> Posted by Sonja Kelly, Fellow, CFI

2014 World Bank/IMF Annual Meeting

Sound financial inclusion regulation and policy does not an ethical financial system make. In financial inclusion, we often talk about the importance of consumer protection, industry transparency, and fair market conditions. In the absence of universal standards of what these principles look like in practice, we turn to regulators and policymakers. I contend that we cannot keep relying on regulation to make the financial system moral and just. Since much of my own research promotes financial inclusion policy and regulation, this is a fairly inflammatory statement for me to make. But when we look only to regulators to create a financially inclusive and fair marketplace, we miss the mark.

In my own life, I see an analogy to our family game night. I am a very competitive person. I confess that there are times (fairly frequent times) that I cheat. I can easily miscount the number of spaces my piece is moving in Monopoly, or I can set down three cards and make it look like one card in Uno. My husband sometimes catches me, or my efforts to cheat simply aren’t drastic enough, so very rarely do I change the outcome of the game. But no number of rules can keep me from trying. Nevertheless, I’m sure my husband would agree that rules and regulations are not sufficient. Game night would be far more ethical if, instead of relying on the game rules, we relied on our responsibility to one another (check back with me in a few months to ask how a recalibration of my own internal compass is going).

In his remarks to during the recent World Bank Annual Meetings, the Most Reverend Justin Welby (Archbishop of Canterbury) emphasized that ethics in finance is not about creating carrots and sticks, but about doing the right thing because it is the right thing to do. Welby’s charge to participants in the meeting, including Governor of the Bank of England Mark Carney and Managing Director of the International Monetary Fund Christine Lagarde, recognizes the necessity of the personal ethical compass—not solely a reliance on regulators.

We heap on regulators the responsibility of client protection, of fair pricing, of industry transparency, of non-discrimination, of product diversification, and more. This emphasis is certainly appropriate, to a point. It is the regulator’s job to set the rules of the marketplace. And most certainly there are well-built regulations and there are poorly built regulations. But an emphasis solely only on the possibilities of regulation, instead of more broadly on the ethical approach of all stakeholders together, is incomplete.

Regulators are only a part of the puzzle. Heads of financial services institutions, instead of being focused solely on the well-being of their organization and shareholders, must consider their roles as stewards of the well-being of the individuals. Employees must internally feel the weight of their decisions within institutions. Financial crises cannot be blamed solely on faulty systems.

The Smart Campaign recognizes this, and works to build an industry commitment to implement consumer protection principles. While the Smart Campaign is sometimes called on to advise governments on regulation for consumer protection, most of their work is with individual financial institutions, the standards and policies they apply within their own organizations and motivating the individuals who work in their organizations. The Smart Campaign nicely articulates that without consumer protection embedded within the fabric of an institution itself, clients will not receive ethical and fair treatment. To date, the Smart Campaign has certified 25 institutions that demonstrate that they are living the client protection principles.

At the World Bank Annual Meetings, Welby highlighted the inherent limitations of relying on regulations to protect the rights of the entire financial system. To this, Carney turned to Welby and jokingly asked for forgiveness, admitting that he, just like anyone, makes mistakes every day. Carney, arguably one of the most powerful regulators in the world, admitting his own limitations (however glibly) underscores that no regulator, no matter how powerful, has the capacity to anticipate, regulate, and prepare for everything. After a point, responsible finance must come from one’s own internal compass.

This reality should change the way we think about regulation of the financial system. Increased momentum in financial inclusion will come not from a shiny new set of regulations but from the intention, moral compass, and subsequent action of the people involved in pushing financial inclusion forward. As we finalize this year’s Global Microscope on Financial Inclusion with the Economist Intelligence Unit, I am especially reminded of this. Even in a place with great regulation, people can be harmed by their financial products. Even in a place with poor regulation, people’s lives can be changed by caring financial institutions and the people that run them.

Photo credit: World Bank Photo Collection.

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