A Hitchhiker's Guide to Comparative Financial Regulation

Over the past decades, we have witnessed a massive globalization of finance. So much so that we often have the impression that financial globalization would spontaneously result in regulatory harmonisation. Indeed, some areas of financial regulation have reached a remarkable degree of harmonisation, at least at the regional level. However, considerable divergence persists in several other areas. This observation motivates our recent edited book titled ‘Comparative Financial Regulation.’

In this book, we try to identify the drivers of convergence and divergence of different jurisdictions in key areas of financial regulation. We develop an analytical framework to study the role of law in finance and how to approach financial regulation from a comparative perspective. For decades, the comparative approach to financial regulation was at the periphery of scholarship because harmonisation was often plainly assumed while divergences were disregarded. However, the current environment characterized by geopolitical tension and increasing nationalism reveals the importance of differences in the regulation of global finance and of legal comparison to make sense of them.

This book does not aim to cover every jurisdiction. Rather, it aims to provide the reader with the methodology to approach financial regulation comparatively. Therefore, we have collected contributions from worldwide experts in financial regulation, including scholars based in the European continent, UK, USA and Asia. We asked the contributors to engage in a functional comparison of different areas of financial regulation in different jurisdictions. Because opinions of reasonable minds may differ about the functions of financial regulation, we have focused the analysis on one overarching question that we frame in the introductory chapter—‘what drives convergence and divergence of financial regulation?’

At the heart of our functional approach to comparative financial regulation stands market failures, which are endemic to finance regardless of whether financial intermediation is undertaken by banks or capital markets. We do not mean to overstate the distinction between these two segments of financial markets as we acknowledge that many overlaps exists and they are increasing—think, for instance, of securitisation. However, in our opinion, the distinction between banking and capital markets remains important to analyze financial regulation and to make sense of the complexities stemming from the overlaps. Therefore, we focus our analysis on the key market failures in banking and in capital markets, respectively (systemic) negative externalities and information asymmetries.

Reflecting this distinction, we have divided the regulatory analysis into two macro areas: ‘Financial Markets’ (Part II), which contains chapters on mandatory disclosure, conduct of business rules, market integrity and insider trading, securities market regulation, investment funds and investment platforms regulation; and ‘Financial Institutions’ (Part III), which contains chapters on micro and macro prudential regulation, corporate governance of banks, recovery and resolution of banks, regulation of financial collateral, regulation of payments, clearing and settlements, and the law of central banking. Because financial innovation has made the distinction between banking and capital markets more blurred than ever, we have collected the latest cross-cutting regulatory developments in Part IV (‘Frontiers’), which covers contributions on sustainability and securities market regulation, sustainability and prudential banking regulation, cryptocurrencies and stablecoins regulation, and regulatory policies for crypto-asset offerings. The three parts are preceded by Part I (‘Introduction’), which includes our above-mentioned analytical framework, a historical analysis of convergence of financial regulation, and the comparative institutional architecture of financial regulation and supervision.

We identify three main frictions preventing full harmonisation: the private law underpinnings of financial markets; the diverging policy objectives and regulatory goals; and the varying structure of financial markets. On the other hand, we identify two main drivers of convergence: the push by industry associations to reduce transaction costs, particularly in cross-border financial transactions such as derivatives, and the policymakers’ concern with risk spillovers and potential race-to-the-bottom from regulatory arbitrage. On this basis, we have categorized the drivers of convergence and divergence in four groups. First, the underlying national private laws, in particular property and contract law, provide the legal basis for financial contracts and for financial entities to carry out financial transactions. Second, different regulators may pursue different policy goals or use different legal tools while pursuing the same goal. Third, financial regulators must account for the different structure and degree of integration of financial markets while pursuing their policy objectives. And fourth, regulators are exposed to a set of other, heterogeneous forces shaping their policymaking. These categories are a recurring theme in each chapter of the book.

The relevance of this comparative exercise is manifold. To begin with, it helps the reader understand how policymakers’ preferences vary geographically and over time. For example, jurisdiction A’s stricter enforcement of banking regulation compared to jurisdiction B, or the adoption of a more stringent approach than in the past, often reflects distinct social, economic, and political choices. Moreover, the functional approach sheds light on the legal mechanisms and degree of harmonisation needed to address emerging challenges for financial regulation, such as blockchain-based transactions or the increasing relevance of sustainable finance.

A key premise of the book is that the relationship between regulatory convergence and market efficiency, as well as financial stability, varies with time and between sectors. Therefore, our book does not seek to determine the optimal level of harmonisation. We doubt that such an optimal level exists or can be determined. Rather, we aim to provide a hitchhiker’s guide to navigate the complexities of converging or diverging financial regulations.

This research handbook aims at a broad readership, including but not limited to policymakers, graduate students, and academics in law and in economics. A globe-spanning group of contributors, coupled with the functional approach, provides the reader with a broad overview of how financial regulation converges (or not) towards common standards in key jurisdictions. More importantly, the book provides the analytical tools to understand and interpret financial regulation from a comparative perspective, even in jurisdictions not directly covered. As this book is research-driven, we do not seek to provide definitive answers, but we do hope to frame the relevant questions.

The authors’ book is available here.

Edoardo Martino is an Assistant Professor of Law and Economics at the University of Amsterdam.

Hossein Nabilou is an Assistant Professor of Law and Finance at the University of Amsterdam.

Alessio M. Pacces is a Professor of Law and Finance at the University of Amsterdam.