In a damning and refreshingly frank speech, Andrew Haldane, executive director, financial stability at the Bank of England advocated ripping up the rulebook altogether and starting afresh.
“The events which have shaped the evolution of financial regulation include crises, scandals innovation and liberalisation. Each has elicited a response, typically the addition of a new regulatory layer. The cumulative consequence has been a regulatory tide which has tended to flow only in one direction – towards a lengthier, more complex rulebook,” he said.
Pages and pages
At the Internationall Financial Law Review awards held in London, Haldane explained the UK Banking Act of 1979 covered 52 sections and ran to 75 pages. In comparison the new Financial Services Act from last year has 695 sections and 534 pages.
In the US, he said, the picture is no less dramatic, with the Dodd-Frank Act of 2010 running to 848 pages, versus the Glass-Steagall Act issued in response to the Great Depression in 1933 at only 37 pages.
He predicted that once completed the Dodd-Frank Act might run to 30,000 pages.
“The tax code has followed a similar evolutionary trajectory. In the UK in 1997, Tolley’s Tax Guide ran to around 5,000 pages. By 2009 it had reached over 11,500 pages; just two years later, 17,795. That is a threefold rise in less than 15 years.”
Haldane’s speech came just days after an agreement dubbed the ‘European Fatca’ was made between the UK and four of its largest fellow EU members – which is sure to seed reams of further rules and regulation.
Furthermore, on Tuesday, the FCA predicted it would need an additional 15% from its annual funding requirement in 2013/14, a request treated with scorn by the financial services community because of its unaccountable nature.
Haldane nodded to the high cost of maintaining such a vast framework of rules in his speech, for both the regulator and for firms who have to increase their numbers of compliance staff.
Huge cost burden
“In Europe, the cost of implementing Basel III is estimated at over 70,000 full-time private sector jobs. As these resources might otherwise have been profitably deployed in other industries, these are deadweight opportunity costs borne by society,” he said.
On top of this factor, the complex systems were not seen to be effective in solving the problems for which they were a response, and may actually increase the likelihood of loopholes or work-arounds emerging.
The individuals with the deepest pockets were pitched as those best able to exploit the cracks and squeeze through the loopholes, with studies finding the single most important determination of tax evasion often the complexity of the tax code.
“Some would argue that we face a Canute-like task in turning this tide – and like Canute that it will be in vain. But unlike the seas this complex tide is ours to turn. With the economy, the time has never been better,” Haldane concluded.
Do you think Haldane has a point? Can the rulebook be ripped up completely, or would the baby be thrown out with the bathwater? Let us know in the comments box below…