An interesting discussion about regulators with teeth cropped up during John Gapper’s panel on financial centers. Gapper noted that the SEC was much better at jailing white-collar criminals than any of London’s financial regulators, to which Guy Saxton, the CEO First London Securities, essentially said so much the better for London.
Saxton’s argument was that jailing criminals doesn’t achieve very much in terms of changing future behavior. In the London system, he said, where brokers can be effectively ostracized and wiped out by the rest of the market if they violate the written and unwritten principles, has a much more salutary effect on the market as a whole.
The other side of the argument came from Magnus Böcker, the president of Nasdaq OMX Group, who said that having regulators with real teeth does increase investors’ trust and faith in the markets.
My feeling is that when it comes to financial markets, it’s unrealistic to hope that criminal behavior will be punished by the local civil prosecutors rather than specialized regulators. I also feel that in a world where the vast majority of insider trades go unprosecuted (just look at the behavior of credit default swaps ahead of big M&A deals), the real fear of going to jail if you’re found out is one of the few things that can meaningfully decrease such activity.