Terrific MentorsJohn Bittleston, Eliza Quek & Denise Pang – Career, Business and Personal Mentors

Effective Regulation

10 May 2010

“Regulation is necessary to maintain balance. It is steeped in discernment, not judgement.” Denise Pang, Mentor

Difficult to say whether it’s the ‘Cream of the Crop’ or the ‘Bottom of the Barrel’ with the latest round of indictments in the financial sector.

The inability of Financial Regulators to stop fraudulent banks, malpracticing financial institutions and cheating portfolio advisors must make us question if regulation ever works. An accusation of conflict of interest caused the resignation of the Deputy Chairman of the Financial Services Authority, the main body responsible for regulating the financial affairs of the UK.

The unseeing eyes of the bishops and priests of one of the world’s great religions over the child abuse that was rife in its midst has led to some resignations, too. But both bankers and priests were convinced that they were regulating. They were regulating for the benefit of the organisations and institutions to which they belonged – exclusively in their own interests. It seems never to have occurred to them to regulate for service to their customers or followers.

Whether any regulation works is a pretty important question since it pervades every moment of our lives. It costs a lot of money to devise, monitor and prosecute. It interferes with our liberty, consumes a lot of time and creates stress and irritation, both causes of illness and disharmony. If regulation doesn’t work why are we wasting all these resources and energy?

Clearly some controls do work. Our roads would be strewn with bodies if not for the traffic regulations. Our society would be chaotic if not for the basic laws that govern behaviour. But regulation cannot cover all possibilities and personal standards must, at some stage, determine a culture. So where does regulation leave off and Personal Social Responsibility (PSR) begin?

It all hinges on how greedy we should be. Religion acknowledges some level of greed. “Save your soul” is a selfish instruction. The instinct to rescue your own family ahead of others is primarily self-serving, but it must be correct in many circumstances. Parents’ protectiveness towards their children has an element of self-perpetuation about it and yet we rightly applaud it.

Society thrives on competition, creating, in the process, winners and losers. With 6.5 billion people on the planet – and fifty percent more forecast in the next hundred years – we are set to become an even more competitive society.

Good competition allows us to grow, keep slim and active and thrive. Bad competition is protective, restrictive, sectarian, divisive; it destroys society. Bad competition is when the end justifies the means. This is not tenable given that life is a journey, not a destination. To forget this dangerously flaws the philosophy of any individual or group.

Just as a society thrives on competition so also it flourishes on cooperation. For all mankind’s wars, we are a generally cooperative species – at least when things are going well. With impending shortages of food, water and air our intentions to cooperate universally will be severely tested whereas our tendency to cooperate in smaller, excluding, groups will increase.

People will always have secret groups, private clubs, closed societies. They do more damage than good. They are anti-social because they benefit members at the expense of non-members. They take mutual back-scratching to a high art. Why have we not learnt that yet?

It is dangerous when organisations become too big, which means too powerful. Much has been made of the expression “too big to fail”. It means too big to be controlled by the majority of us through our governments. Whatever the benefits of scale, society must never allow the existence of any organisation that is too big to fail. If it is too big to fail it must be too big to exist.

So how much regulation should there be and how can that regulation be effective?

The most efficient form of regulation is transparency. It doesn’t eliminate undesirable groups but it makes their anti-social element less effective. The need for transparency is acknowledged in the financial world by the existence of auditors, a worthy and enlightened institution compromised by the fact that they are paid by the people they are supposed to make transparent. In sport it is called fixing.

The market place, that harbinger of true and open competition, works only when anti-consumer collusion is effectively outlawed. Regulators are supposed to do this. Sadly, they are seldom as clever as the people they are trying to regulate, who get paid a great deal more. Correctly persuaded that some cooperation is required in business between competitors, the regulators fail to distinguish between cooperation that benefits the customer and cooperation that benefits only the cooperators.

A recent response by a big clearing bank to my enquiry as to why the gap between lending and deposit rates was so exorbitant informed me that they rates were “pegged”. I enquired by whom and still await a reply. The same bank was unable to explain why collateral to cover a loan had to be twice the value of the loan. Their explanation that it was “accepted policy to ensure the stability of the loan” is gobbledygook, something at which banks are expert.

Regulation must therefore succeed in making transparent all those things that people would prefer not to be seen. But wouldn’t this shatter business advantage? Do I want my businesses secrets broadcast before I can cash in on them? Of course not, but if the price of honesty is transparency then I prefer honesty to undercover collusion. In practice, this part of regulation is already well on the way to being achieved but not by governments, regulators or the businesses involved. Consumers now use the internet to tell each other what businesses would rather remained confidential. Long may it continue to do so.

An interesting fallout of this is that word of mouth, that mediaeval form of promotion, is back in favour. My brother is more useful as a guide to buying than an expensive TV commercial.

The world has yet to come to grips with the fact that any planet with intelligent life on it, and certainly any as crowded as ours, cannot afford the disparity between the rich and the poor that currently exists. This is not an attack on wealth only on excessive disparity of wealth. It is as impossible to justify the enormous salaries of the top business managers today as it was to justify the vast inherited wealth of old families in the past.

Sharing resources is not now an option. If we do not, millions will die prematurely and unnecessarily. But they will kill before they die. The regulators in charge of this are called politicians and an appalling job they have generally made of it, too. They have forgotten that George Orwell’s ‘Animal Farm’ was meant to be an irony, not a guide to astute political behaviour.

Moves to introduce the worthy concept of Corporate Social Responsibility (CSR) have inevitably largely failed. Corporations do not have consciences, they have public relations departments. So CSR has become another job for the PR staff. The heart of good regulation does not lie in processes and forms but in individuals.

Until each person aims to have his or her own standard of behaviour higher than those of everyone around them no amount of regulation will totally solve the problem. Penalizing banks with additional taxes will merely increase the bonus levels since the charges – ‘plus 15%’ – are passed on to the customer.

Simple and intelligent regulation based on transparency, governable size and sharing is possible only when lesson one in business school is about PSR – Personal Social Responsibility.

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