 Hi guys, it's MJ and in this video. I want to talk about regulation and Regulation is something I really enjoy. It's quite a cool topic It is a little bit controversial because regulations have failed in the past and have created more problems than what they've been trying to fix But it is quite cool. I mean it is a biblical topic I mean right from the beginning of the Bible we have Adam and Eve God gives them a rule to follow When you have the 10 commandments and then you know the whole Bible Comes around regulation in some sense. So I like the fact that it is biblical. It's been here since the dawn of time But it is something that we're still messing up with we're still creating regulations that have terrible consequences and are creating market inefficiencies and Have some bad things. So That's also one exciting about regulation is that it is an area that is evolving It is constantly improving. So by studying this it is a way that you could add quite a lot of value to the markets So what I've done is I've looked at regulations and all that stuff And I've come up with something known as the regulation cycle and what it is It's six steps that I think Regulation goes through so what I want to do in this video is talk about this regulation cycle And then I'm going to make separate videos on trust law corporate governance listing authorities ethical issues And so forth, you know, so regulation is a very very big topic But like I said, it is one that is constantly changing. I mean if we just look at regulation, so if we need to say Someone they say well, what is regulation? It is a bit of an abstract concept. It's an abstract concept It forms part of management. So the whole point of regulation is it's some sort of management. I have forgotten how to spell Management that's quite awkward. Anyway, some sort of management It consists of a whole bunch of rules and you know, what to do what not to do It also has some sort of punishments And the whole thing is that regulation, you know tries to protect protect people Reduce financial crime all these various things what can be done to regulations? They can be changed They can be enforced You know, there's all these things that can be done to regulation anyway, I want to focus on this regulation cycle and Yeah, let's let's begin with that. Like I said, these videos are a lot of my opinion The stuff I'm specifically talking about might not be in the textbook. So be careful You know, don't quote me in your exam and then you fail then to come and sue me. That wouldn't be too much fun So yeah, just giving you guys that health warning. Anyway regulation cycle How I see it is that it starts with some sort of wrong So there is a wrong in the world and we are unhappy with the wrong and we want to turn this wrong around This wrong could be known as the aims of regulation some common wrongs are There's there's four main ones that we we see in the notes. They are You know reducing financial crime the markets being inefficient Markets lacking confidence and The final one is, you know, them being unfair or How we refer to it as, you know consumer protection So these are the four Main aims of regulation are trying to correct these wrongs But it's because of these wrongs that we have regulation You know, it's because we have sickness that we have doctors It's because we have people breaking the law that we have lawyers It's because we have risk that we have activities and it's because we have wrongs in the world that we have regulations so we have these wrongs and How we see fits to, you know Stopping these wrongs is we set up something known as a regime Regime, okay, my spelling is not on form today. Is that a spell regime? Okay, so you have these specific regimes now the regimes could be Just very simply the law of the land So the government it could be some sort of voluntary code Another type of regime could be self-regulation Another one could be statutory Regulation and I mean you could even get like a little bit of a hybrid of all of these things. I mean Law of the land will specifically be looking at trying to reduce crime Voluntary codes will try and remove inefficiency Self-regulations will try and focus on say, you know, the confidence and a statutory regulator will make sure that, you know Consumers are protected but having said that each one can do all four of them You could have a blend of it. Some rules could be law of the land some can be voluntary Some could be statutory some can be self so they're not their little closed-off boxes They are all kind of, you know joint in there together So after you have a wrong you set up a regime and what these regimes do is they set up things known as rules So that's the next step in our cycle is rules and if you see nice about my little regulation cycle I've tried to make everything start with the letter R except for wrong That's also like a silent W, but you'll see all of them have ours in it. So anyway, we've got a wrong We set up a regime the regime then sets up rules now the rules is an attempt to right a wrong So I mean for instance, it could be saying like, you know holding a reserve when it comes to an insurance company not being able to Pay its clients when the benefit falls due, you know, that was unfair So you can write that wrong by saying telling them to hold hold reserves The thing is not all rules are that straightforward, you know, they some of them can be quite vague and confusing For instance, you know, what how much reserve should you hold? You know what percentage what minimum amount because you could say, oh, every insurance company needs to hold a hundred million Rad and reserves and yes, that's great That will that will really protect consumers if every insurance company had such a massive reserve But then a rule like that is known as to be quite rigid quite constrictive It could be like a little bit of a barrier to entry into the market because now only the rich can sell insurance Now they can charge higher bounce because now they formed some sort of monopoly You know, so you want to make sure that your rules aren't too rigid that they stuff all Innovation and all these type of things now the thing with rules is they do need to be constantly updated Because people keep finding loopholes specifically in finance tax insurance all these type of things when you have a lot of money And a lot of smart people and a very vague or weirdly confused Stated rule you're gonna find a loophole these guys. This is their day