Don’t Blame Regulators For Your Mistakes

If there’s one thing that annoys me when I read stories of investments gone bad, it’s pointing the finger at the regulators.

A regulator is only as good as the information on their desk. They rely on disclosure from people in the investment industry. They rely on people filling out forms honestly. They rely on the people they are regulating.

Because regulators are human beings, they can’t aggregate little bits of background information about every single person or company involved in the investment industry all on their lonesome.

They need a lot of information that is hidden in other company’s databases, withheld by private investors who’ve been burned and don’t want to reveal the embarassmnet or simply not possible to put down on paper.

The regulators are essentially window dressing for the political class. The creation of the Financial Markets Authority enables the government to stand in front of investors on the campaign trail and honestly tell them they’ve tightened up regulation and given regulators more teeth.

But it’s simply putting lipstick on a pig. Again, regulators are human beings. And they haven’t been given much more teeth than the Securities Commission had. They still rely on the cooperation of the investment industry.

And there’s the rub. The incentives of regulators and the incentives of the regulated rarely coincide. More regulation leads to more compliance costs, which leads to higher fees passed on to investors.

The regulatory activists forget that. By outsourcing regulation to a regulatory agency instead of doing it themselves or via private third parties (who could trust ratings agencies?), they’re increasing the cost of participating in the investment industry.

They’re also pitting two very different types of people against each other. The sort of people who work for regulatory agencies are cut from a different cloth. Many investment industry professionals would best be described as aggressive.

Have a look at them the next time you watch a press conference. Do they look like bulldogs to you? They sure don’t to me. And that’s why regulators and investors will always lose.

In order for a regulatory agency to actually have some teeth, they need to employ aggressive bulldogs. This is hard to do when New Zealand is a small country. Conflicts of interest are a bigger problem than the possibility of regulatory capture in my opinion.

That’s not to say regulators in New Zealand are on a hiding to nothing. If there’s one thing New Zealand does well, it’s having one of the least terrible regulatory regimes in the world. If you think the Commerce Commission and the telecommunications sector was bad, have a look at overseas literature and get back to me. They’re quite tame by global standards.

So my message to participants in the invesment industry is simple.

Don’t blame regulators for your mistakes.

If you take responsibility for ensuring that you’re not walking into a minefield with your hard-earned cash, it will hurt when you get it wrong.

But it’s more realistic to acknowledge that the only person who can do due diligence properly is you.

Trying to pass the blame onto regulatory agencies is pathetic.

They’re just doing their best with the filed down regulatory toolkit you keep voting for every 3 years.