A few years ago, I spoke to a financial services lawyer who said he’d do away with the whole concept of regulation within our sector. We had just marked a decade since the collapse of Lehman Brothers, and a global pandemic was, at best, a footnote on most institutional risk reports. Written by Liz Pfeuti.
His argument was compelling. People will generally do what they want or push to the very edges of the limit of the law if they can get away with it – and they mostly can. Like kids leaning over a precipice, safe in the knowledge that a terrified parent or guardian will snatch them back before they plunge to their death, most of us will push boundaries.
Regulation gives us all the comfort of a safety net. It allows us to take risks, thinking someone has our backs. This enables us to open bank accounts, drive cars and book holidays months in advance. But, as we see the continued collapse of financial institutions, massive fraud enacted on a daily basis in some of the most developed and supposedly educated economies, and the chronic damage being inflicted on our society and environment, it’s hard to say it’s working. On a very basic level, if laws worked, we wouldn’t need prisons. If regulations and fines worked within any sector, we would have clean rivers, an absence of cold calls and public trust in financial services.
Back to my lawyer friend. In his view, we need a system of mutual accountability and responsibility. If a company continues to ignore the expected standard set by its customers and general society, it goes out of business. Instead of fines, which are ultimately passed on to customers anyway, just let their practices catch up with them. There would be casualties along the way, but they are a constant anyway. In the financial services sector alone, discoveries of malpractice every day belie an entire landscape of individual and very personal devastation.
Since Lehman, countless people have been swindled out of savings by fraudsters and taxpayers to the tune of billions as different crooks took advantage of a pandemic-panicked system. Since 2008, banks have racked up millions in fines and charges, which are swallowed up by cash pots specifically set aside to cover them. Equally, banks have had to cover the losses they make on customers who have little intention of paying back what they owe (rather than being unable, I point out).
This is not a criticism of regulators as a whole. They are set up to fail. The moment a new rule is put in place, a department in a financial institution, at least ten times better funded than the rule-setter, is set to work figuring out how close to the wind it can sail and, if it crosses the line, how much will it cost to do so. It’s business. It makes sense to the accounts team, the CEO and investor relations. It does not make sense in a civilised society.
Each Saturday morning, after my gym session, I fill a shopping bag with rubbish dropped on the pavement as I walk the mile back to my house. There are laws against littering in the UK.
What has this to do with fund management? I realise a system of self-rule will never take off. Apart from there being far too many vested interests and money swirling around aimed at influencing policy, human nature has developed to need the comfort blanket of regulation. But imagine how much more relaxed our world – and our industry – would be if we could trust everyone to do the right thing without being told to because if we made crossing the line a real business risk rather than a cost of doing business, we might take it more seriously.
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