One of my accounting firm partners was a big fan of wind-powered vehicles. Ice racer, sail plane, and a 37-foot C&C sailboat. The sailboat lived on Lake Huron. He once told me that wearing a life jacket on the sailboat was a waste of time. About the only thing they were good for was to make it easier to find the bodies.
That was likely wrong, but it does make for an interesting comparison to regulators.
No regulation and no regulator can prevent an individual from committing a criminal act. Given that, what is the purpose or regulation?
There could be several, but the obvious ones are:
The question becomes, “Do regulations exist for the clients’ well-being or do they exist for the well-being of the regulators?” The third group, “the regulated” are clearly not better off.
All regulation reduces the efficiency of business. Not because the business reject the ideas, but rather because the good ones were doing the necessary work anyway and doing it in efficient ways given their priorities. Regulation by regulators is different than honest, efficient businesses use to govern the particular transaction. It is too fussy, less common-sense based and more paper oriented. Plus the reporting, security, data collection and filing load. Plus the overhead in upstream entities that have supervisory responsibility.
Recall two facts:
An awkward to explain sidebar to the regulation question, is that clients are less well served when advisers are regulated. Clients do not see all possible methods and theories. No sane adviser will offer advice, or propose actions that are outside the “standard of practice.” For example, how would an investment adviser tell a client that “Modern Portfolio Theory” and the “Efficient Market Hypothesis” are probably wrong? Could he afford to provide a client with material that proposed other courses of action? Could he even insist that a client learn about the choices? Would his insurer believe the same story?
The adviser will be okay as long as the client suffers no losses.
Regulation runs contra to client financial literacy because some clients believe they don’t need to learn anything. The regulators assume that the rules of behavior by both advisers and their clients are correct, unchanging and well known. They are not and they are evolving rather quickly. Responsible and informed clients are the best regulators.
Does anyone study the cost-benefit of regulation prior to imposing the rules and the procedures? Likely not. If they did, it is probable that they would find the cost to provide the regulators, the rules and procedures, and the supervisory activity, exceeds the losses that would have occurred without them. There may exist, but I have not seen, a study or survey of the regulated, that claims their business and their clients are better for the regulation. If these two groups are not better off, then the regulation exists for the regulators not for the rest of us.
Regulation for the sake of the regulators seems irrational. Let’s find out.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. email@example.com