agenda. This timing could be at odds with the current environment of elevated risks from cryptoassets, cybersecurity, online finfluencers, and volatile retail trading apps, where market surveillance and enforcement efforts should remain a priority.

Meanwhile, the United Kingdom and the EU are also pursuing deregulation strategies with the goal of enhancing commercial competitiveness. A similar rhetoric is taking hold, whereby regulation is increasingly considered a direct inhibitor of growth, innovation, and market competitiveness. In the United Kingdom, Chancellor of the Exchequer Rachel Reeves recently referred to the term overregulation as acting like “a boot on the neck” of business. The solution in her view is cutting red tape so there would be a positive “ripple effect” on the entire UK economy.

The EU deregulation efforts are a set of objectives that will impact data privacy, consumer rights, climate, and environment reporting requirements, including a reworked Corporate Sustainability Reporting Directive. One interesting move related to the financial industry has been the renaming of the Capital Markets Union initiative to the Savings and Investments Union initiative, suggesting a more progrowth/less regulation agenda. For now, the language features a “simplification and lighter touch” approach to procedures considered excessively burdensome, rather than outright elimination of important protections.

Examples of this EU approach include a range of projects, such as legislative harmonization using directly applicable regulations where appropriate to reduce cross-border barriers; simplified rules on due diligence and transparency requirements in securitization and aims to make public markets more attractive, especially for small and medium-sized enterprises, by minimizing administrative burdens; and more efficient supervision whereby financial institutions across the EU receive uniform regulatory treatment by strengthening convergence tools and potentially reallocating certain supervisory tasks to the EU level where it efficiency improves.

Whatever the techniques used for deregulation, CFA Institute will work to ensure that regulatory simplification and efficiency do not forsake investment protection and market stability. No matter the market or regulatory jurisdiction, we hardly need a crystal ball to tell us where financial deregulation failed us in the past. In 2008, the GFC took place in an environment characterized by accelerating banking and financial engineering techniques and innovative developments in the derivatives space, which had overall created a complex nexus between retail banking, investment banking, and asset management, while rules on business practices and product governance had been relaxed. Financial innovation was supposed to drive investment and facilitate the flow of productive capital to support economic growth, while market forces would efficiently manage risks. We know the ending to that story.