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Financial Services Regulation Under the Financial Services Authority: a Reassertion of the Market Failure Thesis?

Published online by Cambridge University Press:  07 July 2005

Harry McVea
Harry McVea*
Affiliation:
University of Bristol
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Extract

Despite the fact that the “nature, role and form” of financial market regulation has varied—sometimes significantly—from jurisdiction to jurisdiction, traditionally there has been a remarkable degree of unanimity about the need for comprehensive regulatory controls governing the operations of financial institutions and the financial markets more generally. In essence, this consensus derives from a conception of financial markets as being sufficiently distinct from other kinds of economic activity, such as manufacturing electrical goods, or the marketing of adventure holidays, to require extensive regulation and oversight. From a descriptive point of view, the inspiration for much of this regulation—at least in its statutory form—can very often be traced to various reactions to financial crises. In the US, for example, extensive Federal Securities legislation, which has been in place since the 1930s, was Congress’s response to bank runs and alleged financial abuses in the depression era.

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The Cambridge Law Journal , Volume 64 , Issue 2 , 23 July 2005 , pp. 413 - 448
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Copyright © The Cambridge Law Journal and Contributors 2005

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Footnotes

Part of this article was written while I was a Visitor at the Faculty of Law, University of Sydney.

References

1 Llewellyn, D. T., The Regulation and Supervision of Financial Institutions (London 1986), 9Google Scholar.

2 Ibid., pp. 1-9; and Gowland, D., The Regulation of Financial Markets in the 1990s (Aldershot 1990), 1Google Scholar.

3 For example, see McMeel, G. and Virgo, J., Financial Advice and Financial Products: Law and Liability (Oxford 2001)Google Scholar: “[w]hat seems to have driven reform initiatives in the United Kingdom in most instances is reaction to some recent financial collapse or crisis.” (at para. 2.02).

4 See Llewellyn, Regulation and Supervision of Financial Institutions, 25. The legitimacy of these measures has, however, come under attack of late. See e.g. Benston, G. J., Regulating Financial Markets: A Critique and some Proposals, Hobart Paper 135 (London 1988), 68Google Scholar.

5 See Gower, L. C. B., “‘Big Bang’ and City Regulation” (1988) 51 M.L.R. 1, 7Google Scholar; and Black, J., Rules and Regulators (Oxford 1997), 60Google Scholar.

6 See McMeel and Virgo, Financial Advice and Financial Products, para. 2.02. For details of the scandal, see para. 2.09 and sources cited therein.

7 C.A.E. Goodhart, “What is the Purpose of Regulating Financial Markets?”, mimeo. (London School of Economics, 1986), 1.

8 Llewellyn, Regulation and Supervision of Financial Institutions, 9.

9 The market failure model is sometimes characterised as a “public interest” theory of regulation. See Posner, R.A., “Theories of Regulation” (1974) 5 Bell Journal of Economics 335Google Scholar, partially reprinted in Ogus, A.I. and Veljanovski, C. (eds.), Readings in the Economics of Law and Regulation (Oxford 1984) 240–249Google Scholar. See also Ogus, A.I., Regulation: Legal Form & Economic Theory (Oxford 1994)Google Scholar ch. 3, where economic goals (market failure) and noneconomic goals (e.g. “distributional justice”, “paternalism” and “community values”) are discussed. Public interest theories of regulation are often contrasted with “private interest” theories. For a critical overview of private interest theories generally, see Ogus, ibid, at p. 4 and ch. 4; and Scott, C. and Black, J., Cranston's Consumers and the Law, 3rd edn. (London 2000), 34–35Google Scholar.

10 See e.g. Posner, ibid. at p. 241: “[there is an] assumption … that government regulation [as understood by the public interest model] is virtually costless.”

11 See generally Ogus and Veljanovski, Readings, ch. 2.

12 Ogus, Readings, p. 30.

13 This section draws upon Rubin, E.L., “Deregulation, Reregulation, and the Myth of the Market” (1988) 45 Washington & Lee Law Review 1249, 1257Google Scholar. It is also useful to note that the seeds of the market failure thesis lie in a clear demarcation between the private and public realms. See generally A Symposium: The Public/Private Distinction (1982) 130 U Pa L Rev 1289-1656.

14 Breyer, S., “Analysing Regulatory Failure: Mismatches, Less Restrictive Alternatives, and Reform” (1979) 92 Harv L Rev 549, 552Google Scholar.

15 Ibid.

16 Rubin, “Deregulation”, 1258.

17 Ibid.

18 Ibid.

19 Ogus, Regulation, 2.

20 Rubin, “Deregulation”, 1259.

21 Ibid., at p. 1260.

22 Breyer, “Analyzing Regulatory Failure”, 552.

23 Ibid. See also Ogus, Regulation, 22: “it decentralises and disperses power”; and Friedman, M., Capitalism and Freedom (Chicago 1962), 15Google Scholar: “the market [operates] impersonally and without centralised authority.”

