Criminology Research Council grant ; (7/88)
This study examines the policing of financial services and, in particular, the regulation of futures markets, in two jurisdictions: Australia and Hong Kong.
The Hong Kong component examines the operation of the Hong Kong stock and futures exchanges during the crash of October 1987 and in particular the controversial decision to close the exchanges. It argues that the closure decision exposes a serious conflict of interest and abuse of power on the part of the major decision-makers and fundamental flaws in Hong Kong's self-regulatory system. Moreover, these events raise broader questions about the strengths and weaknesses of different regulatory regimes and about the value of different theoretical explanations of regulatory behaviour. In particular, it is argued that the most influential theory concerning the regulation of financial markets - that of certain Chicago School economists - raises as many questions as it answers, and that an alternative view which locates cultural and organisational factors at its core provides a more satisfactory explanation of the events of October 1987.
The Australian component examines the contemporary system of regulation of the Australian futures market, which is based primarily on self-regulation with some modest degree of government oversight. It argues that the effectiveness or otherwise of self-regulation will depend crucially on a number of structural variables which may differ markedly between jurisdictions. While in some jurisdictions (for example, Hong Kong) self-regulation may be an abject failure, in others it may prove the most viable and effective form of social control.
The study identifies a number of important structural features of the Sydney market which make it particularly amenable to social control. As a result, the Australian market is less vulnerable to fraud, manipulation and insolvency than many other markets. The players have disincentives to engage in market abuses. When they do engage in them, they are more readily detected than elsewhere, and exchange decision-makers themselves, in many circumstances, have the appropriate incentives to curb abuses.
However, this is not to suggest that self-regulation is free from significant shortcomings. In respect of enforcement, in particular, self-regulation has not worked well. There is evidence of a 'private club' relationship between members, which has been to the detriment of the public interest. However, these shortcomings are neither fundamental nor irremediable, and a number of recommendations are made for reform. If implemented, these would do much to ensure that the Australian investors maintain confidence in the integrity of the market. Such integrity is essential not only for the protection of customers, but also for further industry growth.