Businesses often consider regulation an anathema. Yet, often it’s only the rules that tell you whether you’re winning, that keep cheaters out of the game, and that give you a platform for growth.
Is there no end to the PPI (payment protection insurance) story? The news this week that Lloyds Banking Group has set aside another £1bn for PPI compensation suggest the retrospective application of rules around product marketing are still a big cost to UK banks.
That hasn’t been the only big regulatory penalty this week, either. Vodafone incurred a £4.5m fine for what were, effectively, failures in its billing system. More than 10,000 customers were able to top up their pay-as-you-go accounts despite the deactivation of their numbers. (We’ll leave aside the question of why so many people bothered to buy credit for a phone they clearly never used.)
Regulator Ofcom, which levied the fine, was clear about its remit. “Vodafone's failings were serious and unacceptable, and these fines send a clear warning to all telecoms companies,” said Lindsey Fussell, Ofcom Consumer Group Director. “Phone services are a vital part of people's lives, and we expect all customers to be treated fairly and in good faith.”
Business people often complain about regulation, and there are many cases where dull paperwork and jobsworth regulators do add unnecessary workload for CFOs and their colleagues. But we shouldn’t be too quick to castigate regulators – or to junk the rules that govern business.
Take banking: for many in the financial services industry, PPI is a classic case of a regulator (in this case the FCA) applying a gold-plated standard of conduct to a case where, arguably, buyer beware should have been the rule. Reams of other conduct and compliance regulations complicate banking operations and create an environment that stifles competition.
This is an industry that is based on that most delicate of attributes: trust. When systemic failures – like the financial crash of 2008 – harm the entire industry, it is, in fact, the regulators who offer both businesses and consumers a measure of trust in their financial services counterparties. And it’s regulators that ensure during volatile times that the most conservative businesses are not penalised for their good sense.
More importantly, it is regulation that prevents rash or freebooting disruptors from tearing down businesses that have taken decades (or even centuries) to build up. As Josh Brown (aka The Reformed Broker) put it earlier this year:
Why isn’t Apple, with almost $200bn in cash at its disposal, building out a full-fledged financial institution? Why isn’t Google handling loans and making credit decisions based on its trove of user data? Why hasn’t Facebook more thoroughly interjected itself into the middle of all the commerce taking place on its platform? Why has Amazon singularly spared the banks amidst all of the other industries they’ve turned upside down?
One-word answer: Regulation.
If you’re a banking executive, it’s time to stop complaining about the only thing preventing the onslaught. It’s time to start looking at capital requirements and multiple points of oversight as what they are: The last barriers of entry.
This observation applies in lots of sectors – and is true even of the basic accounting rules. The trust shareholders have in your reporting is largely down to regulation. The fact that fraudulent rivals can’t force you out of business? Regulation. That you can invest in quality, safe products without fear that substandard competitors will drive the market down? You guessed it.
The banking industry has paid out more than £23bn in PPI penalties, and that seems a harsh price for trying to turn a profit. Telecoms companies have faced punitive fines for data breaches and higher costs for consumer protection. But in both cases, the regulators are acting as much in defence of the industry brand as it is the consumer.
Yes, it means we need to invest in systems that make meeting the regulations easier – from accounting standards and tax laws to pollution limits and crime prevention. But those also make businesses better run, too.
So while we shouldn’t simply roll over and accept every last piece of red tape, we should also be thankful for regulation when helps us all play by shared rules.