In my world, there are three topics to be avoided in polite conversation: politics, religion, and regulation. Personally, I much prefer discussing the first two, but today, let’s tackle the third…

Is it an essential safeguard for consumer rights and market integrity? Is it a clumsily constructed barrier to innovation, or even an infringement on individual responsibility and the dangerous removal of moral hazard?

Hygiene vs Market-Shifting.

‘Regulation’ as a concept is so broad it’s practically meaningless. One might as well consider the function of ‘the law’ or ‘public opinion’. So let’s limit this to two principal functions of regulation: restraining harmful practices, and shifting market behaviour towards socially-positive outcomes. In either case, regulation represents society’s collective will, albeit imperfectly expressed, about what we want our markets (and lives) to look like.

Regulations can protect consumers from predatory practices in environments in which they can’t possibly have the same access to, and understanding of, information as their corporate counterparties. We may not love being told what we can invest in, but I’ve yet to meet anybody who thinks the removal of bad actors from retail deposit banking should be left to the natural forces of the market, so I assume we all agree that some restraining regulation is necessary and the question this leaves is, ‘how much’?

If you think regulation isn’t needed, you’re the reason it’s needed.

Equally, an increasing amount of regulation isn’t designed to achieve protection at all, even if it’s occasionally dressed up as such, but rather it’s designed to shift the function of markets in directions preferable to society; again, albeit that such preferences may be imperfectly intuited, articulated or enacted. Regulation is slow to come in, heavily lobby-influenced, an unhappy marriage of technocracy and politics, and invariably fighting the last war, but it’s nonetheless a vital tool in achieving the world we want.

Nowhere is the role of progressive regulation more obviously essential than when ‘internalising the externalities’, i.e. those things which, by their very definition as ‘externalities’ are not properly encapsulated in market transactions. “Greenwashing” as a problem of asymmetry of information could, theoretically, be solved by an optimally efficient market (of course, it shouldn’t be, and we should absolutely regulate it away) but within the very conventions of standard economics, the externalities of environmental impact can only be properly incorporated into markets through regulation of one kind or another; either barring, mandating, incentivising, or taxing.

Here We Go Again.

“Those who cannot remember the past are condemned to repeat it.”

George Santayana

Because regulations don’t exist, things go awry. We clamour for regulation (…invariably, fighting the last war). Because of the regulation, the disaster isn’t repeated, and after a short while, we forget why we regulated in the first place. We clamour for deregulation; after all, the lack of disasters is surely proof that regulation was always unnecessary anyway… Rinse and repeat.

To escape this iron law of human folly, we need to stop thinking about regulation being inherently good or bad, or indicative of a small or large State (and therefore bound up with our opinions on the role of governments and individual liberties). Instead we should learn to think of it as another mechanism through which society makes manifest its priorities and values. Of course this doesn’t, in itself, tell us which regulation should be passed, but it guides us in how to think about it. And for us, the regulated, it helps us accept that regulation is an expression of the societies and communities we serve, and without whom we couldn’t exist. We should be particularly wary of waving the banner of ‘deregulation’ as its own end.

Remember… if you think regulation isn’t needed, you’re the reason it’s needed.

The Mushrooming of Regulation.

Despite occasional, local rollbacks, the trend is towards an ever-expanding corpus of regulation. Once upon a time, I was the Compliance Officer of a fund management business with 20+ funds, employing quite a few structures, and I was (reasonably) confident I knew everything I needed to know. It didn’t last long. And now the idea that anybody could have sole command of the regulatory knowledge in a moderately complex business is fantastical. Now the value someone like me adds, is to know which questions to ask and how to understand, challenge, and implement the answer.

As regulations multiply, so too do the challenges associated with staying compliant; particularly in smaller or fast-moving businesses which will lack the internal resources required to navigate increasingly detailed legal landscapes. While advisors can always be found to provide an answer to a question, knowing which question to ask, and what to do with the answer, are increasingly vital attributes for success.

Making Complexity Actionable.

Regulation is undeniably complex, but if we’re willing to engage with its intricacies (rather than just wishing it weren’t so), there’s progress we can make in fostering fairer markets and promoting sustainable growth. Thriving in such an environment means:

• effective horizon scanning,
• knowing the right questions to ask,
• knowing what to do with the answers,
• implementing the right oversight, and
• reacting appropriately to the signals it provides.