24 As to these, see the works of Ogus, and Scott and Black, above note 9.

25 See Breyer, “Analyzing Regulatory Failure”, 553.

26 Goodhart, “What is the Purpose of Regulating Financial Markets?”.

27 Goodhart, C. A. E., Hartmann, P., Llewellyn, D., Rojas-Suarez, L., and Weisbrod, S., Financial Regulation: Why, How, and Where Now? (London 1998), 4Google Scholar.

28 See Baumol, W. J., The Stock Market and Economic Efficiency (New York 1965), 4Google Scholar.

29 Goodhart et al., Financial Regulation.

30 Gowland, Regulation of Financial Markets, 45.

31 Ibid. The view that market confidence is a public good also finds support in Kay, J., “The Forms of Regulation”, in Seldon, A. (ed.), Financial Regulation—or Over-Regulation? (London 1988), 33, 38-39Google Scholar. Interestingly, the public good argument has also been used to support the mandatory disclosure regime: Coffee, J. C., “Market Failure and the Economic Case for a Mandatory Disclosure System” (1984) 70 Virginia Law Rev 717, 722Google Scholar.

32 The FSA's role as investors’ champion (see Financial Services and Markets Act 2000 (FSMA), Part XXV), overcomes some of the free rider problems associated with private financial services law enforcement.

33 See Goodhart, “What is the Purpose of Regulating Financial Markets?”, 5.

34 See Ogus, Regulation, pp. 18-19.

35 Systemic risks are said to be present when there is a risk that an event or shock in one sector will “trigger a loss of economic value or [a loss of] confidence in, and attendant increases in uncertainty about” that sector, which in turn spills over to other sectors of the financial system, and possibly other systems. Group of Ten, Report on Consolidation in the Financial Sector (Basel 2001)Google Scholar quoted in FSA, Reasonable Expectations: Regulation in a Non-Zero Failure World (September 2003), para. 4.6. For systemic concerns outside the banking system, see Schinasi, G.J., Craig, R.S., Drees, B., and Kramer, C., Modern Banking and OTC Derivatives Markets: The Transformation of Global Finance and its Implications for Systemic Risk, International Monetary Fund, Occasional Paper 203 (Washington, DC 2000), 1Google Scholar; and Wood, G., “Competition, Regulation and Financial Stability”, in Booth, P. and Currie, D. (eds.), The Regulation of Financial Markets, IEA Readings 58 (London 2003), 63, 67.Google Scholar

36 See Goodhart, “What is the Purpose of Regulating Financial Markets?”, 16.

37 See Goodhart et al., Financial Regulation, 9.

38 Parkinson, J.E., Corporate Power and Responsibility (Oxford 1993), 201Google Scholar (footnote omitted).

39 Interestingly, there is some empirical evidence to suggest that such information-related so-called market failures do exist with regard to the provision of financial services. See Law and Economics Consultancy Group (LECG), Restrictions on Competition in the Provision of Professional Services—A Report for the Office of Fair Trading (London 2000)Google Scholar, para. 38.

40 See Goodhart, “What is the Purpose of Regulating Financial Markets?”, 18-21. See also Goodhart et al., Financial Regulation, 7-8.

41 See (albeit in a different context) Hanlon, G. and Jackson, J.D., “Last Orders at the Bar? Competition, Choice and Justice for All—The Impact of Solicitor-Advocacy” (1999) 19 O.J.L.S. 555, 564-566Google Scholar.

42 See Fox, L. J., “Accountants, the Hawks of the Professional World: They Foul Our Nest and Theirs Too, Plus Other Ruminations on the Issue of MDPs” (2000) 84 Minn Law Rev 1097, 1101Google Scholar.

43 In a slightly different context, see also, Arthur Andersen's high profile and ultimately fatal involvement in both the Enron and WorldCom affairs, and KPMG's controversial and damaging involvement in the Xerox saga.

44 Cheffins, B. R., Company Law: Theory, Structure, and Operation (Oxford 1997), 134Google Scholar.

45 Scott and Black, Consumers and the Law, 34.

46 Ibid.

47 Cheffins, Company Law, 134 (footnote omitted). See also Sunstein, C. R., After the Rights Revolution: Reconceiving the Regulatory State (Cambridge, Massachusetts 1990), 53Google Scholar; and Eisenberg, M. A. “The Limits of Cognition and the Limits of Contract” (1995) 47 Stan Law Rev 211Google Scholar.

48 Ibid., at p. 135. See also Eisenberg, M.A., “The Bargain Principle and its Limits” (1982) 95 Harv Law Rev 741, 763-773Google Scholar.