job. They will find a loophole They will exploit it. So rules do need to be constantly updated They need to be updated with say new technology and technology can now You know, cause certain rules to be void or say hey can help the market or something like that But one thing I do hate a lot about regulation is that instead of a saying, okay guys Let's scrap that rule and let's restart. They say, okay, let's just make an amendment to that rule Let's just add a rule on top of a rule on top of a rule We're too quick to add rules and we're too slow to remove rules and that's why when you look at accountants They have these massive massive tax textbooks that just contain all their rules and policies and what you can't do And people have to dedicate their lives to understanding the rule book and that's not fun So that is one of the weaknesses or one of the things I don't like about Regulation Let me just Remove this over here so that we do have enough space For our little cycle. So yeah, that is the rules of regulations Now once a rule has been set in there will be a response So they will be told. Okay, the regulation is that you need to hold reserves Companies or individuals who ever that rule applies to will respond to the rule They will either say, okay, that's great. Let's set up reserves. They will take action to respond to the rule You know, that's kind of like the right thing to do So when we see a response to a rule there should be some sort of you know change in behavior Change in behavior. They're gonna start doing new things. They're gonna stop doing bad old things You know, the whole idea is to do the right thing However, sometimes a company might disagree. They might say holding reserves or that amount of reserves is not actually the right thing to do They might disagree with the rules They might say stuff that we're not gonna do it You know, and it can be quite a lot of tension between the corporations and the regulatory authorities This one makes self-regulation quite quite an interesting one is that these guys understand the business the best however self-regulation You know, then you have to start asking questions. Well, how independent are they and I can get quite quite complicated But the idea is that there's after you set up a rule There's a response you either change your behavior and you do the right thing Whatever that is big philosophical discussion you can have there or you say stuff it I'm gonna stay to my same ways But what regulation does require is that after there has been this response there does need to be a report and A lot of people who start off with actuarial science and go into the working world This is where you're probably gonna start off is in one of the most boringest things you'll ever do is building reports. So what you do is you now need to report or You know create some sort of evidence some sort of audit trail that you have been doing the right thing So a report is something like an audit trail It's evidence It's documentation. It's very good. It's very good to create reports, but they're very boring to do and yeah, they normally give it to the junior staff to do it and Management will then look at the reports Conclusions or they will look at the the report and then draw conclusions or decide what to do But regulators will require some sort of report filling in your tax returns. That's a sort of report Filling out certain things. It's a report. It's big documentations very important and it is quite a boring thing to do but something interesting happens with reporting and response and Remember that whole saying two wrongs don't make a right well Some people actually disagree with that in the sense that What you can do is you can do the wrong thing So you do the wrong thing. So you say I'm not gonna hold a reserve But then you lie and you say that you have done the right thing and then what that does is you will pass the regulation So the regulation says you need to hold Capital and reserve and you need to report on it Some people will hold capital reserve, but fail to report it. They'll get punished people who don't hold a report But then lie and say that they do might pass certain regulations and that's why regulations now becomes a little bit tricky Because of this whole deal of trust, you know, people can lie. They can be dishonest How do they get around that? They need enough sending auditors or have their own Their own task force to go and check it in Holding a reserve is quite a simple one when regulations or rules start becoming more complicated the policing around them also becomes more complicated I mean, we have seen spectacular cases in the past specifically, you know companies like Enron who have done the wrong thing then lied on their reports or lied on their financial statements and You know bypassed regulation and even bypassed auditors for so long But in a perfect world everyone responds. They do their reporting. Everything's great They're supposed to say in their report if they didn't hold enough Reserves or they did or they didn't or what they failed to do and all that stuff. We do expect people to be honest in reporting Hopefully they are but the idea is that after they've then had their report So if they would then report say no, we didn't hold enough reserves or we did The regulatory body would have some sort of reaction Okay, this is the final step in my cycle. They would have a reaction reaction is Hopefully they would do nothing if you did the right thing and you did all your correct reporting You know, they don't do anything. I don't think there's many awards for oh, you made the best report Although they might be sometimes a reward for the safest bank or the bank that holds the most capital the insurance company But I haven't really seen too much of that they should because it'd be quite a nice marketing ploy But normally there's there's nothing nothing happens if you do the right thing But if you do the wrong thing then that's where a lot of the reaction comes in and they need this reaction because they don't enforce it If there's no punishment or something for for disobeying the regulation then the regulation is pointless so they will have some sort of Punishment just like like I said it was it is biblical, you know The rule was don't eat that apple or that fruit thing Adam and Eve go and eat the fruit thing and God punishes them by kicking them out of the beautiful garden you know, there was there was a punishment or the the rule was enforced