No Rule Guarantees Behaviour

I have been intrigued by the response to yesterday’s piece about direct sell insurance in Australia and the regulatory matters that relate to it.

The gist of the comments are these:

  • Regulation makes the delivery of the service more costly.  More paperwork, more repetitive information.
  • Most regulation is too nit-picky.  For example one advisor points out that the money laundering rules imposed from above would require paperwork if he sold a universal life policy to his father.
  • Most of the people at the distributor or insurer level, who enforce the regulations, actually do not know what is done in the field.
  • The various regulators have not co-ordinated their efforts.  One says they do not need such and such but an issuer or other regulator says that the first agency does require it.

All regulation claims to protect people from unprincipled contractors.  The rules will keep you safe.  Frequently politicians and regulators promote fear and then promote themselves as the answer.

Their arguments deny reality.

Most criminals pay no attention to rules.  Rules do not matter unless you pay attention to them and act to comply.

Most of the things that harm clients are already illegal.  Certainly Bernie Madoff and his Ponzi scheme were outside the law and the regulations that existed.  Would more rules have prevented him from taking money?  Unlikely.

The bigger question is why did the SEC, the nominal regulator, do nothing.

The SEC has an annual budget in excess of $1 billion.  Not all compliance to be sure but they certainly have enough money to look for easy to find things like Madoff.  They could argue that these frauds are hard to find but the evidence clearly says otherwise.  Harry Markopolos knew with near certainty that it was a fraud and so informed the SEC years prior.  It would not have been hard to find if they read their mail and then did anything.

It is the “then did anything” part that fails.  Regulators want the authority and the prestige and the job, but they do not want to be hands on.  Like bullying in school.  What school does anything about it.  You were probably safer from bullies 40 years ago.  At least you would not have gotten into trouble for punching one out.

I am okay with regulation if it is the minimal amount required to protect society.  And then, if and only if, the regulator actually follows up on the miscreants.  Promptly and severely.

As it is now, regulation causes expense to the people who need no regulation.  Clients are more poorly served.  Some are not served at all because the revenue does not justify the cost.

Who wins that game?  Regulators is my guess.  Certainly clients and the regulated do not.  Let’s do it better.


Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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