Probably the best regulator in the world?

I see the Treasury has been consulting on its new approach to financial regulation. Some of the main ideas – reforming the tri-partite model – have been discussed at length elsewhere. What caught my eye were the issues which address our new government’s approach to regulatory culture.

The first issue to leap off the page was the question whether the principles of good regulatory practice should be enshrined in the legislation which will bring about the new regime. Sounds like a no-brainer. Of course, you would want a regulator to aim, for example, to use its resources in the most efficient and economic way. But hold on a minute. Let’s be blunt about this. If the people chosen to regulate the financial services industry can’t work that out for themselves, they are not the right people for this difficult job.

Making a legislative obligation out of the need to use public money wisely is unlikely to remedy a defective mindset if it turns out that the people who are appointed don’t naturally think in these terms. The general direction of travel of this government is said to be towards making individuals in society take more responsibility for their actions and not rely on others to make rules for them. That being so, it might be appropriate to start by setting an example with the legislation which governs the individuals who sit on regulatory bodies.

The paper also says that the government is looking for a more risk-based approach. But little is said (yet) in recognition of the big cultural shift that will be needed to achieve that outcome. One of the most popular phrases after any adverse incident in recent years has been: “We must ensure this never happens again”. But a truly risk-based approach suggests that we should do no more than ensure that this probably never happens again. Which means that, if it does, the regulator didn’t necessarily fail. Are we ready for that? Probably not.

Perhaps  something needs to be done to ensure that we never think like that again.

[yarpp]