49 Cheffins, Company Law, 134.

50 Ibid., at p. 135.

51 Ibid. (footnote omitted).

52 J.L. Moore, “Cost-Benefit Analysis: Issues in Its Use in Regulation” (CRS Report for Congress, 28th June, 1995) (http://www.ncseonline.org/nle/crsreports/risk/rsk-4.cfm?&CFID=1164799&CFTGKEN=80028139) at 5 (originally consulted December 2003).

53 FSA, The Conduct of Business Sourcebook (Consultation Paper 45a, February 2000) Annex C, para. 1.1.

54 Moore, “Cost-Benefit Analysis”.

55 This discussion is based upon Gowland, Regulation of Financial Markets, 21-24; and Goodhart, “The Costs of Regulation” in Seldon (ed), Financial Regulation, 17.

56 Goodhart, “Costs of Regulation”, 22-24.

57 Ibid., at p. 25.

58 Ibid. Against this, however, is the argument that “a major spur to innovation is a desire to avoid the impact of regulation, and such innovation can convey social as well as purely private benefits.” Gowland, Regulation of Financial Markets, 24.

59 The downside, however, of framing a regulatory calculus on this basis, is that there could develop what has been referred to as a “race to the bottom”, whereby financial centres compete with one another to provide regulatory frameworks which are attractive to market players resulting, in turn, in a falling away of standards.

60 H. Davies, ‘Why Regulate?’ (Henry Thornton Lecture, City University Business School, 4 November 1998) (http://www.fsa.gov.uk/Pages/Library/Communication/Speeches/1998/SP19.shtml/ at 2 (emphasis added) (originally consulted December 2003). For a more recent expression of the same sentiments, see J Tiner, ‘Is UK Plc Over-regulated?’ (http://www.fsa.gov.uk/Pages/Library/Communication/Speeches/2005/sp223.shtml/ at 1 (consulted January 2005).

61 H. Davies, ‘A New Regulator for the New Millennium’ (Proceedings of an FSA Conference entitled: ‘A Radical New Approach to Regulation’, 11 December 2000) (http://www.fsa.gov.uk/Pages/Library/Communication/Speeches/2000/sp67.shtml/ at 3 (originally consulted December 2003). The FSA would not, of course, be the first regulator to feel the need to couch its policy-making in a way which resonates with those it regulates. However, the FSA's adoption of market failure theory seems not so much an attempt to win over the regulated community (or, indeed, deflect attention away from its true regulatory intentions). Rather it would seem to represent a genuine expression of how the FSA thinks regulation ought properly to be conceived.

62 Ibid.

63 Ibid., at p. 4. The broad idea of characterising markets as a preferred approach is, however, not entirely new to public policy-making in the UK's financial services arena. For example, the Thatcherite Conservative Government's White Paper on Financial Services—upon which the Financial Services Act 1986 was predicated—claimed that “[m]arket forces provide the best means of ensuring that an industry meets the needs of its customers.” Financial Services in the United Kingdom: A New Framework for Investor Protection (1985), Cmnd 9432, para. 3.2(i) (emphasis added).

64 A.M. Whittaker, ‘The Role of Competition in Financial Services Regulation’ (Speech to the Regulatory Policy Institute, 27 April 2001) (http://www.fsa.gov.uk/Pages/Library/Communication/Speeches/2001/sp79.shtml) at para. 26 (originally consulted December 2003). See also FSA, Reasonable Expectations, para. 1.1: “[t]he key purpose of the FSA's regulatory regime is to correct market failure.” Interestingly, some of the FSA's advisers explicitly characterise regulation in market failure terms. D. T. Llewellyn, for example, has written that “the case for regulation must reduce ultimately to some form of market failure.” Llewellyn, Regulation and Supervision of Financial Institutions, 10.

65 “In meeting our objectives in a manner consistent with the principles of good regulation, we have adopted a regulatory approach based on correcting market failure. But where the market is functioning effectively, we do not constrain willing buyers and sellers of financial services. There are, however, numerous cases where unregulated financial markets will not achieve the best outcome due to some form of market failure, making action on our part unnecessary” (FSA, Reasonable Expectations, para. 4.1). Interestingly, the FSAs has also regularly commissioned research from independent consultancy organisations that couch their analysis explicitly in terms of market failure. For example, see Europe Economics, Costs of Compliance (June 2003), ii.

66 According to Blair, M., Financial Services: The New Core Rules (London 1991)Google Scholar, the initial rules made under the Financial Services Act 1986 were widely criticised for being “[t]oo long, too detailed, and too prescriptive” (at p. 1).

