Theoretical Perspectives on Regulatory Enforcement
| DOI | https://doi.org/10.1108/eb025732 |
| Date | 01 February 1996 |
| Pages | 334-348 |
| Published date | 01 February 1996 |
| Author | Joanna Gray,Elspeth Fennell |
| Subject Matter | Accounting & finance |
Journal of Financial Crime— Vol.3 No. 4 — Analysis
Analysis
Theoretical Perspectives on Regulatory
Enforcement
Joanna Gray and Elspeth Fennell
This
article
argues that a more broadly based understand-
ing of the
processes
of the enforcement of
regulation
and
compliance needs to be developed. It highlights aspects of
two recent newsworthy cases of non-compliance with
financial regulation. It
concludes
that future
practice
needs
to be informed by research from a wider range of
theoret-
ical disciplines than have been employed in the study of
financial
regulation
hitherto.
INTRODUCTION
Detailed and specific 'regulatory law' has largely
supplanted the more general precepts of the
common law in defining the legal framework for
financial services business. This increasing reliance
on statute-based law and regulation is not unique
to financial services but is found throughout other
industries and sectors of economic activity. Com-
pany law
itself,
which sets the wider moral frame-
work for business, has been affected by this change
in the formulation, design and enforcement mech-
anisms of law. Our understanding of the institu-
tions and techniques of regulation and regulatory
law has undoubtedly increased in recent years but
our knowledge of the actual workings of those
institutions has lagged behind. The first part of this
paper considers why this should be so and reviews
some of the more important work done to date on
the processes of regulation and compliance.
Recent and newsworthy cases of defaults and
losses in the financial services sector have arisen
not so much as a result of 'bad' law in the sense
that there is anything wrong with the rules them-
selves but rather the problem lies in the way they
are not being enforced effectively, particularly at an
operational level within the regulated firm. The
mismanagement of the Maxwell companies' pen-
sion funds and the subsequent discovery that the
Investment Management Regulatory Authority
(IMRO) failed in its naive and overly literal appli-
cation of its rules, is an example of regulatory
failure at the external level. The collapse of Bar-
ings'
futures trading business following the crimi-
nal activity of its Singapore-based derivatives trade
Nick Leeson is perhaps the most widely known
example of failure of the regulatory system to 'bite'
at an operational level and percolate the business
culture of its subjects. The second part of this
article considers these two examples of 'regulatory
failure' and asks if the orthodoxy prevailing on
their 'causes' reveals the need for regulatory prac-
tice to learn from some less orthodox theoretical
disciplines than it has hitherto looked to.
The last part of the article tentatively suggests
the types of research that could be done to foster a
better understanding of the
processes
rather than the
institutions of financial regulation and compliance.
How and why does compliance happen in one
firm, individual or group of individuals and yet not
in another? What factors make an individual more
likely to falsify an account or financial statement
sometimes on some occasions and yet not on
others? What makes one individual persistently lie
to regulators and/or compliance personnel? Such
research, which must be based in practical experi-
ence and observation of the compliance process as
well as theory, may assist in the detection and
prevention of future regulatory offences and hence
increase the efficacy of the substantive rules and
regulations we design and the way in which we
seek to enforce them.
UNDERSTANDING THE ENFORCEMENT
OF REGULATION AND COMPLIANCE
The Financial Services Act 1986 spawned a whole
new industry — that of regulatory compliance —
and those active in it play a pivotal role, as the link
between regulator and regulated, in seeing that
financial services business is conducted properly
within the legal framework set by legislators and
regulators.1 To date there has been much anecdotal
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