The Regulatory Compass: towards a purpose-driven approach to financial regulation
The report draws on the experiences of the Finance Innovation Lab’s community of purpose-led innovators to argue that rather than being ‘purpose-neutral’, regulation is often designed around the large, shareholder-focussed firms that dominate the market. Finance Innovation Lab explore how regulatory assumptions hinder financial firms focussed on social and environmental impact, and identify three conceptual fallacies that limit the ability of regulators to embed social purpose in their approach:
Three fallacies permeate current regulatory thinking:
The fallacy of composition: if every unit in the system works, the whole system works
The fallacy of neutrality: current regulatory approaches are values-free and any changes to this would mean taking an unjustified moral stance
The fallacy of market efficiency: competition and ‘market integrity’ are effective proxies for the outcomes we want the financial system to serve.
UK regulators and the policymakers who instruct them need to develop a more explicit and more holistic concept of what social purpose means in the context of financial services. Understanding how the financial system is delivering on this ultimate purpose requires regulators to have new mandates, rooted in democratic consultation on the purpose of finance; a different mindset, embracing fully human-centred regulation; and new metrics that assess how well the financial system and financial firms are fulfilling their ultimate purposes.
The Regulatory Compass aims to open up a new debate about the future of financial regulation in a changing world. It offers an important message not just to regulators and policymakers, but to all who want to make finance serve a purpose beyond profit.