67 Review of Investor Protection, (Chair: LCB Gower) Cmnd 9125 (1984) Part 1. Economists uniformly derided Gower's work for paying insufficient attention to the costs of financial services regulation and, in particular, for his failure “to accept that some form of cost-benefit assessment was in order.” C. Veljanovski, “Introduction” in Seldon (ed.), Financial Regulation, 7; and: “[t]he conceptual foundations of the [Financial Services Act 1986] grew out of a total disregard for the economic realities of financial markets.” (at p. 11). See also C.A.E. Goodhart, “The Costs of Regulation” in Seldon (ed.), Financial Regulation, 17: “[w]hat worries me is the lack of attention to costs evidenced at virtually all stages of the current exercise” (at p. 31).

68 FSMA 2000, s. 2(3)(c).

69 The use of cost-benefit analysis by the FSA has not met with uniform approval. See e.g. Opposition comments in Standing Committee during the passage of the FSMA 2000: “[t]here is a natural suspicion in the market that these cost-benefit analyses will be self-serving to some extent, and that the FSA will produce them to justify its own actions.” quoted in Alcock, A., The Financial Services and Markets Act 2000—A Guide to the New Law (Bristol 2000), 95Google Scholar. See also Goodhart, C.A.E., “Regulating the Regulator—An Economist's Perspective” in Goodhart, C.A.E. and Ferran, E. (eds.), Regulating Financial Services and Markets in the Twenty First Century (Oxford 2001), 151, 157Google Scholar. For more general criticism of the use of cost-benefit analysis in administrative decision making, see Baldwin, R. and Cave, M., Understanding Regulation: Theory, Strategy, and Practice (Oxford 1999)Google Scholar ch. 7 (“The Cost-Benefit Testing of Regulation”), and Kuttner, R., Everything for Sale: The Virtue and Limits of Markets (New York 1997), 300–303Google Scholar.

70 The FSA's regulatory objectives are defined in the FSMA 2000, s. 2(2), as (a) market confidence; (b) public awareness; (c) protection of consumers; and (d) the reduction of crime.

71 See C. Briault, ‘The Costs of Financial Regulation’ (ZEW/AEI Conference on Regulation and Supervision of Financial Markets and Institutions in the EU, Manheim, 10 July 2003) (http://www.fsa.gov.uk/Pages/Library/Communication/Speeches/2003/sp140.shtml) at 2 (originally consulted August 2003).

72 FSMA 2000, s. 155(6).

73 FSMA 2000, s. 155(10). The Act also contains provisions to dis-apply the requirement for a CBA in certain circumstances: ss. 155(7)-(9)). For example, the FSA need not conduct a costbenefit analysis it if is satisfied that any increase in costs will be de minimis: FSMA 2000, s. 155(8)(b).

74 Briault, “Costs of Financial Regulation”, 1.

75 Ibid., at p. 2.

76 Ibid., at p. 3, and referring to “the importance which the [FSA] attaches to cost-benefit analysis.” (at 1). The FSA is also keen to see CBA more widely adopted at the EU level (ibid., at p. 2).

77 Alfon, I. and Andrews, P., Cost-Benefit Analysis in Financial Regulation: How to Do it and How it Adds Value, FSA, Occasional Paper Series 3 (September 1999), 5Google Scholar. The Alfon and Andrews paper has been described by the FSA as “a statement of the FSA's position”: Briault, “Costs of Financial Regulation”.

78 V. DiLorenzo, “Cost-benefit Analysis, Deregulated Markets, and Consumer Benefits: A Study of the Financial Services Modernisation Experience” (2002-2003) 6 New York University Journal of Legislation and Public Policy 321, 325-236.

79 Briault, “Costs of Financial Regulation”, 2.

80 See Davies, “Why Regulate?”.

81 As Peltzman has noted, “[t]he ingenuity of economists ensures that the list of potential sources of market failure will never be complete”, quoted in Scott and Black, Consumers and the Law, 33-34. Thus e.g. weaknesses in the concept of a “rational actor”—which many think is central to the operation of the market failure paradigm—are, or at least can be reinterpreted as market failures. See note 44 above and accompanying text. This sort of reasoning has, however, a degree of circularity about it and, if taken to extremes, has a tendency to empty the theory of any meaningful content.

82 See Collins, H., The Law of Contract 3rd edn., (London 1997)Google Scholar: “[m]arket transactions regulated by law can never be free.” (at p. 13); Ekins, P. and Max-Neef, M., Real-Life Economics: Understanding Wealth Creation (London 1992)Google Scholar: ‘[t]here is no such thing as the “free” market.” (at p. 311). See also Hodgson, G. M., Economics and Institutions (Cambridge 1988), 178.Google Scholar

83 Parkinson, Corporate Power and Responsibility, 31 n. 100, relying on Bratton, W. W., “The “Nexus of Contracts” Corporation: A Critical Appraisal” (1989) 74 Cornell Law Review 407, 438-439Google Scholar.

