Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

UK Bill about Light Touch Regulation of Exchanges

I have been reading the bill
that the UK has introduced to ensure that a foreign acquisition of the
London Stock Exchange does not endanger the “light touch
regulation” of UK exchanges. When I blogged
about this idea three months back, I was mildly in favour of it, but
when I see the actual law, my reaction is quite negative.

First of all, the law is far too wide. It says

A requirement is excessive if –

  1. it is not required under Community law or any enactment or
    rule of law in the United Kingdom, and
  2. either–
    1. it is not justified as pursuing a reasonable regulatory
      objective, or
    2. it is disproportionate to the end to be achieved.

Second, the law requires any exchange that proposes to make any
regulatory provision to give written notice of the proposal to the
FSA. The provision can be introduced only if the FSA does not veto it
during a 30 day period. The only saving grace is that the FSA has been
empowered to limit the applicability of this clause to
“specified descriptions of regulatory provision or in specified
circumstances”.

It appears to me that in the name of preserving a light touch
regulation, the law is introducing a whole new layer of regulation
that is not light touch at all. The motivation for the law was to deal
with certain extreme situations and it would have been better to limit
the law to such situations. As it stands, the law only illustrates the
general principle that knee jerk legislative responses end up as
disasters.

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