Download dan awrey, william blair and david kershaw

Between Law and Markets: Is there a Role for
Culture and Ethics in Financial Regulation?
DAN AWREY, WILLIAM BLAIR AND DAVID
KERSHAW
DRIVERS
 Reaching for our pistol!
 Yet… culture matters for better or worse
 Yet…ethics matters or it should have mattered
 The limits of conventional financial regulatory responses
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But would it have made a difference?
 Getting from a cultural and ethical here to there
 Can regulation help?
ROAD MAP
 The Limits of regulation
 The nature of ethics
 Identifying the preconditions to cultural formation
 A regulatory role in norm formation?
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Process based regulation
The FSA’s TCF Initiative
 Expanding the project
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Treating Counterparties Fairly
Taking Externalities Seriously
 Back to basics: incentives!
The Limits of Law and Regulation
 Familiar limits to law and regulation
 Limits of conventional responses to financial regulation
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Regulating the exploitation of counterparties
Disclosure
 Taking responsibility for your counterparty’s decision
 Product regulation
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Regulating socially excessive risk taking
Capital requirements
 Business separation
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 Limited in outlook as well as effectiveness
Theorizing Ethics and Culture
 Types of constraint
 Ethics, endogeneity and enhancement
 Cultural norms and the preconditions to their formation
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Across markets
Within firms
 The problem of counter-veiling norms
 Towards an other regarding ‘ethical culture’
Using regulation to stimulate culture and
foreground ethical commitments
 Process-orientated regulation
 The preconditions to cultural change
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Tone from the very top
If we talk, they might come!
External Enforcement
 Being realistic about cultural change – tilting the playing field
 Innovating in financial regulation: treating customers fairly
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The basis and the outcomes
What matters
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leadership
External enforcement, reputation
Getting used to ambiguity or not reaching for your gun
Has it worked?
TCF Outcomes
(1) fair treatment of consumers is embedded in corporate
(2)
(3)
(4)
(5)
(6)
culture;
products and services meet the needs of identified
consumer groups and are targeted accordingly;
sufficient information is provided to consumers before,
during and after the point of sale;
any advice is suitable to a particular consumer;
products and services meet the expectations of
consumers; and
consumers do not face unreasonable post-sale barriers
imposed by firms to change product, switch provider,
submit a claim, or make a complaint.
Extending the Project
 Extending TCF: Treating Counterparties Fairly
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Exploiting sophisticated counterparties
The outcomes
External enforcement difficulties
Unwarranted paternalism?
Paraphrasing Friedman: ‘it’s about being informed stupid’
 Taking Externalities seriously
 The GFC and Socially excessive risk taking
 Thinking about the social costs of action
 The outcomes
 The problem with ambiguity: Does it matter what it means?
 Enforcement difficulties
Extended TCF
(1) that the fair treatment of counterparties is
embedded in corporate culture
(2) that a counterparty discloses clearly and openly all
relevant information about a product which it is
marketing
(3) that a counterparty does not attempt to take any
steps that could distort the interpretation or
weighting of the disclosed information; and
(4) that a counterparty does not market products that
in its view sophisticated market participants would
be unable to understand and price accurately.
TES: Objectives
(1) To ensure that the identification and avoidance of
socially excessive risk taking is embedded in
corporate culture;
(2) to identify and monitor potential socially excessive
(i.e. systemic) risks generated by a firm’s activities;
(3) to better understand a firm’s exposure to systemic
risks; and
(4) to determine how best to minimize these risks on
an ongoing basis.
Back to Basics: The Incentives
 Cultural initiatives lose when faced with conflicting incentives
 Do the initiative make sense without compatible incentives
 Exploring incentive options
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Board composition: an ethics committee
Remuneration
Corporate objectives
Shareholder rights
Duties and liability
Concluding remarks
 Parental guidance
 Influencing behaviour
 Its not about silver bullets but behavioural probabilities
 Culture, incentives and regulatory effectiveness