Sane Regulation

Financial services seems to be the regulatory target for many countries just now.  Some have moved further on than others.  Has anyone checked to see if the regulations benefit anyone other than the regulators?  Should they?

People in the industry have concerns and eventually the people who use those services will have concerns too.  How did it come to be that top down regulation makes sense?

Top down regulation has a flaw.  Regulators are not omniscient.  Top down regulation assumes things not in evidence.  Things like the consumer would be better off.  The industry would be more transparent.  The products would provide better value.  The regulators assume they understand what consumers want, need and can be competent to buy.  Top down regulations fail because they are rule based and important parts of the rules are carelessly defined.

Compare that to bottom-up regulation.  Every business that subscribes to high standards of quality, transparency, service and value has a duty to insure their competitors face the same costs for these as they do themselves. If we must bear the cost of adequate employee safety, or a fair wage, or reasonable working hours, so should our competitors.  Lobby the government for universal regulation.  When you think about it, the absence of universal regulation is a reason China can out-compete North America in many job markets.  Clearly non-universal regulation has competitive disadvantages.

Sometimes customers will demand regulation. That regulation is part of the role of government.  Do you think the government’s weights and measurement standards are unreasonable?  Of course not.  I want gas pumps, package sizes, and butchers’ scales to be accurate and am happy to have the government intervene on my behalf.

Essentially the same idea with traffic laws, or false advertising, or frauds of all kinds.  People want them.  Governments supply them,  but often stop there.

Rules without enforcement are useless.  If you cannot readily enforce the laws, do not create them. Failure to enforce diminishes credibility and leads to disrespect of future laws.

I don’t know how financial services work everywhere, even here they’re opaque, but I do know that the people making the rules are inadequately informed as to need and the steps required for a practitioner to comply.  They seem not to realize that every overhead step in the supply chain either raises prices or reduces the number of clients practitioners are willing to service.  I know of one financial institutions that provides near zero service on any investment account under $500,000.  A bit hard on young people and most old people.

The biggest impediment to sane regulation, and coincidentally the reason bottom up does not work, is the clients tend to know too little to be effective decision makers. Or effective complainers. A well informed client is unlikely to fall prey to a predatory advisor.  A poorly informed client will blame others for any weak outcome. Regulation is a moral hazard.   They don’t need to learn,  or so they think. 

Clients need to know more.  They must be the financial planner, the informed consumer, the capable decision maker.  They should not expect a modestly informed regulator to protect them from adversity.

In that realm, all financial advisors, from accountants to fund managers to insurance advisors, to lawyers will become sub-contractors for a client. Only clients have a duty to co-ordinate the advice and products.  In our current society, few have that ability.  Advisors become salespeople instead of assistant buyers.

Advisors could help themselves if they spent more time raising the client’s understanding and knowledge.  Clients overestimate their financial literacy and regulators think they can replace that deficiency with rules.

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.

Please be in touch if I can help you.  866-285-7772

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