The Dangers of Knee Jerk Reaction

A few weeks ago, I finally got around to reading the cover story, Bitter Medicine in the latest issue of Trade Finance. Wrapped in some truly nice metaphors involving the Wild West and Casinos, the author delves into the sickness that has infected the financial services industry and the medicines that world governments will be applying shortly to treat it.   The sickness was and is an addiction to risk and reward.  The medication will be regulation and not just a little… but a massive dose of regulation. So imagine my surprise to see that at least one former Washington Insider, Newt Gingrich is actually calling for the repeal of one of the few pieces of legislation passed in the last decade to provide oversight to financial governance—Sarbanes Oxley (SOX).  

SOX was initially intended to prevent the type of fraud and accounting problems that created and ultimately destroyed Enron and WorldCom.  Like a great deal of Washington legislation, it was written and passed quickly in response to public outrage over scandals that cost employees jobs and investors millions.  So despite hindsight from people such as Mr. Gingrich, whatever imperfections and restrictions that may exist in SOX, it is unlikely given the current state of the Financial Services industry that the law will be repealed.  To my way of thinking, the focus for global leaders looking to regulate the industry should not be on repealing SOX or tweaking other existing global legislation but rather on crafting thoughtful, proactive wholesale legislation that meets the requirements of the 21st century financial marketplace—a marketplace that demands transparency, automation and flexibility. 

So how will global leaders answer the public’s demand for accountability and oversight without simply cobbling together a patchwork of cumbersome rules and regulations?  Unfortunately, the first step in the process may be the hardest—avoid a knee-jerk reaction. Take action yes—but as the saying going act in haste—repent in leisure.  If we are going to avoid another meltdown in another decade or so, it will be imperative that leaders take this unique opportunity to build a framework of regulation that can scale. (Please allow me a slight detour from the topic at hand to just say that one way to avoid knee jerk reactions is to stop using the word crisis.   I’m removing this word from my vocabulary—as I think it is overused, promotes panic and encourages bad decision making. Okay back to the matter at hand…).

So first things first…how do you build regulations that will scale?  Begin with the acknowledgement that a hodgepodge of in-country regulations is simply not feasible in our interconnected, interdependent global economy.  Second concede that any and all new regulation will require global buy-in and cooperation if it is going to succeed.  Third recognize that cooperation will require a new level of transparency to cultivate and ensure trust among the players.    And fourth accept that technology is going to be key if there is any hope of creating the type of transparency needed to cross physical, political and geographical borders to make any of it (regulation) enforceable. 

And what will be required of technology?  Well for starters, the ability to automate existing processes, provide transparency into these same processes and be flexible enough to allow for change and growth.  A tall order but a necessary one if technology is going to help facilitate the 21st century financial services industry.