84 The contention that the existence of black markets represent examples of the “naturalness” of markets, independent of state creation, largely misses the point. Such markets are atypical of the vast bulk of exchange-based relationships in liberal democracies. Although such markets do have a tendency to emerge (and in this rather trivial sense they are, I suppose, natural), they in no way represent a model paradigm for the sorts of exchanges which we would describe, or even understand, as being socially desirable, and which we would want to nurture in a liberal democracy. And even if markets were considered as natural phenomena, naturalness of itself has no claim to being a preferred approach. However, my primary concern here is not so much about the naturalness of markets, but rather that this view tends to underlie the claim that, presumptively, regulation requires justification whereas market processes do not.

85 See Shearing, C.D., “A Constitutive Conception of Regulation” in Grabosky, P. and Braithwaite, J. (eds.), Business Regulation and Australia's Future (Canberra 1993)Google Scholar: “[m]arkets are not self-ordering. Markets are always and necessarily regulated through careful constitutive work …. [the] pre-existing regulatory reality is [often] masked … by the assumption that the market is simply given …. [i]n other words ordering is irrevocably a political activity … . [t]here is no unconstituted market to which to turn nor is there market ordering which will relieve us [of] the task of regulation.” (at pp. 70-72)); Samuels, W.J., “Interrelations Between Legal and Economic Processes” (1971) 14 Journal of Law and Economics 435, 442Google Scholar; and Granovetter, M., “Economic Institutions as Social Constructions: A Framework for Analysis” in Swedberg, R. (ed.), Economic Sociology 269 (Cheltenham 1996)Google Scholar: “economic institutions (like all institutions) do not arise automatically in some form made inevitable by external circumstances, but are ‘socially constructed’.” (at p. 270).

86 See Parkinson, Corporate Power and Responsibility, 31, n. 100, drawing on D. Millon “Theories of the Corporation” [1990] Duke Law Journal 201, 261. See also Ekins and Max-Neef, Real-Life Economics, 312: “inaction favours the status quo, but there is nothing inherently desirable about the status quo”.

87 Sunstein, C., Free Markets and Social Justice (New York 1997), 5Google Scholar. See also H. Collins, The Law of Contract, 4th edn. (London 2003): “there is no such thing as the market order” (at p.13), and sources cited there.

88 Rubin, “Deregulation”, 1267 (footnote omitted); and Sunstein, Free Markets, 384: “[m]arkets are (a particular form of) government intervention”. See also Sunstein, After the Rights Revolution, 42: “[t]he decision to permit market-ordering pursuant to [the existing] allocation [of entitlements] represents a controversial choice about competing values”; and Ekins and Max-Neef, Real-Life Economics, 312: “[w]hat advocates of a ‘free’ market are calling for is not the dissolution of the state's role in defining and enforcing the market. [Rather they want] this role to be enacted strictly on the basis of existing private property rights, which is a very different matter. ‘Free marketeers’ are simply those who propose the freedom of private property under its current distribution, to the inevitable advantage of the rich at the inevitable expense of [those] who own little or no property.” (emphasis in the original).

89 Rubin, “Deregulation”, 1264. According to Ekins and Max-Neef, Real-Life Economics, 312, “[t]he case for state action (or inaction) must always be made in value terms: the status quo ([or] proposed change) must be shown [for whatever reason] to be suboptimal and the proposed change ([or] status quo) shown to be preferable. The inescapable role of ethics in these decisions is obvious.”

90 Sunstein, After the Rights Revolution, 36.

91 According to Friedman, Capitalism and Freedom, 13-15, “[e]xchange can … bring about coordination without coercion …. [Effective freedom of exchange … prevents one person from interfering with another in respect of most of his activities. The consumer is protected by coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on. And the market does this impersonally and without centralised authority.” Kuttner, Everything for Sale, 309, expresses this characterisation thus: “all private choices are free of coercion, since the actor is always free to choose another course … [t]he state is always coercive; the market never.”

92 See Collins, Law of Contract, 12.

93 Collins, ibid. See also Trebilcock, M. J., The Limits of Freedom of Contract (Cambridge, Mass 1997), 8Google Scholar: “[p]rivate ordering is most compatible with [individual autonomy] because it minimises the extent to which individuals are subject to externally imposed forms of coercion or socially ordained forms of status” (citing Hayek, Friedman, Nozick, and Fried).

94 Collins, ibid.

95 Sunstein, After the Rights Revolution, 32. Waltzer describes this fake neutrality thus: “[t]he good life is pursued by individuals, sponsored by groups; the state presides over the pursuit and the sponsorship but does not participate in either.” Walzer, M., “The Communitarian Critique of Liberalism” in Etzioni, A. (ed.), The New Communitarian Thinking (Charlottesville 1995), 52, 63Google Scholar.

