Published: 9 Aug 2016
Professor Michael Mainelli and Bob McDowall look at voluntary standards markets in financial services regulation and position of quality in the industry.
The financial services sector postures as a strongly capitalist, private enterprise sector where government only gets in the way. Yet finance is intensely regulated, not surprisingly because most financial services exist because of our mistrust of others.
Legislation is the political response to every crisis and legislation has made financial regulation the major growth area of the financial industry.
Putting this in historical context, the Great Depression led to the 1932 Glass-Steagall Banking Act, Enron and numerous other accounting failures to the 2002 Sarbanes-Oxley Act and the International Forum for Independent Audit Regulators, and the global financial crises to the 2010 Dodd-Frank Act, G-20 Summits and the Financial Stability Board.
There is a pendulum effect where reregulation is the price of deregulation.
UK regulatory failures in the 1990s led to the Financial Services & Markets Act 2000, creating a single, centralised financial regulator.
The financial crises since 2007 have propelled financial regulation to the ‘twin peaks’ of system stability and consumer protection.
Has more regulation helped regulators increase market confidence, enhance financial stability, protect consumers, or reduce financial crime? Not really.
But neither are financial sector nostrums correct that ‘all regulation is bad, and anything not regulated is therefore good’.
In 2013 Long Finance and the BSI published ‘Backing Market Forces: How to make Voluntary Standards Markets Work for Financial Services Regulation’, which explored how ‘voluntary standards markets’ might be applied more widely to financial services regulation.
A voluntary standards market is ‘a commercial system in which actual and potential buyers and suppliers of products and services rely on conformity assessments’.
Voluntary standards markets help to increase market confidence, enhance financial stability, and protect consumers.
Accreditation and recognition
Accreditation provides the basis for recognition of conformity assessment bodies, attesting conformity to standards or requirements of, for example, European Directives and Regulations.
Interestingly, the European Commission’s New Approach (from the 1990s) is that accreditation will be defined as a service of general interest, representing the last authoritative level of control of conformity assessment.
The report’s central finding was that a voluntary standards market could play a greater role in rebuilding a safer and more trusted financial services sector.
Standards can apply to people (skills, qualifications, and behaviour), products (characteristics or specifications), processes and systems (quality, outsourcing, security).
Two further reports in 2014, ‘Opportunities for Standards in Investment & Asset Management’ and ‘Opportunities for Standards in Insurance’, went into detail on how standards might be applied and who might be the potential users of new standards.
An example of such thinking in action has been a 2015 consultation by the States of Jersey on a Channel Islands Standard for distributed ledgers for the regulation of virtual currencies, cryptocurrencies, and other mutual transaction communities.
Voluntary standards markets could be a better medium and long-term approach for compliance and regulation in areas such as cyber-security, know-your-customer, anti-money-laundering, or modelling.
Backing Market Forces ranked financial services as an infrequent user of voluntary standards markets compared with other sectors such as food, shipping, or aviation.
During the course of the study it was clear that the chasm in the financial services’ debate was between ‘government regulation’ or ‘free markets’.
Financial workers did not see bridges across the chasm. At best, they remembered ‘self regulation’.
Financial thinkers were unfamiliar with the scale and extent of ISO standards or the larger certification bodies.
They were puzzled by their industry’s extremely low number of standards: 51 published international standards versus the food industry’s 813.
They were impressed to hear of the rapid advance since 2011 a consumer product label, Fairbanking, which became UKAS-accredited in 2013.
Bridging the debate
During the study, terms such as ‘the quality industry’, ‘accreditation and certification systems’, or ‘conformity assessment processes’ did not clearly bridge the debate.
Distinctions among certifiers, auditors, and accreditors thoroughly muddled people trying to grasp new concepts.
Mandatory, compulsory, ethical, social, certificated, chartered, standards, guidelines, and other terms darkened the waters further.
There were no terms to use to explain voluntary standards markets to financial services people as clear as ‘government regulation’ or ‘free market’.
The study settled on ‘voluntary standards markets’ as describing this middle way between overly free markets and government controlled industries.
With a clear and agreed term, certification and accreditation bodies could mutually promote the case for adoption of voluntary standards markets in the first place, before descending into the technicalities of how to do it.
Trade and industry bodies would find it easier to work voluntary standards markets into their strategic thinking.
Regulators and legislators could pause and knowingly encourage voluntary standards markets at an early stage.
At further events, such as an April 2015 event on ‘Fixing The Value Of Quality: Voluntary Standards, Markets & Finance’ with the Chartered Institute for Securities & Investment, linguistic complexity slowed new thinking.
More terminological twisting hampered a February 2016 event on ‘Voluntary Standards And The Insurance Industry’.
Institutions sympathetic to voluntary standards markets, such as the CQI, IRCA, UKAS, BSI, ISO, or ISEAL Alliance could help significantly by promoting a common term for the general case rather than their specific segment of the market.
Financial institutions should be the first to try to address market failures with appropriate market forces.
We need to give financial services people a term that clearly describes our markets. Perhaps we should willingly adopt ‘voluntary standards markets’.
Professor Michael Mainelli is executive chairman of Z/Yen Group and a non-executive director of the United Kingdom Accreditation Service. His latest book, ‘The Price of Fish: A New Approach to Wicked Economics and Better Decisions’, written with Ian Harris, featured standards markets and won the 2012 Independent Publisher Book Awards Finance, Investment & Economics Gold Prize.
Bob McDowall is a Z/Yen associate and chairman of the Policy and Finance Committee, States of Alderney, Channel Islands.