BoE: 'Regulators cannot police every market practice'

In a panel discussion at the Federal Reserve Bank of New York on 20^th October, Minouche Shafik suggested that a combination of regulation and legislation, or ‘hard law’, and standards set by market participants, or ‘soft law’, would be the most effective way to reduce the frequency of misconduct.

“We cannot expect misconduct to never occur in financial markets – history has taught us that there will always be individuals prepared to do the wrong thing if there is a reward,” Ms Shafik explained.

“Regulators must introduce rules and regulations to enforce minimum standards of conduct, hold individuals to account for their actions, and put in place incentives to promote good conduct.

“But hard law is not enough … Regulators cannot police every market practice, especially in fast-moving markets, nor can they dictate a firm’s culture.”

Ms Shafik suggested that market participants should instead take it upon themselves to encourage behavioural change and adherence to voluntary standards.

The deputy governor listed peer pressure, Kitemarking and enhancing business opportunities through compliance as the best ways to establish and encourage these standards.

She added: “This is where industry leadership is vital.

“It will take time to move from ‘ethical drift’ to ‘ethical lift’.

“Better regulation is part of the solution, but so is a more effective partnership between the official and private sectors to improve market practices and conduct norms.”