96 It amounts, says Shearing, to a “sleight of hand [which wins] a political victory by denying that there is a battle to be fought.” Shearing, “Constitutive Conception of Regulation”, 71.

97 Real-Life Economics, 311. See also Trebilcock, Limits of Freedom of Contract, 20: “markets are inherently coercive, because few individuals have the choice of engaging in exchange activities or not, especially with respect to the sale of their labor”; and Hale, R.L., “Coercion and Distribution in a Supposedly Non-Coercive State” (1923) 38 Political Science Quarterly 470Google Scholar.

98 Sunstein, After the Rights Revolution, 41; similarly, “the government's allocation will affect the ways in which preferences are manifested in markets, which rely on the criterion of willingness to pay. Willingness to pay is a function of ability to pay and an actor's ability to pay is a function of the amount of goods that have been (legally) allocated to him. In these circumstances it is hard to see neutrality in governmental respect for preferences, whatever their content and consequences.” (ibid.); Collins, Law of Contract, 12: “[n]o other social order so successfully disguises the fact that it constitutes an order at all” (footnote omitted); and G.E. Frug, “Why Neutrality?” (1983) 92 Yale Law Journal 1591: “no government action can be neutral”; and “government neutrality is a chimera” (at p. 1597).

99 Trebilcock, Limits of Freedom of Contract, 20 “[individuals] do not start out equal, if only because of the effects of the genetic lottery or early family circumstances, which are morally arbitrary.” (footnote omitted). See also Kuttner, Everything for Sale, 42 “[if every] exchange is presumed ‘free’ and every choice voluntary, one can then deny that some choices are invidiously precluded by prior circumstances, dubious inequalities of status or power, or by markets themselves; that tastes are both somewhat unstable and subject to manipulation; and that extra-market remedies are sometimes the most direct route to outcomes that people really want but cannot find via market institutions”; and Hodgson, G.M., The Democratic Economy (Harmondsworth 1984), 25.Google Scholar

100 Though see Trebilcock, Limits of Freedom of Contract, 20-21.

101 See Collins, Law of Contract, 13.

102 Ibid., at p. 9. See also P.H. Schuck, “Regulation, Non-Market Values, and the Administrative State: A Comment on Professor Stewart” (1983) 92 Yale Law Journal 1602, 1605: “[if] opportunities are socially created or constructed, they can be socially reconstituted in the name of social equity. If social forces leave citizens vulnerable to the depredations of those who society favours, society can intervene to repair its earlier mischief. Given these assumptions about social responsibility for existing power differences and injustices, we could hardly subscribe to an ideology that compelled the state to be indifferent to which private interests were served and to be neutral as to which conceptions of the good were embodied in public policies and practices.”; and A. Etzioni, “Toward an I & We Paradigm” (1989) 18 Contemporary Sociology 171, 175: “when people act to express a value they have truly acquired … within a pluralistic community … people are not, nor do they feel coerced …. Rather they feel affirmed when they uphold their values.”

103 See Walzer, “Communitarian Critique of Liberalism” 55, drawing on Hirschman's metaphors: “liberal rights … have more to do with ‘exit’ than with ‘voice’.”

104 Trebilcock, Limits of Freedom of Contract, 243-244. As Barber puts it: “[t]he road to autonomy leads through not around commonality”: Barber, B, Strong Democracy: Participatory Politics for a New Age (Berkeley 1984), 217Google Scholar.

105 See Hodgson, Economics and Institutions.

106 Brown, P.G., “The Failure of Market Failures” (1992) 21 Journal of Socio-Economics 1, 15Google Scholar.

107 Ibid.: they are “formal terms only”. See also Samuels, “Interrelations Between Legal and Economic Processes”, 440: “market forces emerge and take on a shape and slope only within the pattern of, inter alia, legal choices as to relative rights, relative exposure to injury, and relative coercive advantage and disadvantage … Private rights, for example, property rights, are in effect capacities to participate in the economic decisions-making process as a coercive force.”

108 Brown, ibid.

109 Ibid., at p. 19.

110 See note 33 above and accompanying text.

111 See Trebilcock, Limits of Freedom of Contract, 59: “the concept of externalities is one of the least satisfactory concepts in welfare economics and the concept of harm to others is one of the least satisfactory and most indeterminate concepts in liberal political theory.”; and Sunstein, After the Rights Revolution, 55: “[a]ny workable theory of externalities must describe and limit the category of effects that count as regulable injuries to third parties; and that theory must partake of political theory rather than science or even economics.”

112 See note 35 above and accompanying text.

113 See e.g. G.G. Kaufman, “How Real is the Risk of Massive Bank Collapse?” (2000) 23 Regulation 25; and Benston, Regulating Financial Markets, 20.

