Financial Regulation: transparency, stupid.

An interesting late-night rant last night with my lodger, who works for the Financial Services Authority, about transparency.  My points, as a transparency extremist, were my usual ones:

  • opacity is a factor in all cases of financial fraud / irregularity;
  • therefore, as a regulator, the FSA should always be pressing for greater transparency;
  • The regulator should never encourage or require secrecy;
  • technology allows us to be much more transparent than ever before;
  • the regulator should require information to be published as machine-readable realtime datastreams;

His point was that sometimes, a little information is worse than none at all. The example he gave was the FSA risk models (which it uses to asses compliance). Should it publish them? It wants to be transparent, but if it does, the organisations they are trying to regulate will probably (ok, almost certainly) game the system so as to pass their risk models while continuing to behave riskily. Therefore it keeps them secret.

This isn’t satisfactory; besides, there’s a natural justice argument which says that the regulatees have a right to know the rules against which they are being regulated. My answer was that they, the regulator, should be regulating by making publication of key data a condition of regulation.  If this was all they did, it would still make the market much safer. Again, he said that customers aren’t interested in how much Tier 1 or whatever capital an organisation has; which is true. But they are interested in knowing that it’s not going to go titsup while it’s holding their money. If the organisations being regulated were required to publish, in real-time, their financial positions, in a machine-readable, standard format,  plenty of people would write competing smart algorithms to mine the data. If it’s only published deep in the pdf of the annual report, six months after the year end, no-one will bother.  We’d started our discussion talking about the financial aggregators (, etc) . I’m suspicious of these, because their funding model is opaque and commission-based, and they aren’t comprehensive so they don’t do what they say on the tin. You will never find a quote from Direct Line on, so won’t necessarily give you the best deal, just as you won’t find a quote from Ryanair on Opodo or Expedia. But a financial aggregator using a different business model (commission is almost always the wrong incentive) could very usefully assess the financial stability of its members if they were to provide it with a feed of the necessary information in electronic form.

It’s simple.  Perfect competion demands perfect information; there isn’t perfect information, so the market is not perfectly competitive. But technology frees information, so it should be used to make the market more competitive.


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