The Age of Muscular Regulation

At $4.5bn BP's fine for the Deepwater Horizon disaster is huge but unsurprising; the company had set aside a larger sum for this liability. The fine's magnitude may, however, shift our focus from some recent developments that show the increasing boldness of regulators across all industries.

I've written before about the more muscular approach taken by regulators since the crash of 2007 and that trend has continued. Recent examples include the fines and continued investigations around Libor manipulation, this week's launch of probes into alleged rigging of the UK gas market, and JP Morgan's six-month ban from trading electricity in the US.

The change in regulation hasn't just been seen in the actions of regulators. There is a new boldness in the comments they are willing to make to, and about, the industries they regulate. Last month, Andrew Haldane, an executive director at the Bank of England, spoke of morality and of "deep and rising inequality" when he addressed a gathering of the Occupy movement in London. Such comments would be almost unthinkable for a central banker only a few years ago. Similarly, this week, in a move that closely reflects the current political and public zeitgeist, the Financial Services Authority (FSA) told banks that it expects them to show bonus restraint this year.

This newfound boldness among regulators is not manifesting itself solely in the form of pressuring, pounding and punishing industry. The FSA, which on the one hand is warning banks about bonuses, investigating alleged market fixing and cracking the whip over PPI, is also easing capital and liquidity rules for the UK's largest banks in an effort to boost lending. This move falls under the banner of macroprudential regulation, which is the current big thing among global regulators. The idea is appealing: regulators adjust how they manage an industry with the aim of providing benefits for the wider economy.

All these examples point to the dawn of a new age of muscular regulation, where industries find themselves increasingly challenged and guided by regulators. This is a big change from the light-touch regulation of previous years. Although the impact of this new era is hard to predict, there is a danger that as regulators become emboldened in using their powers, they may find themselves under pressure to respond to political and public opinion. It is a pressure regulators must resist if they are to strike the right balance between intervening to ensure a market is working efficiently without manipulating it for short-term, populist reasons.