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5 Brook. J. Corp. Fin. & Com. L. 273 (2010-2011)
Regulating Financial Innovation: A More Principles-Based Proposal

handle is hein.journals/broojcfc5 and id is 277 raw text is: ARTICLES REGULATING FINANCIAL INNOVATION: A MORE PRINCIPLES-BASED PROPOSAL? Dan Awrey* INTRODUCTION The global financial crisis has exposed the complexity of modem financial markets. One of the primary drivers of this complexity has been financial innovation. From sub-prime mortgages, securitization, and credit default swaps to sophisticated quantitative models for measuring and managing risk, the footprints of financial innovation can be found at almost every step along the road to the Great Recession. More broadly, complexity and innovation-its nature and its pace-have combined to generate significant asymmetries of information and expertise between public regulators and private (regulated) actors and exacerbated the agency cost problems that pervade global financial markets. At the same time, the pace of innovation has left financial regulators and regulation chronically behind the curve. Identifying the optimal policy response to the complexity and nature and pace of innovation within financial markets is, accordingly, vitally important in terms of the delivery of effective financial regulation. Astonishingly, however, none of the proposals for regulatory reform which have emerged in response to the crisis-including the recently enacted Wall Street Reform and Consumer Protection Act'-directly address the challenges posed by these seemingly ubiquitous forces. With a view to redressing this somewhat glaring oversight, this paper examines the desirability of more principles-based financial regulation (or MPBR) as a potential response to the challenges stemming from the complexity and innovativeness of modern financial markets. The focal point of this examination is thus the philosophy or style of financial regulation: it is concerned with who generates substantive regulation (and outcomes) within regulatory regimes and how, as opposed to the institutional structure, statutory construction, or substantive content of regulation, in and of themselves. MPBR is itself a recent innovation- cutting against the historically predominant trend toward prescriptive, rules- based approaches to financial regulation. MPBR experienced a surge in momentum in the decade or so prior to the crisis, with comprehensive principles-based regimes pursued by the United Kingdom (U.K.) Financial Services Authority (FSA), the Australian Securities and Investment * University Lecturer in Law and Finance and Fellow, Linacre College, Oxford University. The author would like to thank John Armour for his comments. 1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

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