Fixing the Fix: Governance, Culture, Ethics, and the Extending Perimeter of Financial Regulation

The bourgeoning investigation into the manipulation of key financial benchmarks, such as the London Interbank Offered Rate (Libor), has seen the imposition of an escalating range of fines by regulatory and law enforcement agencies. While primarily focused in the United Kingdom and the United States, the misconduct spans the globe. It has also prompted the exit of a number of financial institutions from the setting of benchmark rates. This has posed a range of practical and conceptual problems, which apply at national, regional and global levels. At a practical level, the credibility of the benchmarks, which are a public good, has been undermined, prompting an incremental but observable erosion of public confidence in market integrity. Exit has the effect of reducing pricing transparency and thus liquidity. Secondly, the investigation of collusion has brought the arrival of competition regulators into the arcane world of financial regulation. Their focus on breaking up cartels changes the dynamics, prompting a rapid expansion of the regulatory perimeter. It also facilitates a fundamental rethinking of capital market purpose. This paper evaluates how the confluence of regulatory and criminal investigation offers a time-limited opportunity to transcend the incremental and flawed nature of technical reform. It assesses the conceptual coherence of attempts, driven by the United Kingdom, but with significant support from both the Financial Stability Board and the International Monetary Fund, to create “fair and effective” markets by articulating a new vision of “inclusive capitalism” and whether this addresses the observed institutional corruption.