As Einstein famously said the. "The definition of insanity is doing the same thing over and over and expecting different results."
It appears we have not learned the lesson. In a Wall Street Journal report on 2nd May, The Federal Reserve’s top banking regulator was reported as saying that 'banking supervisors failed to take forceful action to address growing problems at Silicon Valley Bank before it collapsed.'
The fix? More regulation!
We have been here before, many times: Enron, Worldcom, Adelphia, Lehman Brothers, Wirecard, Carillion, Natwest. Every major business failure seems to trigger the exact same response. We need better, that means more, regulation.
Sarbannes-Oxley (2002) was supposed to fix false or fraudulent financial reporting in the wake of Enron, Worldcom and Tyco.
Dodd-Frank (2010) promised to make the U.S. Financial System safer for everybody.
The UK government has laid out sweeping reforms for the auditing of large companies in the wake of the failure of Carilion and BHS. UK audit shake-up targets big firms after spate of corporate failures
When are politicians, regulators, business leaders, and government officials going to realise that the regulatory frameworks in use today are fundamentally broken? And no, the answer is not, as some politicians believe, less or no regulation. We need different regulation. We need to reinvent regulation so that it is fit for purpose in the modern world. Regulation needs to be:
Systemic -- regulation needs to address the whole system not just isolated elements
Frictionless
-- the cost of regulatory compliance is a tax on business (and on people as we ulitmately pay the cost and suffer the pain of regulatory failure)
Dynamic -- adapts to the changing environment and operates at the same velocity as the businesses and markets it seeks to regulate
Integrated -- regulations need to connect across different domains and incent compliant behaviour
Data driven -- regulators are far behind the organisations they seek to regulate in the use of real time data and technology
Few of today's models meet any of these critiera. The reasons are explained by the way in which regulation is developed and how it is managed over time.
Reactive -- most legislation is enacted in response to an event. Its provebially shutting the st
able door after the horse has bolted.
Singular focus -- most regulations seek to fix only one problem (inaccurate financial reporting, audit failure, excessive balance sheet leverage, etc)
Fragmented management -- the alphabet soup of regulatory authorities (SEC, CFPB, CFTC, FRC, The Fed, BCBD, FDIC, EU, the list is endless) is a recipe for disaster. Who
is responsible for what? Who ensures things don't fall through the cracks? Who has a total view of market?
Detective/Preventive -- almost all regulation is based upon either rules that seek to prevent bad things from happening or post-events reviews, audits and checks that detect bad things after they have occurred. In today's real-time, globally connected, complex and dynamic markets neither approach is effective.
Will we see change? Its unlikely without recognition of the problem and clear leadership and political will to change. Today, there are simply too many vested interests with a stake in sustaining and expanding a broken model.
Watch this space for the next major failure and demand for regulation.