Financial services regulation is often perceived as a specialised technical area of finance that is best left to the compliance and risk management departments of banks and insurance companies. The financial crisis that erupted in 2008, when politicians had to use taxpayers’ money to rescue some banks from bankruptcy, has elevated regulation to a new level of relevance to most people who entrust financial services operators with the custody of their money.
John A. Consiglio has just published a book that looks critically at developments in the regulatory sector in the last several years. Insights on Financial Services Regulation is not a textbook on regulation. It is a soul-searching exercise by a scholar to help financial services students as well as practitioners to understand better certain aspects of regulation that are rarely subjected to academic analysis.
The author discusses critical issues that are hardwired in regulation, and that impact many people beyond the captive audience of those who work in the financial services industry. In his concise book, Dr Consiglio delves into thought-provoking topics like the public interest elements in regulation, information asymmetry, the economist/regulator role of regulators, the teaching of regulation at tertiary level, and the real-world environment in which regulations operates.
While there is a common theme in all the eight chapters of this book, one can also benefit from reading this collection of academic essays individually to help build a better understanding of the elements that define proper regulation.
Dr Consiglio tackles successfully the slightly negative connotations that ‘regulation’ often implies. He argues that in today’s environment, regulation needs to steer away from the confrontational mode that pitches the regulator against the regulated. Regulation should be more about creating a context of incentives to develop harmony between regulators and the operators in the financial service industry, for the benefit of customers.
The chapter on the role of public interest in regulation introduces a very relevant dimension to the understanding of proper regulation. Dr Consiglio rightly argues that simple honesty should be the bedrock of every financial services operator. Adequate regulation should, therefore, be about financial protection, financial stability and financial advancement.
This may seem like an obvious assumption. However, the governance crisis, and the consequent need for governments to rescue poorly managed banks in the last decade, confirm how some leaders of the industry often ignore the public interest.
Dr Consiglio uses his long experience as a banking practitioner, regulator and tertiary level educator to discuss the importance of risk management and information asymmetry, and how these impact on regulation. The author describes how self-regulation in the latter part of the last century had generally failed to make the financial services industry safer.
The difficulties faced by those outside the financial services industry when trying to gauge the performance of operators are captured in the definition of information asymmetry.
This phenomenon can lead to panic in financial markets when a crisis erupts in a particular institution and which affects confidence in other operators. The regulator’s reaction to this risk is generally to introduce more mandatory disclosure requirements. This strategy, however, can never be more than an imperfect tool to reduce information asymmetry.
Dr Consiglio, a seasoned educator, gives prominence to the challenges of teaching banking regulation to university and business school students. He rightly argues that one cannot master the essentials of regulation through academic studies alone. Working in the industry and being exposed to particular organisation ethics and cultures, are an essential element of acquiring knowledge of regulation.
The growing importance of good corporate governance to manage conduct risk is one of the hallmarks of recent regulation of the industry. Equally important is the emphasis being given in tertiary education for financial services students to not just think strategically, but also to understand both public and private long-term interest of the industry.
This book benefits from the author’s vast and varied experience in financial services. The changes in the industry, especially over the last decade, make it necessary for financial services practitioners as well as students, to understand the underlying dynamics of modern regulation.
Dr Consiglio’s book is a must-read for all professionals and students who have a particular interest in the financial services sector.