I’ve been examining the politics of money for over 10 years. Most of those efforts have gone into understanding how executive-level politicians make decisions that affect the governance of the international monetary system. In the past few years I’ve gotten more into the financial services side of things, which requires a different kind of thinking.
When you want to know how an industry ticks you have to interact with them. I know that sounds like a no-brainer, but some academic research lacks that touch. The only way to understand a group is to mingle, learn the jargon, ask a lot of questions, and play devil’s advocate, nicely. You can’t do that with a survey and you certainly aren’t going to gain their trust to get them talking and eventually understand their perspectives without showing you are interested in establishing a professional relationship. This is true when you do research with politicians or really anyone in a decision-making capacity. You are asking them to describe the challenges they face and frustrations and they have to know that you do not have an agenda – you want to ‘get it right.’
So as building trust underlies the research process, the same principles apply to the business of finance. Bankers make money for their clients so it is profit driven, and by default this means it is also relationship driven. The trust between client and financial representative is at the heart of the industry wealth and money is personal. And, the lack of trust among finance and regulators is, in my mind, problematically related.
Last week I went to London to attend the Future of Financial Standards conference sponsored by the SWIFT Institute and the LSE Standards Forum Team. It brought together most of the major players, former regulators (a current regulator in the form of the keynote speaker Commissioner O’Malia of the Commodity Futures Trading Commission (CFTC)), bankers, statisticians, academics and a few technology experts (coding, database operations and design). The mind mapping boards below illustrate an outline of discussions.
To summarize: Regulations are often written by politicians and lawyers who do not have a working understanding of how financial markets operate or how their databases are structured. Each national regulator wants different types of information, which pose problems for financial institutions that operate in many states. Standards in financial language are notoriously difficult to establish because products are classified in different ways across firms, markets, and within regulations. This makes it very difficult to collect and report accurate data and comply with these regulations. Data taken from one type of database cannot easily be transferred to another database (it might show errors in one and not another) because of coding issues, so there’s an inconsistency in the IT as well.
The general consensus was that regulators, bankers, and tech people all see the problem from different angles; they blame each other for reporting shortcomings, but they agree they should talk more to each other too.
And yet, most participants saw a solution that involved the industry setting the standard on its own and then presenting it to regulators. You can see the disconnect from the process and the solution, right? They are all mutually dependent, yet still thinking sectorally. Unfortunately, this attitude also pervades regulatory and legal thinking.
One panelist hit the nail on the head though – trust. Regulators aren’t going to listen to the industry because they do not trust it.
Does the industry know its business better than regulators? Yes. Does it have more resources? Yes. Do regulators and banks have different objectives? Not really, no. (They both like stability and manageable risk, but yes they do have different roles in promoting these aims.) Do they have different opinions about what this is and how to do this? Yes.
As one participant told me, “Every suggestion is not an attempt to hijack the process and assert corporate interests. There are international standards that have been in place for a while now, like the ISO, which are a good starting point.”
The (not new) lesson here is that the financial services has a reputation problem with officials (and some of their clients) that requires a change in its culture. Building trust with regulators means that a relationship must be cultivated, just like they do with their clients. But, have we come too far off the track to mend it? I don’t think so.
Data is the foundation for the financial services industry. I argue that record keeping and reporting is good for business because it helps banks take stock of what they have, what their employees are doing, and highlights areas where they can offer their clients better services. Accurate record keeping costs less in the long run and means that officials are less apt to come knocking on their doors for miss-behaviors. The more that the industry does on its own the more that they will make money and by default improve that regulatory relationship.
Similarly, regulatory officials might get more bees to the honey if they understood how financial IT networks worked, how these companies recorded their data (or not) and began to talk a little in terms of profits. Governments have to learn to speak in terms that finance understands rather than dictate terms or make threats. This tactic does not mean that regulators will get what they want – it just causes confusion and produces complaints about costs. The data they end up getting is not the quality they expect either.
The forum did an excellent job of presenting the problem of banks faced complying with regulation – it is a technical problem; a language problem; a communication problem; and ultimately a cultural problem. The culture problem, which exists on both sides of the coin (If we add the technologists then we need a 3 sided die) is more difficult.
There are some trying to bridge the divide and emphasize Corporate Responsibility, or Corporate Social Responsibility. (i.e. Ruggie, and Abbott and Snidal)., but I think we need to examine the regulatory mindset too. It starts with the realization that the effort is worthwhile both for profit and for the whole of society, and that the time invested to build that trust produces a system in which we all can live and prosper.