Paradoxes and Failures: ‘New Governance’ Techniques and the Financial Crisis
| Date | 01 November 2012 |
| Published date | 01 November 2012 |
| DOI | http://doi.org/10.1111/j.1468-2230.2012.00936.x |
| Author | Julia Black |
Paradoxes and Failures:‘New Governance’Techniques and
the Financial Crisis
Julia Black*
This article examines the performance of four ‘new governance’ techniques of regulation in
the period leading up to the financial crisis: principles based regulation, risk based regulation,
meta-regulation and enrolment.These techniques have been advocated on the basis that they are
responsive,flexible, and in enrolling others in the regulatory project thereby expand its capacity,
and even its legitimacy. However, experience in the crisis revealed that in their implementation
they can be out of touch or indulgent, focus heavily on auditable systems and processes, and that
in enrolling others they can increase vulnerabilities and the potential for negative endogenous
effects.The argument is not that there should be a return to adversar ial‘command and control’
regulation, rather that experience of these strategies in the crisis suggests a need to understand in
greater depth the refractive effects of the organisational, technical/functional and cognitive
dimensions of regulatory governance, if we are to understand and adapt its performance in
different contexts.
INTRODUCTION
The 2007–9 financial crisis had a complex cocktail of causes, and there is a
significant literature by both regulators and commentators analysing just what
went wrong. Indeed, in a recent review, Howard Davies identified thirty nine
different causes from the prevailing literature,1ranging from the macro to the
micro,from global imbalances and loose monetary policy to the practices of US
mortgage brokers, credit rating agencies and testosterone-fuelled bankers, though
the story that is told as to the causes of the crisis can vary with the position of the
narrator.2Regulation was not the sole cause of the crisis, but it certainly had a
significant role to play. Failings were made both by state and non-state regulators
and by market actors at the global, EU and national level, ranging from transna-
tional regulatory committees to financial institutions and their internal corporate
governance structures,and an accepted narrative quickly emerged, at least amongst
the regulatory elites, as to just what the main regulatory failures were.3
*Professor of Law and Research Associate, Centre for the Analysis of Risk and Regulation, London
School of Economics and Political Science. Earlier versions of this paper werepresented at conferences
inWarwick (September 2011) and Oxford (January 2012) and I thank participants for their comments.
I also thank Rob Baldwin, Cristie Ford, Martin Lodge and Niamh Moloney for reading and com-
menting on an earlier draft.The usual responsibilities remain my own.
1 H. Davies, The Financial Crisis – Who is to Blame? (Cambridge: Polity Press, 2010).
2 See J. Froud,A. Nilsson, M. Moran and K. Williams,‘Stories and Interests in Finance:Agendas of
Governance Before and After the Financial Crisis’ (2012) 25 Governance 35.
3 See eg Financial Stability Forum (FSF), Report of the Financial Stability Forum on Enhancing Market
and Institutional Resilience (Basel: FSF, 2008); Financial Stability Board (FSB), Improving Financial
Regulation – Report of the FSB to G20 Leaders (Basel: FSB, 2009); Financial Ser vices Authority
(FSA), The Turner Review:A regulatory response to the global banking crisis (London: FSA, 2009); FSB,
Senior Supervisors Group Report on Risk Management Lessons from the Global Banking Crisis of 2008
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© 2012The Author.The Modern Law Review © 2012The Moder n LawReview Limited. (2012) 75(6) MLR 1037–1063
Published by BlackwellPublishing, 9600 Garsington Road, Oxford OX42DQ, UK and 350 Main Street, Malden,MA 02148, USA
There are endless ways in which the crisis story can be told, and as many
different ways of analysing it as there are possible combinations of social science
schools of thought, from rationalist, interest group analyses through the various
forms of institutionalism to interpretivist and constructivist approaches, and in
many combinations. Moreover, the crisis moved financial regulation from the
pages of academic journals to the front pages of the newspapers, with the result
that everyone has their own interpretation of what went wrong, and each
reader wants to hear the story that fits with their own preoccupations. So it is
important to set out what this discussion is aiming to do, and what it is not.
The focus here is primarily on the functional, operational side of regulatory
governance. This is clearly not the only perspective that could be taken on
analysing the crisis, but it is a valid one: regulation is a functional task and
much mainstream regulatory literature is highly functionalist in its orientation.
However, unlike most of that literature this article does not have a prescriptive
agenda – it is not proposing a new strategy which can resolve all the problems
identified. Nor is it adopting a political economy approach: it is not primarily
concerned to examine in detail why these strategies were adopted in the first
place (though it does not assume that in making that choice regulators or policy
makers have a free rein), though does reflect on assumptions underlying their
operation. Nor does it analyse how regulators responded to the crisis: this is not
an exploration of the dynamics of the crisis-response or the construction of a
post-crisis agenda.
Instead, this article explores a particular puzzle: why and how did so many of
the ‘new governance’ regulatory strategies, which have been lauded in the last
two decades as superior in many ways to traditional ‘command and control’
(CAC) regulation,fail? In exploring this question,it looks at the way that four of
these strategies operated in practice, at least in the UK: principles based regula-
tion; meta-regulation; enrolment; and risk based regulation, each of which is
explained below. It illustrates how their operation both created and revealed
internal contradictions and tensions which led to failure or paradoxical out-
comes. It does not argue that command and control regulation is therefore
superior.Rather, the conditions of complexity,uncer tainty,fragmentation, ungov-
ernability and dynamism which cause CAC regulation to fail, and to which
new governance techniques are meant to offer a superior response, all remain.
However, what it does argue is that the highly functionalist, toolbox approach,
which focuses on fashioning and prescribing the appropriate regulatory tools in
order to achieve desired outcomes (and in which many of us, including this
author, have engaged), is necessary but insufficient to that approach’s own ends,
which are reformist and prescriptive. Regulation is a complex and multi-
dimensional activity. Failures in any of these dimensions can create points of
vulnerability, such that the carefully fashioned tool will simply not function as
intended. Instead it is transformed in the very process of its performance,resulting
in a number of paradoxes.
(Basel: FSB, 2009); de Larosière Group,Report of the High-Level Group on Financial Super vision in the
EU of 25 February 2009 (Luxembourg: Office for Official Publications of the European Com-
munities, 2009); LSE Report, The Future of Finance (London: LSE, 2010).
‘New Governance’Techniques and the Financial Crisis
© 2012 TheAuthor.The Moder n Law Review© 2012 The Modern Law Review Limited.
1038 (2012) 75(6) MLR 1037–1063
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