Financial regulation: Why bother at all?

12th July 2011

Investors in shares, with money in financial institutions, who buy collective investments etc. are always "well advised" to look out for regulated investment. 

Case in point: Barlow Clowes was a company that avoided regulation by being registered in Gibraltar and we know how that ended.

So regulation means safe, correct?  Ken Eisold made the point that companies are supposed to regulate themselves, through their board.

Increasingly, companies look to non-executive directors to "keep them in line".

But if all else fails the FSA (or the Bank of England, or whoever is latest in line) will step in, won't they? 

Social networks, the phenomenon behind the success of phenomena like Facebook and LinkedIn – and the film  "Six degrees of separation" – are a reason to have doubts. 

Put simply, it appears that most people in the world are connected by, on average, only six other people. 

Among the US Fortune1000 there were an average of 4.5 people between any two directors and 3.5 between any two boards.

To put it into perspective that's among 1,000 companies, across all industries, in the whole of the US.

In the relatively tiny UK, in just the financial markets, how many degrees of separation are there? 

I don't know of definitive research, but I would be astonished if it was more than three, probably two or less.

In that sort of network, the odds are good that the best golfing buddy of one finance professional will know the regular house guest of any another. 

From whom are the regulators recruited?  The "experts", i.e. those who have extensive experience in the field and are therefore part of the network.

Lord Turner who currently heads the FSA is effectively part of the network.  

So is Sir Fred Goodwin (just because he's been disgraced, doesn't mean his golfing buddies will shun him). 

Peter Clowes was part of the network.  That's not to say, "it's an old boys network, power corrupts etc."  It is human nature, and the regulators are human. 

If you see a friend doing something that may be questionable ethically, do you immediately condemn them?  Or do you give them time to explain the circumstances?

Regulators are supposed to be above all that – but speaking as a psychologist, I doubt that it is possible to avoid all consideration of social networks, humans are social animals. 

So it will be hotly denied that the regulators view of financial dealings will be different depending upon whether both parties are part of the same social network or not. 

But is it realistic to suppose that if there are financial problems in a bank, that a senior regulator – who is connected by social bonds – is going to take immediate drastic steps to protect investors from potential ruin, or are they going to give their friend the benefit of the doubt and wait until there is overwhelming evidence of wrongdoing before acting?

Kim Stephenson is an occupational psychologist and trained financial adviser.

His website Taming the Pound is aimed at helping people get control of their thinking about money, so they can use their money – and avoid their money using them.

More from Kim on Mindful Money

Why a great leader doesn't always make for a great business.

To receive our free weekly email sign up here.      




Leave a Reply

Your email address will not be published. Required fields are marked *