Regulatory climate

The Importance of Regulatory Climate

Although a plethora of important factors contribute to the economic success and the cultural atmosphere of a city, some would argue that in addition to the quality of people that inhabit the area, economic regulation ranks as one of the most important contributing factors. Specific changes in regulations (as well as deregulations) can directly lead to the inflow and outflow of large businesses into an area. As legislation provides for a more profitable business atmosphere and enhanced synergy, businesses will undoubtedly choose to relocate either to or away from the city in question. Consequently, the past, present and future of London's regulatory climate is worthy of exploration.

In The Competitive Position of London as a Global Financial Centre published by the Corporation of London Regulatory Environment ranks as the second most competitive factor in determining the top Global Financial Centers in the world. London ranks on the top of this ranking largely due to the regulatory climate.

Past

Like most countries, Great Britain was once regulated by its acting government. Yet, there were key differences both internationally and nationally that set the country apart from many comparable countries. Specifically, London was a highly accommodating city for businesses on account of several reasons. While certain other countries began to introduce stricter regulation, Great Britain took a more passive approach to the open market. United States based firms were looking to travel abroad to Western Europe, and London was undoubtedly the best option. Furthermore, the Bank of England had an open-door foreign policy which allowed non-sterling business operations. Also, business operations in London have easy access to communications with many other time zones. The large growth first occurred in London's financial district, and then spread to many surrounding locations.

At the same time, an influential change in the government occurred, with the election of Margaret Thatcher in 1979, the first female Prime Minister. Thatcher represented the Conservative Party and devised plans to reduce state intervention, introduce a free market, and stimulate entrepreneurship.

On October 27, 1986 The British Government and the London Stock Exchange (LSE) agreed upon set policies regarding regulation and trading. The country handed over its power as long as the LSE would agree to the following conditions:

Ownership of member firms by an outside corporation is allowed.
All firms become broker/dealers able to operate in a dual capacity.
Minimum scales of commission are abolished.
Individual members cease to have voting rights.
Trading moves from being conducted face-to-face on a market floor to being performed via computer and telephone from separate dealing rooms.
The Exchange becomes a private limited company under the Companies Act 1985.

October 27, 1986 is known as the "Big Bang," because of the large number of economic condition changes that occurred in a short amount of time. From that date on, competition in trading grew exponentially.

Present

As the business world continues to become more complicated, legislators are finding their time and resources continually stretched more thin. Consequently, the British government decided to set up an independent body that would dedicate its time to both the research and policy advising of necessary regulatory action. The independent body is known as the Better Regulation Task Force (BRTF) and consists of 18 members. The BTRF members serve three year terms, and are appointed by the Minister of the Cabinet Office (currently in 2008, Ed Miliband). Skeptics argue that allowing the Minister for the Cabinet Office to select these individuals calls into question political agendas. In response to this harsh criticism, the Minister is required to appoint individuals from a diverse array of fields, including public sectors, business sectors, trade unions, and academia.

The BTRF continually works to improve the regulatory framework by challenging the government on the implementation, implications, and impact of all enacted regulation, as well as advising on future regulation (although it has little legitimate authority, its advice is held in high regard due to its non-partisan status). In today's fast moving business world, it is important to frequently revisit all regulation, as it can quickly become stagnant and ineffective. The BTRF tries to embody five main principles in every piece of advice that it offers, including: proportionality, accountability, consistency, transparency and target oriented behavior.

Unlike in the United States, there is only one regulatory enforcement body in the United Kingdom, the Financial Services Authority. The FSA works to reduce conflicts between agency agendas and streamlines communications between companies and regulation enforcement. The BTRF offers advice to the government, but the FSA enforces the regulations.

Future

There are many challenges currently facing Britain, and in particular London, as the BTRF decides what direction the regulatory climate needs to take in the future. The two main areas of interest are Britain's disproportionate attitude towards risk management and the removal of burdensome regulations on small honest businesses who cannot afford costs associated with such regulation.

After Ex-Prime Minister Tony Blair called for attention to this disproportionate attitude toward risk management, Risk Haythornthwaite, head chair of the BTRF, responded by noting, "the law of diminishing returns suggests that the smaller and more remote a risk, the greater the cost of eradicating it." This led to the conclusion that it is both ineffective and inefficient to ask a large body, such as the government, to micro-manage risk and that this over-reliance has led to eroded personal responsibility. Consequently the BTRF is leading a movement to support entrepreneurship, adventure, and self-reliance of future business and personal finance.

Connected to the idea of new enterprise and riskier behavior is the movement to remove the "red tape" that has burdened small businesses for years. The BTRF feels that regulation has always been designed to control the exceptions, but usually ends up burdening the whole, thus leading to further deregulation of costly requirements. To use an old cliche, in this case "less (regulation) is certainly more." By eliminating needless paperwork, small businesses will be allowed to flourish, further enhancing the British economy. Just as the large deregulation of financial services in the "Big Bang" of the 1980's sparked London's economy, the BTRF will again turn to deregulatory measures to sustain growth and keep London on it's perch as the financial center of the world.

FSA-- Fighting Crime in the Marketplace

It is imortant to note that prior to the FSA (Financial Services Authority), the Bank of England was the primary regulator of London's financial markets.

The FSA is given a broad range of rule-making, investigatory powers, and enforcement powers, in order to meet their objectives, including:

Promoting efficient, orderly and fair markets;
Helping retail consumers achieve a fair deal; and
Improving our business capability and effectiveness

Even though it seems as though London is lax of rule making and policy enforcement, a handbook actually exists that writes out 29,000 regulations that the FSA must enforce andn abide by. They include to fight money laundering, fraud, and market abuse, as well as review the handbook and make regulations stronger and more restrictive when necessary.

If you are interested, the handbook can be found at the following website: http://fsahandbook.info/FSA/index.jsp 

England's Impact on the United States Regulatory Climate

Recently the Wall Street Journal and CNBC reported on New York City's effort to copy the English regulatory environment. Governor Elliot Spitzer initiated legislation for New York to adopt a principle based system, similar to the UK, to help ease the burden on businesses. The hope of the new legislation is that New York's lazzie faire stance will encourage Initial Public Offerings and Seasoned Equity Offerings to take place in New York instead of London. The strategic move hopes to reverse New York's diminishing market share, and ensure that New York can better compete with London in international exchange.