114 Masera, R. S., “Issues in Financial Regulation: Efficiency, Stability and Information”, in Fair, D.E. and de Boissieu, C. (eds.) Financial Institutions in Europe Under New Competitive Conditions (The Hague 1990), 319, 325Google Scholar.

115 Knowing this, banking operators will, so the argument runs, redouble their efforts in order to ensure the provision of products or services which consumers wish to purchase and at a price they are willing to pay. Those who are unable to withstand the competition, fall by the wayside.

116 Brown, “Failure of Market Failures”, 16-17.

117 See Bank of International Settlement Quarterly Review, “International Banking and Financial Market Developments” (June 2003) (http://www.bis.org/publ/r_qt0306.pdf) at 36 (consulted April 2005).

118 See e.g. Macy, J.R., “Wall Street Versus Main Street: How Ignorance, Hyperbole, and Fear Lead To Regulation” (1998) 65 University of Chicago Law Review 1487, 1508Google Scholar.

119 For a review of the Long Term Capital Management (LTCM) debacle, see e.g. G. Wood, “Competition, Regulation and Financial Stability” in Booth and Currie (eds.), Regulation of Financial Markets, 63, 66-67. See also Kuttner, Everything for Sale, 166, speaking of derivatives: “a device invented to make risk more manageable leads to a market that is more speculative as a whole.”

120 Brown, “Failure of Market Failures”, 17. See also Trebilcock, Limits of Freedom of Contract, 20: “[determining which [externalities], if negative, are to count in constraining the ability of parties to contract with each other poses major conceptual problems”; and Kuttner, Everything for Sale, 281: “[the term ‘externality’] is helpful in understanding the dynamics of how markets fail to price accurately, but often conveys too narrow a conception of what is at work. For these issues often involve public values that are impossible to reduce to a simple economic calculus. They also raise distributional questions that cannot be reduced to efficiency terms.”

121 Schmid, A. A., Property, Power, and Public Choice (New York 1978), 28Google Scholar, quoting Kenneth Boulding. See also Brown, “Failure of Market Failures”, 16: “[t]he scope of the state is not prescribed by market failures, but market failures … are possible to define only after many questions about the scope of the state have been decided on other grounds.”

122 See Sunstein, Free Markets and Social Justice, 384.

123 According to Rubin, “the market image requires that self-interest focus on the kinds of rewards that a market … can provide”: Rubin, “Deregulation”, 1259.

124 See generally Andersen, E., “The Ethical Limitations of the Market” (1990) 6 Economics & Philosophy 179Google Scholar.

125 Baron, J. B. and Dunoff, J. L., “Against Market Rationality: Moral Critiques of Economic Analysis in Legal Theory” (1996) 17 Cardozo Law Review 431, 439Google Scholar.

126 Sunstein, Free Markets and Social Justice, 5-6. More generally see Granovetter, M. and Swedberg, R., “Introduction to the Second Edition” in Granovetter, and Swedberg, (eds.), The Sociology of Economic Life, 2nd edn. (Boulder, Colorado 2001) 1, 11Google Scholar.

127 See Rubin, “Deregulation”, 1267 (emphasis added). See also Trebilcock, Limits of Freedom of Contract, 156: “[c]ommunitarians, such as Michael Sandel, Alastair MacIntyre, Charles Taylor, are critical of what they view as an impoverished, pre-social, atomistic conception of human identity which fails to acknowledge the extent to which individual identities are shaped and constituted by their particular social, historical, cultural, and linguistic contexts” (footnotes omitted). Clearly this entails that preferences are both socially constructed and socially relative.

128 Rubin, ibid.

129 Ibid. But see Trebilcock, Limits of Freedom of Contract, 155 (paraphrasing Hayek) on this issue: “[t]o say that a desire is not important because it is not innate is to say that the whole cultural achievement of humanity is not important …. [An] individual's desire for literature, music, art, and so on probably does not originate with him in the sense that this would exist if literature, art, and music were not produced. In other words, the knowledge of what is being or can be produced is one of the many factors that influence what people will want.”

130 Rubin, “Deregulation”, 1268.

131 Ibid., at p. 1259.

132 See Barron and Dunoff, “Against Market Rationality”. See also Sagoff, M., “Values and Preferences” (1986) 96 Ethics 301, 302Google Scholar: “[i]t cannot be argued that satisfaction of preferences is a good thing in itself, for many preferences are sadistic, envious, racist, or unjust.”; Sunstein, After the Rights Revolution, 46: “private preferences should not always be respected … far from being fixed and exogenous, they adapt to and indeed are a function of existing circumstances, which may include injustice, in the form (for example) of limitations in both available opportunities and information.”

133 In this respect it is interesting to note that from a descriptive point of view, much law/policy is specifically designed to thwart/frustrate preferences which are divisive, hurtful, and so on, and this has typically been viewed as a legitimate and, indeed, necessary role for the state in all liberal democracies. See Barron and Dunoff, “Against Market Rationality”. This resonates with the idea addressed earlier that markets, preferences, and the state are inextricably linked.

