Regulating wholesale financial markets

According to Callum McCarthy , chairman of the UK’s Financial Services Authority (FSA), the Authority works on the principle that regulatory action should be taken when there is market failure. Indeed, Mr McCarthy believes that the strong test goes beyond that: that there must be both a market failure and the prospect that intervention will provide a net benefit. This, approach, he says, involves recognising both that regulatory intervention has a cost; and that regulatory intervention, like reliance on market operations, has a probability of failure. And that identification of a market failure should not lead to the assumption that regulatory failure is less likely, or less costly. It is an open and empirical question, which needs analysis on a case by case basis. Faced with these problems, what can and what should a regulatory organisation seek to do? In a speech given at a recent financial services seminar organised by Reuters, Mr McCallum set out his views on the regulation of the retail and wholesale financial services markets. The extract below largely focuses on the wholesale markets.