Working with business

Case studies

Enhancing effectiveness, structure and consumer protection in financial regulation
Enhancing effectiveness, structure and consumer protection in financial regulation
Enhancing effectiveness, structure and consumer protection in financial regulation

Influencing reforms of financial regulation

  • Enhancing effectiveness, structure and consumer protection in financial regulation

Loughborough research into financial regulation has had a significant and enduring influence on how regulatory bodies are structured and how they use economic analysis.

The importance of effective financial regulation has earned increasing recognition in policymaker, professional and academic circles over the past 20 years, particularly in light of the global economic crisis.

Research by Professor David Llewellyn has addressed a number of key themes related to this issue.

Studies carried out between 1994 and 2004 explored the application of economic analysis to financial regulation with a particular focus on consumer protection and systemic stability. Llewellyn identified the principal characteristics and market imperfections in financial contracts and product markets which give rise to potential consumer detriment and the case for consumer protection regulation.

A study of the causes of the recent global banking crisis also identified fault-lines in bank business models and in the structure of regulation for financial stability.

Llewellyn was commissioned to develop guidelines for the newly-created Financial Services Authority. Three features of his work set it apart and led to it being widely acknowledged as a landmark in the field.

It emphasised the requirement for financial regulation to be firmly grounded in economic analysis and the identification of market failures and imperfections. It also set out the case for evidence-based regulation in financial services, and explained how the cost-benefit approach to regulation might be conceptualised.

A related strand of research examined the optimal institutional structures and functions of different regulatory agencies. This work developed concepts of integrated and unified agencies and led to recommendations that a Twin Peaks model – where prudential and conduct of business regulation is separated – is likely to be most effective.

Impact

  • ECONOMIC RATIONALE 

    The research made significant and original contributions to the development of the economic rationale for financial regulation at the UK’s Financial Services Authority – now the Financial Conduct Authority (FCA).

  • WORLD LEADING CATALYST 

    The Chief Economist of the FCA remarked that Llewellyn’s recommendations “may be seen as a catalyst for the FSA developing its use of economics in regulatory policy to an extent that has not happened in many – possibly any – other financial regulator around the world”.

  • RESTRUCTURING OF FINANCIAL REGULATION 

    The Twin Peaks model advocated by Llewellyn was adopted when financial regulation in the UK was restructured in April 2013. The FCA was given the remit for conduct of business while the Bank of England took on responsibility for prudential oversight.

  • SOUTH AFRICAN REFORMS INFLUENCED 

    The South African National Treasury and the South African Reserve Bank also drew on Llewellyn’s research into the institutional structure of regulatory agencies in deciding to move to a Twin Peaks model.

  • OVERSIGHT OF EU BANKING REGULATION 

    Professor Llewellyn – in his continuing role as Chair of the Banking Stakeholder Group of the European Banking Authority – contributes to the development of approaches to ensuring high and consistent standards of bank regulation across the EU.