Incentives for complexity in financial regulation

Abstract

Purpose

The purpose of the paper is to find out which incentives are present for persons who are taking care of financial regulation in practice, and how these incentives impact their attitudes towards complexity of financial regulation.

Design/methodology/approach

Based on recent contributions, reasons behind the increase in complexity observed in financial regulation are discussed. The role of actual incentives for the persons involved in setting up and enforcing regulation is detailed.

Findings

Incentives for persons that impact drafting and implementation of financial regulation produce a bias towards excessive complexity. Additional complexity reduces the risk for being exposed to aggressive journalism and pressure from populist politicians. Increasing complexity of regulation will also benefit large players since the costs are largely fixed.

Research limitations/implications

Careful studies measuring the costs of increased complexity in terms of increased resource requirements are needed.

Practical implications

To reduce the bias towards excess complexity, a body consisting of knowledgeable persons with high integrity is required with an explicit mandate of scrutinising regulation in order to reduce, or at least not increase, complexity. This body must be empowered with sufficient discretion to tackle cases that lack precedents.

Originality/value

The paper introduces an explicit discussion of existing incentives on the regulator side of financial markets to increase the understanding of the issues involved in the increased complexity that we observe in the rules that are implemented to guide behaviour in financial markets.

Citation

Berglund, T. (2014), "Incentives for complexity in financial regulation", Journal of Risk Finance, Vol. 15 No. 2, pp. 102-109. https://doi.org/10.1108/JRF-12-2013-0083