and The punishment can be in the force of that they banned like Adam and Eve. They were banned from the garden They could be imposed today. We issue a fine Adam and Eve didn't have money. So they couldn't pay God a fine Or there could be imprisoned You know, God loves Adam and Eve. So he didn't send them to hell in some dungeon or something like that You know, he's quite a nice God. He just banned them from the Paradise Garden I mean banning. I think it's the best thing to do, you know, if someone's not gonna hold reserves for Insurance companies or you know, they're not gonna be doing that I think the best thing to do is just ban them. Say, hey, you're you can't do it You know, it worked for God. It worked pretty well. Just ban people say you can no longer do this action Finding is it's a bit of it. It's I think it's stupid I mean, you you don't hold a reserve for hundreds of millions You do all these bad things and then you get a fine of a one million rend Do you like oh, that's that's not bad. I'll just pay that fine one million rend or You do something minor like you, you know You forget to crush your teas on the report and then they find you a million rend and you like whoa, whoa, whoa That's kind of crazy. So I mean when it comes to the fine, you know, how Big does the punishment have to be how bad is the fine? A lot of times they will impose a massive fine that the media will catch up on but then if you follow the story They settle for a much smaller amount. So fines are yeah, I don't I don't really like fines and Imprisonment, I think that's completely extreme. I don't like prisons at all I think society needs to find a better way to punish people putting someone in prison is a very Inhumane thing to do but anyway, I'm going on to a whole sociological Aspect, let's keep this up on finance. So I think that's bad to imprison someone just for any crime You know, we have to find out some better solution. But anyway, specifically for you know, not holding reserves and you get sent to prison That's yeah, that's that's terrible finding what amount should be put in You know, there's that whole big question there and it might be too small and then it's not really worth it I mean, it's not too if it's too small, there's not that much of a deterrent if it's too big You know, they don't not can be able to pay it. So I think the best one is just to ban people just you know If you're not gonna hold real reserves, you can't sell insurance you revoke your insurance license I think plain and simple. So if a company makes a mistake, they lose their license tough luck those directors get blacklisted they can never be on another insurance company and Then you're hurting them. They're not gonna be able to make money in the future Then they're gonna be like, okay guys, let's take this regulation seriously compared to say just paying a fine Or having a scapegoat that they then seem to prison like the poor secretary or something like that No, I'm joking. Anyway, so now how does the cycle complete itself? The idea is that if people are boycotting Certain things or something like that. Then the reaction would be either. Okay. Let's either change the rules You know, let's make the rules better. Let's add some more rules Let's maybe change the regime. Let's maybe step it up from a self regulatory body to a statutory regular body All the reaction might find out that there's another crime that people are doing So this is where the the cycle comes in But the idea is that hopefully we have identified all of the wrongs the regime can change You know, and I think it's good. I think the most important thing when it comes to to regulations is something like flexibility Flexibility again, I'm not spelling things correctly today flexibility is very very important and I think specifically around technology improvements So we are going through a bit of a tech revolution a really awesome technology is something known as the blockchain and What makes the blockchain so awesome is that it removes the dependency on trust So before people we had to just trust that people were doing the right thing Blockchain is a way to remove trust. It's worked very well with, you know concepts like Bitcoin and other cryptocurrencies But I think blockchain can add a lot of advantages in administrative roles specifically around regulations. It can streamline everything Regulatory bodies need to therefore be flexible. They need to have an open mind They need to consider this technology and see how it can improve the whole situation Because that's the whole thing is that there's costs everywhere setting up a regime cost money You know, they have to have board meetings have to file documents have to pay people Administrative costs then setting up rules. They can start full innovation, which is a massive cost to society They can do this they can do that people have to read them people have to study dedicate their lives to it It's time. So there are lots and lots of costs then creating Reports or changing your behavior might require more funding Reports you have to hire all these junior act trees or junior accountants to Compile all these reports. That's their salaries that cost things then to go and punish them or to make sure that they actually did the trust Employing more people and there's just more and more and more and more cost cost cost cost cost cost cost That's what makes blockchain so cool is that it can streamline this process can reduce costs and can make society In a put it in just in a better place overall. So I think regulation is an exciting topic I don't want to go too much into the specific Specifics because that's when it gets very boring. It gets very boggy. It gets very vague It gets all weird and it's probably gonna change tomorrow Also, each country has probably a different set of regulations and rules each states in America has different rules and regulations So it does get really confusing if you want to try and go into the specifics But if you have a big overview like what I'm trying to show you here with this regulation cycle We can now apply this to the various Principles and you know investment management and the securities industry and we can see what is the best way to do regulation Because at the end of the day, I mean We do when you right these wrongs and regulation is a way to do it so there we go, I hope you guys enjoyed this video and Apologies for the spelling But I will see you guys next time with some more videos around regulation