Julian Franks is Corporation of London Professor of Finance at London Business School.

Colin Mayer is Peter Moores Professor of Management Studies at Saïd Business School, University of Oxford.

Dr Luis Correia da Silva is director of Oxford Economic Research Associates.

The most striking feature of asset management is its diversity and the regulation of asset management companies across Europe reflects this. However, harmonising regulatory rules would be inappropriate because regulation and institutional arrangements are complementary.

As long as pronounced institutional differences persist, then so, too, should different forms of regulation. Regulation systems should be judged on how well they protect investors and their effect on competition.

There is a trade-off between investor protection and competition. High levels of protection can be achieved through large compensation funds and high capital requirements, but at the expense of competition, product variety and entry.

Market failures in asset management arise from information asymmetries and fraud, not in general from systemic risks. They should be corrected by disclosure, auditing, enforcement, insurance, custody and trustees, rather than through capital requirements.

The development of insurance markets, greater clarity of investor protection in custody arrangements, auditing, and enforcement through the courts are important components of a move towards a more market-oriented system. The creation of an integrated financial market in Europe would benefit from such a development, but requires careful consideration.

Raising capital requirements would discourage the development of markets in information and insurance, as well as having a direct impact on competition and entry. Unless capital requirements are set at unrealistically high levels, they could also provide a false sense of security.