Rules versus principles for ethical market behaviour

In designing regulation, as has long been recognized in the academic literature, there is a tension between reliance on fixed mechanical “bright line” rules and the flexibility offered by granting a degree of discretion to the regulator subject to guiding principles. The failure of principles‐based financial regulation a decade ago reinforced a trend towards mechanical rules. This essay, drawing on practical experience gleaned in the years following the Global Financial Crisis, argues that both are needed; indeed, in many cases, the regulatory policymaker needs some discretion if it is to be sufficiently intrusive. Although regulatory discretion brings its own risks, the growing complexity of products and markets suggests a tilt towards granting greater discretion to the regulator in preference to over‐complicating mechanical rules.