History Lesson That Casts Doubt on Regulators' Thesis

By Hilton, Anthony | The Evening Standard (London, England), April 25, 2002 | Go to article overview

History Lesson That Casts Doubt on Regulators' Thesis


Hilton, Anthony, The Evening Standard (London, England)


Byline: ANTHONY HILTON

PUBLIC relations consultants GCI Focus and the law firm Simmons & Simmons ran a seminar last night which looked at the impact of the Financial Services and Markets Act and the new market abuse regime.

The most frequent justification for this legislation is that if markets are well regulated they will attract more business. People outside Britain will use our markets in preference to those of other countries because they know ours are clean, transparent and fair.

I remember Michael Howard, now the Tory shadow Chancellor, making this very point when he was piloting the first Financial Services Bill through Parliament back in 1986. Interestingly, no one sought to challenge this assertion then, any more than they seek to now. Yet there is not a shred of evidence for it.

It needs to be challenged. One of the basic laws of economics is Gresham's-Law of Money, which holds that bad money will drive out good.

It was born of an age of coin-clipping but if anyone doubts whether it holds today they should look at the recent experience of Argentina and its peso, which only a few months ago was pegged to the US dollar and now is accepted by no one.

What intrigues me is that if this works for money, why should it not work for markets? How can we be sure that good markets will drive out bad - the regulator's thesis - rather than that bad markets will drive out good?

Recent evidence comes down firmly in favour of the bad markets. First, cast back three years to when what is now called Eurex took the German Bund contract from Liffe, the London financial futures exchange. The London market was far better regulated, the London market's price discovery mechanisms were far more Anthony Hilton reliable, the London market's liquidity was far greater than anything Frankfurt had to offer. But Germany was cheaper, and brokers and clients could not get their business over there quickly enough. …

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