Economic theory has suggested that competition and free market forces are the preferable environment within which economic entities and industries should operate. The reason for this is that competitive forces provide incentives for economic efficiency and equitable distribution. If market forces are expected not to be capable of providing the correct incentives to the companies there is a need for government intervention. This is known as regulation which is used as a substitute for the missing market forces. The purpose of such regulation is to ensure that no party is able to exploit their unequal position for gain and to ensure that efficiency incentives and equitable distribution are achieved.
Often the method of regulation which has been accepted is that of self regulation - with an industry effectively policing its members. Sometimes, as with the auditing industry, this has proved to be ineffective and external regulators have been appointed. Each regulator has the role of addressing and balancing up the needs of the various stakeholders of their respective industry. The stakeholders of regulated industries or markets include the press, customers and their pressure groups, shareholders, City analysts, and the government. Each of the stakeholders is interested in a different aspect of performance and so views the performance of the industry from a different perspective (Crowther 1996) in order to reach different conclusions. From this list of stakeholders the prime concern has been with addressing the needs of the two dominant stakeholders: shareholders and customers.
Within Western capitalist societies the emphasis is very much on companies providing returns to the shareholders and therefore they are a dominant stakeholder. In the case of the regulated industries the regulators have also been given the task of protecting the customers who would otherwise be 'gouged' by monopoly abuses (Veljanovski, 1991). In terms of customers the prime focus is upon domestic customers, possibly because these are the most numerous and in the weakest bargaining position, or possibly because these are the people who will vote for a government (which appoints the regulator) in the next election. 'Sliding scale' regulation is more specifically oriented to the idea of ensuring consumers are not abused at the expense of shareholders. It allows greater returns to shareholders only if consumer prices are reduced (National Consumer Council, 1989). This form of regulation was popular in the UK at the start of this century and has attracted interest recently as it has been suggested that other forms of regulation fail to deliver an equitable distribution.
The 2008 financial crisis
The recent financial crisis, much as previous ones, has highlighted failures in governance and failures in regulation. Indeed some writers, in their desire for scapegoating, have argued that the regulators are more guilty even than the perpetrators and should be sanctioned accordingly. There is of course one flaw in this argument and one problem with managing the prevention of future financial crisis (Grabel 2003) and this is concerned with the recognition of and regulation of a truly global market for finance. The liberalization of financial markets instigated by the Washington consensus has made the free movement of funds a fact of financial life and has encouraged the parceling together of doubtful debts into mystery parcels to be sold around the world24. And of course the operators in all financial markets, always ready to accept a gamble in the hope of ever larger profits and bonuses have been quick to respond.
Regulators inevitably, according to their founders, must focus upon a local market while finance escapes them through its ability to migrate around the world. Effectively this means that any realistic form of regulation does not and cannot exist (Becker & Westbrook 1998). One consequence of this regulatory failure of course is that contamination spreads and the dubious practices developed in one financial market become the norm in other markets. When the inevitable crisis appears this too spreads from one country to another as all economies are affected by both the consequences of dubious lending practices and by the ensuing crisis of confidence. This calls attention to the fact - recognised but mostly ignored in the financial models used to legitimate financial activity - that the financial market is a global market and a corollary of this is that any regulatory regime must also be global. Therefore we highlight the problems with the current regime and argue that perhaps a global regulatory authority capable of sanctioning even the most powerful actors in the market, including national and transnational governments, is necessary in the current global environment (see Chapter 10).