The Regulators’ Aspirations and Aggravations

‘Regulate’ is the cry of the day, especially by those who know little of the practicalities of business. When the 2007/8 crisis erupted and brought us close to some kind of financial Armageddon everyone turned to the Regulators – first to blame and then to put it right. The Regulators got busy with pen and ink and created rules – sort of cheques and balances – that would protect us from anything remotely like another financial debacle. So they said. (Now they want to do away with the cheques – and about time, too.)

The most important job in the bank suddenly becomes Chief Compliance Officer – a modern day version of She Who Must Be Obeyed. Banking is still going downhill, even if you thought there was no more downhill to go. It will soon take a major step over the cliff that could make 2007/8 look like a gentle breeze. Buckle on your parachute; you will need it.

Nobody, I think, will deny that the banks got out of control. They gambled with our money. When they won, they became richer. When they lost, we became poorer – more of us, I suspect, than are prepared to admit. Being taken to the cleaners by a bank is pretty shaming. For most customers there is no redress, either. Oh, yes, mis-selling has come in for a lot of well-deserved stick but mis-investing has escaped largely unscathed.

Nobody will doubt that regulation is important. It’s what we teach children, isn’t it? Well, actually not. If we bring them up well we first inculcate self-regulation into their behaviour before we train them to obey the law. Laws without self-regulation simply do not work. All attempts to make laws comprehensive turn out like a horrific version of Medusa.

Because of this we rely on The Regulator not simply to regulate but to decide who and when s/he is going to do so. Pretty well everyone needs regulating. Almost everyone will have breached a Code of Conduct, if only because half the things it says contradict the other half. So there is a field day open to the Regulator. How shall s/he decide who to go for? The US Justice Department has recently told prosecutors to go after individuals and the first two convicted, Anthony Allen and Anthony Conti, now await their sentence in March 2016. They have been found guilty of fixing the Libor lending rates.

A recent, very interesting seminar on competition and corruption displayed the Regulators’ problem dramatically. The principles were well and lucidly described and were uncontroversial. We all agreed with them. The practice was more difficult to define and virtually impossible to predict. Cultural differences accounted for much of the dilemma but there was one even greater imponderable – the Regulator’s whim. Who will s/he pick on next? Regulators have their own agendas which include persuading politicians that forking out shed-loads of money to create fines that represent, at best, 10% of the cost is viable both politically and economically.

The people doing the regulating are decent, hard-working and generally very honest. Their unenviable task of rounding up straying sheep and occasionally nipping one on the flank is not easy. They cannot do the job comprehensively and they are human.

Might it be easier – and more successful – to teach people to trade honestly?