Financial markets regulation: political accountability challenged

PurposeThis paper aims to conceptualize and empirically illustrate the challenges that financial market regulation presents to politicians and the organization tasked with specifying regulations and supervising their implementation in the interest of users and consumers of financial instruments. It analyses the problem from the viewpoint of the governor's dilemma and the control/competence conflict, the linked problem of the rent-seeking of agents/intermediators and consumers of financial instruments. Political accountability problems are enhanced by the materiality of the technologies used, i.e. algo trading.Design/methodology/approachThe paper theoretically conceptualizes and empirically illustrates the argument.FindingsThe paper finds that regulators of digitalized financial markets are faced with considerable problems and depend on private agents when regulating financial transactions. However, the new technological instruments also offer new possibilities for securing compliance.Research limitations/implicationsFurther research should focus more in-depth on the cooperation between public and private actors in the specification and implementation of regulatory details. It should further investigate the conditions which allow regulators to use RegTech in the surveillance of financial firms.Practical implicationsSince financial market transactions are opaque for most users, the creation of more transparency is crucial to hold regulators accountable in their activity of surveillance of financial firms. New algorithm-based technologies may lend important support in doing so.Originality/valueBy linking the different analytical perspectives, i.e. the governor's dilemma vis-à-vis the intermediator or agent and the possible rent-seeking of intermediators, under the condition of a highly developed technology of financial transactions as well as the market structure, the paper offers new insights into the limits as well as new opportunities of regulating financial markets allowing for political accountability of regulators and financial firms.