The City of London has a reputation for being a relatively unregulated financial center. The comparative absence of government oversight--especially in contrast with its main European rivals, Paris and Frankfurt--has encouraged innovation and has made London attractive to high-flying global operators. For a long time, the City has relied mainly on self-regulation.
But Britain's new Labor Party government has come to power with the avowed aim of bringing order to London's financial markets--and it's about time. The downside of lax regulation is that the City has been hit by a run of scandals, including the collapse of Barings PLC in 1995, and a costly fund management debacle in 1996 at Deutsche Morgan Grenfell. At some point, enforcing a clear set of rules becomes a competitive necessity, since investors and customers--especially those from other countries--need to know that they will not be cheated and that they can depend on authorities to ferret out small problems before they become big ones. Indeed, tight regulation has been one of the strengths of Wall Street, and in particular the New York Stock Exchange.
The challenge for Prime Minister Tony Blair and the regulators he appoints is to find a balance between regulation and innovation. If they are too tough, business will flee offshore--just as traders hustled to London in the 1970s to set up the Eurobond market out of the reach of U.S. watchdogs. But investors will take flight if Labor doesn't clean up the City's worst excesses. Financial services is Britain's boom industry, and Blair owes it to his country to make sure it runs smoothly--and fairly.