Better regulation should never stifle risk-taking

ALMOST as soon as this financial crisis began, policy makers, central bankers and business leaders began waxing lyrical about regulatory failure and the importance of improving regulation to ensure that such a crisis is not repeated. However, now the mist is beginning to clear and we are moving from crisis mode into the recovery period it is possible to assess what better regulation means and how we can achieve it.<br /><br />I believe it means regulation which improves outcomes: firstly regulation must protect depositors, secondly the risk of systemic failure should be avoided and, thirdly, it should encourage competitive and efficient markets which are open and transparent. It goes without saying that new regulation should be in the areas where it is needed &ndash; protecting against macro-prudential risk in the banking sector for example, rather than sectors which are already functioning well such as non-life insurance or maritime, which need no changes to their current regimes. Regulation should of course limit the taxpayer&rsquo;s risk of having to bail out a failed institution.<br /><br />To achieve these outcomes we must look at the problem objectively, stripping out understandable public anger and ensuring any new regulation is based on analysis and evidence rather than emotion. The European Union&rsquo;s &ldquo;Principles of Better Regulation&rdquo; should be followed whereby new regulation is agreed after proper consultation and impact assessments are carried out.<br /><br />Better regulation should not be an excuse for national or regional protectionism. I firmly believe better regulation can make markets more competitive which in turn makes them more attractive. Neither does it mean each jurisdiction or nation state should wrap itself in endless, red-tape. No one will benefit from competing blocks of non-convergent regulation &ndash; that is simply another form of protectionism. We have a responsibility to work more closely with our European neighbours and engage with the EU&rsquo;s regulatory processes to influence and shape the outcomes.<br /><br />Aside from the role governments and regulators must play we also need to look at the heart of the problem &ndash; inside companies. I welcomed Alistair Darling&rsquo;s comments at last week&rsquo;s Mansion House dinner that the process has to start in the boardroom. It is widely accepted that non-executive directors have been too passive to date and we must acknowledge that we will never be able to regulate against bad judgement. Regulation only sets the framework within which business can operate. Boards, not governments or regulators, run companies.<br /><br />And we must not fall into the trap of thinking either that risk can be abolished or that all risk taking is bad. Not to take risk means not to seek progress.<br /><br />Ian Luder is Mayor of the City of London.