The US financial services industry is already suffering from too much regulation, but is it happening here? Hugh Price investigates
Judge Leo Strine may not be a household name, but as vice chancellor of the Delaware Chancery Court, his observations are highly influential across corporate and political America.Why? Because more than 60% of the Fortune 500 companies are incorporated in the US State of Delaware.
The Enron and WorldCom collapses (both companies fell within the jurisdiction of Delaware) and the Sarbanes-Oxley legislation prompted Judge Strine to comment on the "sour scent of hypocrisy (that) wafted from some important congressional chambers" when federal legislators, who had previously obstructed the development of integrity for public accounting standards, began to support rapid remedial action.
In the judge's opinion, the main problem - financial fraud and a lack of incentive to identify and prevent such behaviour - was not being addressed.
Instead, the US Congress has created regulatory requirements which Judge Strine said had the "perverse effect of impinging on the time that independent directors have to spend on monitoring their corporation's legal compliance".
His stark message was to warn governments not to encourage over-regulation.
In his view, the best regulation for company executives is the need to add shareholder value and review their fiduciary obligations.
Governments, he said, must avoid stifling the wealth-creating potential of businesses with costly obligations which failed to protect investors and distracted boards from implementing effective corporate strategies.
This is pretty strong stuff from a judge who has detailed knowledge of high level US corporate failure.
He had no hesitation in condemning the "unacceptable behaviour" of Lord (Conrad) Black for his management of the Hollinger Group and its planned sale of the Telegraph Group. This criticism has now resulted in criminal proceedings.
Judge Strine's message is simple: too much regulation stifles and suppresses business enterprise and innovation. Business thrives on risk and over-regulation encourages risk averse cultures.
On this side of the Atlantic, similar views have been expressed. The following quotes may strike a chord, but I wonder how many people will recognise their source:
"Something serious is awry when ... the FSA (established to protect the consumer from fraud) is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone, when pension protection inflates dramatically the cost of selling pensions to middle income people".
The source went on to say: "A risk averse business culture is no business culture at all. A risk averse public sector will stifle and deny to many the opportunities to be creative.
"We cannot eliminate risk. We have to live with it (and) manage it."
It may come as a surprise to discover that the above quotes came from a speech made last May to the Institute of Public Policy Research by the Prime Minister, Tony Blair. The full speech can be found at the website: www.No10.gov.uk/output/page7562.asp .
Evidently, Judge Strine and Blair have much in common when it comes to their views on business regulation. Their joint message seems to be : risk averse regulations stifle creativity and reduce opportunity. Is our financial service industry already over-regulated ?
One school of thought suggests not.
Lawrence Baxter, the principal policy adviser to the consumer watchdog Which magazine, recently commented on the practice of selling protection products: "The FSA has uncovered a catalogue of mis-selling tactics including scaremongering," Baxter says.
"The FSA's response is woefully inadequate. Instead of imposing the severest of sanctions, including punitive fines, they are writing to the firms asking them to stop. It is a bit like a policeman watching a bank robbery and then telling the robbers afterwards that they should not have done it."
In fairness to Baxter, his complaint is justified where there has been a clear breach and the FSA takes no action, making it a criticism of the lack of enforcement as opposed to regulation itself.
An alternative view is that of the FSA chairman, Sir Callum McCarthy. He is concerned by the conflict between the approach of the FSA and that of the EU to regulation and financial services directives.
In the UK, the FSA operates a cost benefit analysis approach. The EU's fiche d' impact approach is simply to make a note of the impact of any proposed directives.
Hopefully the EU Commission will accept that regulatory directives must be supported by analysis of their impact on business.
The fear is that different member states will have different interpretations and even different agendas.
But are there any areas for optimism?
The FSA's basic mantra is the obligation to Treat Customers Fairly (TCF) or, as I prefer it, putting customers first.
It is a universal truth that businesses which fail to look after their customers will soon lose them. The financial services industry is highly competitive. If customers feel they are not being properly looked after they will go elsewhere. Putting customers high on the priority list is sound business practice.
The FSA's TCF initiative is not just a recommendation, it is an obligation.
As part of the regulatory process, businesses will have to explain how they treat their customers fairly.
Improved and transparent client facing processes are good business practice.
Technology, when properly harnessed, can help to ensure staff comply with internal processes, help develop best practice and bring peace of mind that everyone in the business is complying with the agreed procedures.
Examples include staff/client scripts ensuring that the clients' attention is drawn to any relevant terms of the policy.
Improved diary management is essential to log regulatory time scales for the benefit of individual clients and the firm's returns.
Internet technology can keep overheads down with its ability to contact clients by e-bulletins advising them of legislative, financial, tax or other changes.
Not surprisingly, there are misgivings about the potential for the FSA to over-regulate, with negative consequences on the financial services industry.
It must be hoped that the views of Judge Strine, the Prime Minister, Sir Callum McCarthy and others will encourageregulators to be vigilant in exercising their policing function and yet cautious of over-regulation.
If businesses put customers first and embrace the upside of technology much good may come out of regulation.IT
'Hugh Price is the director of insurance and a partner at Hugh James Solicitors.