Government and regulators have been in a frenzy of, often unstructured, reaction to the effects of the GFC, casting about for a villain and for the miracle regulatory response that will ensure the bad guy isn’t able to do it again. The fact that it has been nigh on impossible for any government in the world to identify the singular bad guy, or even a clearly recognisable collective bad guy, has led to an amount of scapegoating and a rush to introduce reforms that even those running the reform process suspect will not actually fix the problem but will at least look like action.

In Australia, the frenzy of regulatory response has been directed towards the Financial Advice community, as the specific subset of the larger Financial Services industry that actually connects consumers with the products that apparently harm them. Its not entirely without justification as there have been egregious failings by some individuals in this sector and there is a rumbling disquiet about the conflict of interest that might be evidenced through commission based models of remuneration. Nonetheless, those of us who pay attention to the global stage of financial services and the regulatory questions that have been raised in other jurisdictions have noted that the UK, Europe and the US have come to the conclusion that, although magnified through inappropriate Advice provision, the genuine source of the evil is far more likely to be in the financial services laboratories that invent these products in the first place.

We are even seeing this in the guilt fuelled disclosures of people such as Greg Smith (ex Goldman Sachs executive) who acknowledge that even many of the ‘financial scientists’ and executives who invent and package these instruments into shiny new baubles often have little idea or concern about what it is they’ve built or what consumer consequence might result.

Not only does this highlight that reform of individual sectors is a questionable policy approach, it challenges us to see that these problems are complex and multidimensional. Even more uncomfortably it raises the possibility that the ‘evil mastermind’ that requires eradication might not reside in large corporate towers around the globe but may well be lurking in our own attitudes to finance and our active (if even unwilling) participation in that system as consumers. In which case the only genuine solution is to go back to the table for a far more comprehensive consideration of the design of regulation.

A starting point to that more comprehensive consideration lies in the challenge of reconfiguring our understanding of the way that ethics and standards of good behaviour work. There is a growing informed consensus that the appropriate starting point for the consideration of regulatory design is not at the level of transactional instruments but at the level of human engagement with decision making; taking a stance on how conflict emerges and how people are educated, empowered and incentivised to resolve those conflicts.

In this area, the law (at least in a financial services context) has been a clear failure. In the case of Australia’s Corporations Act (2001), as the governing instrument for financial services law, there is no recognition of the role of the empowered, ethical individual. All individuals in the system are identified as “financial product advisers” without differentiation for education, experience, ethics or professional obligation.

Things may have just changed though!

Last night (22/03/2012), in an historic move, the lower house of Australia’s parliament voted in favour of introducing the possibility for regulatory incentive and regulatory differentiation based on whether an individual belongs to a professional association with an approved professional code.

Much more is to be written on this through regulation and interpretation but as a first point of order, the ramifications of this are profound at a behavioural, compliance and jurisprudential level.

Professional Codes, when properly constructed, speak to a communal concept of professional obligation and ethics. They are a vehicle for a group of like-minded and like-qualified experts in a field to determine the boundaries of acceptable practice. When properly policed they respond to a far wider set of concerns than does the law and provide far greater consumer malpractice protections than the law ever can. However, the importance of the words ‘properly constructed and ‘properly policed’ cannot be underestimated here.

In the example of relevance to this legislation, the Financial Planning Association’s (FPA’s) Code of Professional Practice has already proven itself strong and relevant in all of those dimensions (see Editor note disclosure below). If it is successful in receiving legislative weight it will also then be a precursor to a whole new model of co-regulation partnerships between government and professions

To many readers this will sound like a pipe dream in an environment where professions have been losing ground on professional differentiation for decades but a new way of thinking about the design of regulation sometimes calls for an old way of thinking about the designs of people and their collective decision making. Australia’s Securities and Investment Commission Chair, Greg Medcraft has recently gone on the public record to recod his comfort with the idea of co-regulation (Charter Magazine, 2012), even if only in acknowledging that government regulators are struggling with the enormity of the consumer protection challenge on their own.

Recognition of professions and professionals is not necessarily the boon it might seem because that recognition can only come at the cost of fulfilling the promise to meet the obligation. History is littered with cases of professional communities that have deservedly lost their right to negotiate ‘norms’ and ethical obligations because they failed to see the public and the individual consumer as the object of their obligation.  

However, I am also excited by the bigger picture that the passing of the Bill in the lower house yesterday represents. For the first time in a long time a tentative decision to trust someone other than a government agency has been made, a decision that opens up the possibility for all professions to reinvigorate their sense of purpose and consider how the future of conduct and ethics are negotiated and applied in the design of good regulation.

At the very least, it will be transformative in financial services and the community of financial planning within it that not only can play a role in negotiating good practice and being participants in the regulatory oversight of their community but in rightfully identifying that financial planners are the ones with the responsibility for advocating on behalf of their clients in a complex financial world and who have the primary goal to protect their clients from the worst aspects of that world.

DISCLOSURE: Dr Deen Sanders is the independent Chief Professional Officer for the FPA and in that role oversaw both the authoring of the 2009 version of its Code of Professional Practice as well as its implementation and enforcement. He continues to provide advice to the FPA on its professional regulation and professional integrity system as well as participating in government and regulatory working groups that have been relevant to the passage of the FOFA legislation.