Changing the conversation on financial regulation

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On February 19 the IFoA submitted its feedback and recommendations to HM Treasury on the Phase II Consultation of the Financial Services Future Regulatory Framework Review.

In reviewing the consultation and our responses to it, there has been a growing realisation that we need to have a wider conversation about what the financial sector is for. We are all agreed that the UK wants a vibrant financial sector that is attractive to investors and financial players. But we also want a financial sector that serves society and the public interest – ie the people.

This is not about politics but about culture and purpose.

Too many things have gone wrong in our generation. The culture and assumptions underpinning our financial system, regulations and arrangements have contributed to the following:

  • Climate risk. Biodiversity loss. The impact of the Covid-19 crisis. The entrenched inequality and plight of the marginalised in society. 
  • Accounting scandals. Financial scandals and “mis-selling”. Opaque and complicated insurance and financial products. 
  • Lack of economic, income and health security. The poverty of the regions versus the metropolitan centres. Financial exclusion.

In addition, there are a number of meta and systemic issues overlaying and exacerbating a system that is not working well – the digital divide, an ageing population, asymmetry of information, neglect of consumers’ interests, little focus on society’s purpose and needs, and concerns about intergenerational fairness.

The IFoA has been part of many responses to consultations, policy discussions and public pronouncements over a wide range of issues. There is a unifying theme in our desire for greater fairness and transparency, and better ethics and behaviour. This is not just about rules and technical standards. It is not just about codes of conduct and penalties. This is about good behaviour and culture. And in this regard, no group can do this on its own. It requires a unifying shared narrative, and mutuality and reciprocity of obligations. We can do this together.

We need to join the dots across many conversations and perpetuate a new narrative on the ethics of good behaviour, mutuality and reciprocity. And we have to start talking about this at the highest level of leadership.

Many of the issues we face in the financial sector and society stem from a culture of excessive self-interest, implied and reinforced by our existing economic and financial models. The Washington Consensus, which began its ascendancy in the 1980s (and of which the UK is part), shored up the belief that stock markets know best and the supremacy of stock market valuation in determining true value. The regulators’ and market participants’ job is to make sure the market is made even more efficient and we just maximise growth in share prices. This false reliance on the supremacy of markets is the elephant in the room that we need to address.

We focus on the growth of capital, as embodied in the growth of share price, to the exclusion of the value-add of the business. Share prices come with portfolio risk tools which also miss this point, as they fail to understand the wider nature of risk reflexivity and the inappropriateness of maths to deal with inherent uncertainty.

Many of the true issues the financial system needs to address are outside the measurement of profit and it is hard to argue are reflected in prices. We need a more plural regulatory system that includes a more diverse set of stakeholders in the risk discussion (not just investors vs customers). Any new system must take a more systemic view of how the aggregate risks in the system build-up, and of biases against complexity in favour of alignment between businesses, customers and the wider value-add of the business to society.

Two former Bank of England Governors –Lord Mervyn King and Mark Carney – as well as an increasing array of economists and thinkers, are now calling for change. Our entire economic thinking and financial model, and its financial regulations, are still entwined in the supremacy of the stock markets.

Actuaries, accountants, auditors, lawyers, bankers are all part of the system that seeks to maximise growth and shareholders’ interests and shareholders’ value. The existing corporate ethos still rewards activities that provide short-term profits but run counter to the interests of society. That is our current obligation as players in the commercial field. We have too many conflicts of interest. We are benchmarking ourselves against others on economic performance and rewards. That means more growth, and so we perpetuate the current flawed system – a system that rewards self-interest and looking the other way. And while this may lead to short-term individual company growth, it is likely to reduce longer-term growth, inclusion and benefit to society. We have a tragedy of the commons and a tragedy of time horizons. This is a systemic problem and we must call it out.

We cannot disengage overnight from where we are today. We acknowledge the problem, and we must create the context for change. We can take steps through regulations to shift what is expected of boards and professions. We can make interventions in the investment system. We can propose pragmatic solutions and examples of good behaviours and ethics – cultural change. There needs to be more conversation around what responsible capitalism is and how our regulatory and professional systems can support it.

The IFoA does not have all the solutions but we are working hard to progress thinking and ideas to support the transformative change that is needed. We have identified component parts of the solution that we believe is important, covering a broad range of aspects, for example, systems thinking, biodiversity, the time value of carbon, and cementing sustainability into the actuarial mindset. We look forward to working with HM Treasury – and others – on taking this conversation forward to create real change.


Tan Suee Chieh
IFoA President
March 2021


This article was written for the IFoA Blog