The growing importance of risk in financial regulation



20

would appear to produce less accurate results than meta regulation. Furthermore its impact on
the use of external auditors, as illustrated by the Financial Services Authority (FSA),
contributes to its being a less favorable option than meta regulation.

According to Fiona Haynes168, meta regulation “with its collaborative approach to rule
generation”, could controversially be considered to be the approach with greatest evolvement
when considered in relation to other approaches such as co-regulation, enforced self
regulation and process or management-based regulation. Meta regulation is a method which is
capable of managing “self regulatory capacity” within those sites being regulated whilst
exercising governmental discretion in stipulating the goals and levels of risk reduction to be
achieved in regulation.169

Meta risk regulation is proposed as a means of quantifying and managing risks under the risk
society theory - risks which I would like to refer to as institutional risks. Such a proposal
would not only address, to an extent, the concerns of Beck (in relation to matters of
accountability), but would also be a more appropriate means of controlling more complex
risks which have resulted from developments of science and technology. Such risks can be
contrasted with the more “traditional and novel societal risks”. Enforced Self Regulation is
proposed as a means of addressing such less complex and more traditional forms of risk -
whilst providing some scope for the role of judicial governance and the involvement of courts.
Courts are simply not adequately equipped to deal with the pace with which some financial
instruments, such as derivatives, operate. Even though the Capital Requirements Directive
had provided for increased pro cyclicality, it came into force after the 2007/08 Financial
Crises had practically ended - thus making it impossible for it to have any impact on the
Crisis. As a result, the role of courts and judicial governance in risk regulation should
constitute a topic for purposes of future research. Furthermore, the theory of risk colonisation
which involves the dynamic linkage between societal and institutional risks, as propounded
by Rothstein et al, and within this context,170 would constitute a fertile ground for research.

The ability of responsive regulation to address such a complex171 factor as risk, its flexibility
and responsiveness to regulatees and its environment, among other advantages, make it a
more desirable regulatory tool than traditional regulation or risk based regulation. Whilst
direct monitoring by the State would be required, the involvement of third parties such as non
government organisations would also be crucial to ensuring that a situation, whereby the State
could be captured, is avoided. Furthermore the possibilities available in achieving the right
“regulatory mix” make it a promising regulatory tool. Even though the contested nature of
risk contributes to the difficulty of relying on risk as a regulatory tool, its presence and ever
growing significance cannot be ignored - hence the need for a form of regulation which is
able to manage risk more effectively and which would best suit an evolving regulatory
environment.

168

169

170

171


F Haines,‘Regulatory Failures and Regulatory Solutions: A Characteristic Analysis of the Aftermath of

Disaster’, Law and Social Inquiry ( 2009) 39 (forthcoming) at page 3

ibid at page 1

See H Rothstein, M Huber and G Gaskell ‘A Theory of Risk Colonization: The Spiralling Regulatory Logics
of Societal and Institutional Risk at page 107

According to Baldwin and Cave, risk regulators encounter problems with the search for legitimation as a

result of differences between the lay and experts’ perceptions of risk. For additional information on what
could be done to improve the effect of legitimating arguments and solutions advanced to counter problems of
risk regulation, see R Baldwin and M Cave,
Understanding Regulation: Theory, Strategy and Practice
(1999) Oxford University Press at pages 145 -149. For problems with defining and assessing risk, see page
138 ibid



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