Regulation is like a test in Grade 7. The result demonstrates the student’s mastery of the subject material, but it could lead to other thoughts too. Other thoughts usually have more value. We should pay attention to those.
- Did the teacher do a good job of presentation, followup and curing misconceptions?
- Was the test fair? Reflected the material covered. Straightforward questions.
- Is the particular student able to do tests effectively?
- Does the test score “fit” with other tests and knowledge of the student?
Tests and oversight have a purpose. They discourage undesired behaviour and assist the student in learning desirable behaviour.
We do not believe any group of men adequate enough or wise enough to operate without scrutiny or without criticism. We know that the only way to avoid error is to detect it, that the only way to detect it is to be free to inquire. We know that in secrecy error undetected will flourish and subvert.
J. Robert Oppenheimer
That is not how most regulation turns out. It becomes nit-picky and rule based.
Every regulatory program, quality control program, parent-child relationship, employer-employee arrangement must include oversight. To be effective it must work to address three things:
- Identify behaviour or trends in behaviour that lead to known unacceptable results.
- Identify areas in which the practitioner has deficient knowledge or fails to apply that knowledge
- Provide instruction, guidance, example and study material to overcome the deficiencies identified.
That is the reactive part. The program must do other things that allow everyone to evolve and become more relevant.
- It must discover how people who are dealing with the day-to-day challenges actually perceive those and how they respond. The response may not match what regulators think.
- It must discover the exceptions to the simple rule based world that the overseer knows. Notice that many, if not most, overseers have little practical experience. Even parents and teachers know little about the nuance of daily life for a child. If there are principles to cover the exceptions, then outcomes are predictable. Principles are frequently missing. The rules deal with routine transactions. Non-business transactions must rely on principles.
- The overseers must examine their role. That role must evolve as regulators learn more about the activities that people face.
- Where there are several overseers, for example government agency or agencies, product suppliers, trade groups or associations, and middle level distributors, they must have the same guidelines. It is frustrating to find the regulators cannot agree on what they mean by a certain phrase and diminishes their perceived value.
Rule based without overarching principles fails for several reasons.
- If the overseer does not examine its own role so as to attach to the actual real world instead of the theoretical real world, the rules will be burdensome and people will act to pay lip service to them or to avoid them entirely.
- If regulation exceeds the judgement of experienced and client-centric practitioners, clients will lose because those practitioners will avoid any clients who are not a good fit for the regulatory model.
- Practitioners who become rule based lose the ability to deal with clients who are principle based. When I was in the accounting business, I recall admonishing a tax specialist who I believed saw everything as a tax problem. If I had a machine that legally made $50 bills, he would tell me the tax consequences of running it. My view was there are no tax consequences because I could just print more of them to pay. No client cares about the rules. They care about conscientious and useful advice and good service.
Principle based regulation with clear rules for implementation and recording compliance will permit clients and practitioners to be better. Rule based by itself will not. A pity for everyone except the regulators that rule based is much easier to administer.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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