Toothless to a fault
Whatever your opinion of bankers, one might fairly ask of events in the past few years: where were the regulators? The correct answer—nowhere—is pretty much how regulation seems to work, generally. When things are trucking along, regulation is deemed to work. When things go wrong, it is almost expected not to.
The Securities and Exchange Commission (SEC) was warned about Bernie Madoff’s financial misbehaviour in May 2000. A ‘red flag’ review subsequently argued in great detail that what Madoff claimed to have achieved was impossible. A chorus of expert voices followed. Yet the SEC failed to spot what was so obvious to many others.
The Empire State Building was put up in New York City in 18 months. Eighty years later, to start a European insurance company, able to do business throughout the continent, still takes the best part of a year.
Sarbanes-Oxley regulation afforded companies 18 months to install the new processes necessary to pass the SarbOx test, which almost all of them achieved. Solvency II, the new pan-European regulatory system, is years past its deadline and shows no signs of being introduced any time soon.
Need I continue? What is it about regulators that make them so toothless?
So many reasons. Regulators are like auditors, who come in after the battle and bayonet the wounded. Regulators earn far less, in many financial disciplines, than those they regulate. The financial markets are fantastically complicated, some of them barely understood by those doing the work, let alone an external agency. Some problems can only be defined after they occur. And so on.Any analysis of why the European Insurance and Occupational Pensions Authority (EIOPA) has put off Solvency II so often and for so long must begin with the creation of a European union that politicians are determined to pursue regardless of the cost.
From there, it is possible to proceed to understanding that some of the delays were caused by EIOPA’s predecessor rushing the thing forward before some of the major issues attending it had been raised, let alone resolved, because of perceived political pressure.
If there’s one thing the Bermuda regulator has taught anyone paying attention, it is that ‘us versus them’ is an outdated concept. This isn’t the 17th century—it’s the 21st, where regulator and regulated should understand their common interest in an orderly market.
Insurance fraud is rare at the systemic level. To give the regulator credit would be like the argument of the man with an elephant gun at Lloyd’s, taking credit for there being no elephants in Lime Street. The credit goes to the men and women who run insurance companies for playing the game in the first place (rare bad apples notwithstanding).
In plain English: Solvency II is a hodge-podge, a measure slung together without a great deal of thought or foresight. It is intended to spell out the regulations for financial systems throughout Europe and, de facto, around the world. Complicit though many bankers may have been in the financial crisis, they deserve to be told what the rules will be and when they will apply.