Banking Crisis – Approach to Regulation
A recent tabloid newspaper, but one of the highest repute and a paper of record, contained, in one issue, two articles on the current problems which our world faces namely the banking crisis and its consequences.
“Hordes of lawyers are infesting Britain”
One article, written by a former MP and now a well known pundit at large, argued that “hordes of lawyers are infesting Britain. Wouldn’t it be better for good judgment to prevail over the loophole seekers?” In connection with regulation the author went on to say, “The rule-based approach aims to capture what a regulation means in careful, comprehensive, exhaustively assembled words: an authoritative text. At its best this offers certainty to citizens anxious to know if they are complying with the rules…”. He continued, “The judgment-based approach is what is meant by the Governor’s eyebrow. At the Bank of England the Governor had the power to raise an eyebrow at a financial practice, murmur that he didn’t care for it, and wave it away without explanation. You could call it the “doesn’t look kosher” rule or the “this stinks” method of adjudication. Parents have their own version in responding to children who keep demanding reasons: “Because”.”
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The author concluded “At its best, judgment-based regulation cuts through legalism and nitpicking: it ensures that quibbles about definitions never cause us to lose sight of the big picture – the overall purpose of the rules. At its worst, it allows an individual or committee to regulate on the hoof, giving adjudicators an almost priestly role, interpreting the rules at whim.”
Judgement-based approach v. Rule-based approach
The columnist preferred the judgment based approach which is where I entered the profession forty plus years ago. I am afraid that ruling the country by a nod and a wink and dealing with people because “they are one of us” did not then, and does not now, attract me; indeed it repulses me. For all the faults of the rule based approach, I know that box ticking leads to people ticking boxes and not thinking about why they are ticking boxes and so losing sight of what the real issues are, for all those faults I think it is better, assuming we have to choose at all, for the rule based approach than the personalised judgment approach which leads to prejudice whether well meant or not.
And I write as one who is appalled by the prospect of yet further intensive regulation that is going to descend on us in the near future. Banks will now be run by regulators and not by bankers – though some might think that is not a bad thing bearing in mind how badly bankers have run banks, or those purporting to be bankers have run banks; but banks do not exist in isolation. They will (to use such words so beloved in our times) have to interact with their customers; possibly, even probably, you and me as advisers too, and in our own right as, executors or trustees. We are going to be plagued with more and more form filling and more and more regulation administered by people who can neither understand nor manage the system properly. Very shortly we will spend far more of our time completing forms to allow us to do the job than doing the job itself.
Still that is better than “the governor’s eyebrow”.
Morality and the judgement based approach
The other article written by a cleric not surprisingly focuses on morality. Probably the job of a cleric throughout the centuries; after all what sort of employment would a cleric have if there are no (of whatever kind) sinners in the world. He writes, “… The gradual disappearance of the cluster of principles that went by the name of morality … The result …. [is] to lose our understanding of the vital distinction between the value of things and their price. (No acknowledgement to Oscar Wilde who made a similar point many years ago). ….. Markets don’t guarantee equity, responsibility or integrity … Markets needs morals and morals are not made by markets … Economics need ethics. Markets do not survive by market forces alone.”
The cure to our financial ills, according to the cleric, is, as you would expect, the reintroduction of morality into all our financial dealings. Amongst the ills listed by our cleric is the rise in house prices; the increase in credit card borrowing; the market which “does not distribute awards fairly” – whatever that might mean. All very worthy, even warm and cuddly at one level, but it is impossible to run a country by “curing” these immoralities. Additionally, apart from the fact that who knows what morality means, pray, whose morality? The Taleban, the priests who enforced the Spanish Inquisition, Reverend Hale and Governor Danforth of The Crucible? Perhaps he means the nice, middle of the road members of society, just the sort of people who are likely to be favoured by the Governor’s eyebrow.
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