This may be the year that the US pendulum swings away from excessive regulation towards balanced principles.

The penny has dropped. Overly detailed regulations and excessively prescriptive rules are not well suited to maintaining regulatory effectiveness as market practices evolve rapidly and as globalisation continues to accelerate. These comments from the chairman of JPMorgan Chase, William Harrison, are part of a new Institute of International Finance (IIF) set of proposals for a comprehensive strategic dialogue with the regulators of the financial industry, including a set of key principles designed to frame relationships between regulators and the financial industry.

In short, regulation is coming in for a major rethink. And it is not just bankers through their Washington-based institute, the IIF, who are trying to secure far-reaching reforms; it is also the US secretary of the treasury, Hank Paulson, former chairman of investment bank Goldman Sachs. In November, following the US mid-term elections, Mr Paulson called for a fundamental re-examination of the way the US regulates its capital markets to ensure they remain globally competitive.

Mr Paulson’s clear concern is that perceived heavy-handed regulation is causing the US to be at a disadvantage compared with the perceived lighter touch in London and other markets. The key element revolves around the US’s rules-based approach to regulation versus the more flexible principles-based approach adopted in London and elsewhere. It is becoming abundantly aware that the litigious US legal system combined with legislative overload through measures such as Sarbanes-Oxley has raised concerns about not only the effectiveness, but also the added cost, of regulation on business.

Mr Paulson has sought to strike the right “regulatory balance” that inspires the confidence of investors without imposing excessive costs or constraining growth. The IIF proposals fully endorse this approach, emphasising the role of its guiding principles that will stress three areas of particular importance: global co-ordination of regulatory policies, enforcement practices, and anti-money laundering issues.

It is clear that, in the wake of Enron and 9/11, the pendulum has swung too far in favour of regulation, and even excessive regulation. Bankers, through the IIF, and even Mr Paulson, are now openly acknowledging it and the period of regulatory excess may be coming to an end. 2007 may be the year of regulatory rebalancing and the victory of principles over rules.


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