134 Ibid., at p. 494 (footnote omitted). See also Trebilcock, Limits of Freedom of Contract, 21: “an ‘internal’ theory of exchange … which is premised on vindication of private preferences or individual autonomy and consent is likely to be a seriously incomplete account of the normative bases of the law of contract.”

135 According to Sagoff, “we are not simply a group of consumers, nor are we bent on satisfying only self-regarding preferences. Many of us advocate ideals and have a vision of what we should do or be like as a nation. And we would sacrifice some of our private interests for those public ends”: M. Sagoff, “Economic Theory and Environmental Law” (1981) 79 Michigan Law Review 1393, 1394. See also Kuttner, Everything for Sale, 338: “[c]itizens … express ideological preferences, beliefs about what is good for the collectivity.” See also Sunstein, After the Rights Revolution, 44.

136 Barron and Dunoff, “Against Market Rationality”, 494. See also Sunstein, After the Rights Revolution, 57: “[t]he choices people make as political participants are different from those they make as consumers. Democracy thus calls for an intrusion on markets.”

137 See C. Sunstein, “Republicanism and the Preference Problem” (1990) 66 Chicago-Kent Law Review 181, 189; and Sunstein, After the Rights Revolution, 51: “people's preferences, in their capacities as voters or citizens, are quite different from what they are when people act in their purely private or market capacities.”

138 See Barron and Dunoff, “Against Market Rationality”, 442. See also Sagoff, “Values and Preferences”, 304: “we may be concerned as citizens, or as members of a moral and political community, with all sorts of values … which conflict with the interests we reveal as consumers”; and Sunstein, After the Rights Revolution, 57 (elevating “considered judgment” over mere whim).

139 Rose, C. M., “Environmental Faust Succumbs to Temptations of Economic Mephistopheles, or, Value by any other Name is Preference” (1989) 87 Michigan Law Review 1631, 16361637Google Scholar.

140 Parkinson, Corporate Power and Responsibility, 13.

141 Barron, A. and Scott, C., “The Citizen's Charter Programme” (1992) 55 M.L.R. 526, 546Google Scholar.

142 Parkinson, Corporate Power and Responsibility, 13.

143 See Barron and Scott, “Citizen's Charter Programme”.

144 For an overview of this literature, see Parkinson, Corporate Power and Responsibility, 13-15.

145 See Alcock, Financial Services and Markets Act.

146 Committee to Review the Functioning of Financial Institutions (Chair: Sir Harold Wilson) (Cmnd 7937) 1980, para. 90.

147 “Financial services account for 7% of gross domestic product and contribute £32 billion net to the balance of payments. The United Kingdom's world-beating financial services industry is vital not only because it employs more than a million people, but because it provides a means to look after the savings of many millions more. Firms in all sectors of the economy rely crucially on it for the provision of finance”: Chief Secretary to the Treasury, HC Debates, Vol 344, col. 358 (9th February 2000).

148 See Feintuck, M., ‘The Public Interest’ in Regulation (Oxford 2004), 63–64Google Scholar.

149 See, for example, the way in which the global financier George Soros is reputed to have made a $1bn profit at Britain's (in effect the taxpayers’) expense during the UK's withdrawal from the Exchange Rate Mechanism in 1992, a day which became known as “Black Wednesday”. See http://news.bbc.co.uk/1/hi/business/4249425.stm (consulted 16th February 2005).

150 See generally, Parkinson and Stokes who make the same point regarding large public companies. Parkinson, Corporate Power and Responsibility, ch. 1, and Stokes, M., “Company Law and Legal Theory” in Twining, W. (ed), Legal Theory and the Common Law (Oxford 1986), 155Google Scholar. These private interests not only succeed in acquiring “dominion over things … but also, and more importantly, sovereignty over people”. See Feintuck, ‘Public Interest’, 244 (quoting secondary sources).

151 See Feintuck, ‘Public Interest’, 183-188 (and sources cited therein).

152 Ibid., at p. 190.

153 Section 2(1), (2), FSMA 2000.

154 Although in discharging its general functions under s. 2(3), FSMA 2000, the FSA must “have regard to” a range of mainly (though not solely) economic factors, these need not unduly impede the FSA in its remodelled role. It is also worth noting that the FSA is under a general duty to consult the public: s. 155(1), FSMA 2000 (they also have a specific duty to consult both consumers and practitioners on the “extent to which its general policies and practices are consistent with its general duties under section 2”: s. 8). The FSA is also required to hold a public meeting every year to allow discussion of its annual report and to enable questions to be asked about its overall performance under its statutory mandate: Sched. 1 paras. 10-11.