Regulation by rules is all very well; regulation by values is indispensable.
Last week the Financial Services Authority published its first occasional paper, on The Economic Rationale of Financial Services Regulation. Gripping reading, at least for those who find meetings of the Association of City Compliance Officers are the social highlights of the year. For the rest of us, it may be more fun to think about beards and the customs of Oxford Senior Common Rooms – and there are lessons in all that for the economic rationale of financial services regulation.
It is not long since a French cultural anthropologist came to Oxford to help us understand the differences between the business environment in different countries. (We do not share the fashionable perception that the new international manager can operate in the same way wherever she finds herself). The anthropologist began by describing the rules for determining seniority in an American factory, rules which had been the subject of long negotiation between company and unions.
Seniority is based on date of joining the firm. If two or more employees arrive on the same date, their relative seniority is determined by the alphabetical order of their surnames. However if an employee changes his or her surname after (though not before) the date of joining, seniority will not be affected. If Miss Zybrowski marries Mr Aardvark and adopts his name, she gains nothing in terms of workplace rights. If her brother marries her sister-in-law, once more nothing is changed.
The audience laughed, as they were intended to, at the absurdity of all this. But we need to be careful when we laugh. In France, there is certainly seniority, but it is not the product of any system of rules. It is more often the product of attendance at ENA or Ecole Polytechnique. This mingles with the many conventions of French society which are well known to everyone among the French élite, though not to those who are not. What determines seniority is complex, changing, and incapable of being written down.
And then the Oxford contingent realised how little cause they had for laughter The seniority rules the American company had adopted are exactly the rules that determine seniority in the Oxford common room. You will not find these principles set out anywhere, but woe betide the unwary newcomer who mistakenly sits in the senior fellow’s chair at dessert: or the established fellow who thinks they can ascend the ladder of seniority by changing their name. What the English listeners found absurd was not that such behaviour should exist, but that anyone would go to the trouble of writing the conventions down.
The exchange illustrated different approaches to rule-making, each consonant with the particular culture from which they have emerged. You can seek definition, and insist on due process: but in doing so create bureaucracy and lose flexibility. And you have to choose.
American regulation demonstrates one choice. If you thought American employers were free of burdensome rules, think again. Be sure you are aware of paragraph (g)(l)(i)(A) of the Occupational Safety and Health Administration’s (OSHA) rules on respirators, which prohibits you from allowing respirators with tight-fitting facepieces to be worn by employees who have “facial hair that comes between the sealing surface of the facepiece and the face” Beards, in other words.
But also stubble. The OSHA did not adopt this regulation without careful research. They supported studies in which volunteers grew beards over an eight week period, submitting to regular tests of how well their respirators fitted. Following these experiments, they were able to conclude that “individuals with excessive facial hair, including stubble and wide sideburns, that interfere with the seal cannot expect to obtain as high a degree of respirator performance as clean shaven individuals.”
So they promulgated rules referring to the size, curliness and texture of the beard.
British regulation of the same issues takes the opposite pole. A UK employer must engage in a risk assessment. “The purpose of the risk assessment is to help the employer determine what measures should be taken to comply with duties under the relevant statutory provisions.” And that is, essentially, it. You are in breach of the regulations if you have failed to engage in the risk assessment or have not adopted appropriate measures in the light of it. The Health and Safety Executive will give you advice and encouragement. But what you do is up to you. Only beware of criminal penalties if you get it wrong.
The American structure tells you what you must do, the British system leaves responsibility with the employer. The American structure provides legal certainty, but at the cost of complexity, irrelevance and the stifling of any imagination or initiative.. And that is the basic choice in financial services regulation. Should we prescribe general principles, and leave it to firms themselves to work out the basis of implementation: or should we offer detailed prescription as to how business should be conducted? Neither answer is universally right.
Go for specific regulation of behaviour when the objective and content of the rule are obvious, where it is reasonably easy to see whether or not the rule has been implemented, and where the content and purpose of the rule are unlikely to change much over time. So we need rules to say do not release too much smoke into the atmosphere, do not sell food which contains poisonous substances, keep clients money separate from your own.
Go for general principles when the purposes of the rule are more complex, where its application requires business knowledge the regulator cannot have, where observance is difficult to monitor, and where technology and markets imply that the rule book must change frequently. So we should leave it to those on the ground, or in the factory, to decide how much stubble is acceptable in the workplace, what is best advice, and what information should to be given to customers.
And never forget your obligations under the OHSA: use a long-handled tool to pick up items you drop into a confined space.