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Should markets dictate financial regulations?

As the UK government looks to introduce, via the FSA, a limit on the loan to income ratio with regards to mortgages, there are concerns that overregulation will impact upon the ability of the UK financial markets to "move with the times". As we covered in one of the earlier post, there is a need to increase the regulatory framework and strengthen the regime in the UK but is it sensible to take away the ability of financial markets to dictate financial regulation?

Slowly but surely we have seen the UK government and the regulators take a tighter and tighter grasp of the UK financial market despite the fact that it is one of the leading markets in the world. We have already seen well-known financial institutions decide to move their headquarters overseas because of the tax regime and many believe that an over onerous regulatory regime could also see many other companies redirect their investment and their resources elsewhere.

The UK banking industry has become one of the strongest in the world with exposure to each and every major economy round the globe. While this has backfired to some extent during the worldwide slowdown it has allowed companies such as Royal Bank of Scotland, HSBC, Barclays and others to substantially increase their capital base and their customer base. Is it sensible to reduce the ability of UK banks and financial institutions to decide their own policies in the medium to longer term?

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