Financial Innovation, Derivatives and the UK and UK Interest Rate Swap Scandals: Drawing New Boundaries for the Regulation of Financial Innovation

A number of questions remained unanswered with respect to the regulation of large financial institutions after the global financial crisis (GFC) of 2007-08. Some pressing issues have resurfaced in the context of the recent interest rate swap scandals. These events provided the opportunity to reflect on the wider socio-political agenda that involves the regulation of banks’ behaviour vis-à-vis societal stakeholders. In particular, the IRS scandals have shown the ability that banks have to firstly, innovate and customise complex financial products, and secondly, limit their legal liability when selling them to investors. This has resulted in a highly unfair balance of powers between financial institutions on the one hand and regulators and financial consumers on the other.
The narrative of the scandals points to two fundamental enquiries: 1) It reconceptualises the process of financial innovation in light of the actors behind it and its purposes; 2) It appraises the prevailing culture permeating financial markets and whether regulation can impact on culture at all. This analysis prompts reflection on two policy issues: firstly, on the role of financial institutions in society; and secondly, on their powers vis-à-vis regulators and societal stakeholders. This article will argue that significant changes are still needed in order to cause the shift that would align financial institutions’ business towards sustainable and socially inclusive goals.