Weekend Reading: Trust Me, I'm a Regulator

By: Stephen J. Scott , Founder & CEO of Starling

This piece first appeared in Starling Insights' newsletter on February 16, 2025. If you are interested in receiving our thrice-weekly newsletter, among many other benefits, please consider signing up as a Member of Starling Insights.

In October 2017,?Onora O'Neill was awarded the Berggruen Prize for Philosophy & Culture, recognizing those who "have profoundly shaped human self-understanding and advancement in a rapidly changing world." With the prize, and its $1 million cash award, the Berggruen Institute acknowledged O'Neill for her work on trust and — still more so — on trust-worthiness.

"I think there are at least three necessary elements of trustworthiness: honesty, competence and reliability," O'Neill explained a year earlier, in a?speech?delivered at the Federal Reserve Bank of New York October 2016 conference on Reforming Culture and Behavior in the Financial Services Industry.?"Reliability, in banking as elsewhere, is a matter of achieving competence and honesty not just on special occasions," O'Neill argued, "but with boring regularity."?

Banking is special

Because it is easier "to take advantage of others by untrustworthy action" in banking than it is in other, simpler institutions or realms of interaction,?O'Neill explained,?so too is it all the more important that, in banking, we devise a trustworthy means of evidencing trustworthiness.?

"We need to focus first on trustworthiness and secondly on the intelligible communication of evidence of trustworthiness to others," she argued in New York.?

And here she cautioned against the over-use of regulation as a means of seeking to devise trustworthiness. "Regulation has not always secured trustworthy behaviour," O'Neill rightly reminded, warning that heaping on regulatory mandates may encourage among banks "a focus on compliance with regulatory requirements at the expense of trustworthy performance of primary tasks, and the creation of perverse incentives—thereby tempting some clever people to game the system."

Excessive regulation, in other words, may?erode?trustworthiness.

Taking her argument further, O'Neill raised the concern than an over-reliance on regulation might lead to the false conclusion that Legal = Right. "This, I think, is why it is now widely agreed that we need to look not only to regulation, but to institutional cultures," O'Neill suggested. "Institutions with good cultures—and, specifically, trustworthy cultures—are likely to support and embed standards that matter." Standards of honesty, competence, and reliability, for instance.

Culture is critical

Continuing in this direction, in a January 2017?speech?delivered at The British Academy , O'Neill argued for three "categories of culture":

• Corrupt and destructive cultures, that undermine or evade honesty, competence, or reliability;
• Adequate cultures, that support compliance with law and regulation but no more (mere "compliance cultures," she called them); and
• Good cultures, which demand not only compliance with rules but clarity and engagement with a wider range of important standards for institutional life, and a willingness to check whether and challenge when desired standards of conduct are breached or flouted.

To my mind, this formulation highlights a critical, 4th element of trustworthiness which goes un-named but nevertheless enlivens O'Neill's speech: benevolence. As I've argued elsewhere, trust has both cognitive and affective components — we trust from the head and from the heart. Benevolence goes to the latter.

Cognitively, one wants assurance that trusted others are competent to deliver what is expected of them and that they can be counted upon to do so reliably. It's no good if those upon whom we depend are competent but unreliable or, worse, reliably incompetent.?

And affectively, one wants good grounds to believe that trusted others deal with us honestly, and that?they are genuinely motivated to at least try?to?advance our well-being. It's no good if those upon whom we depend are dishonest about their good intentions or, worse, honestly malevolent.

"Good cultures," as O'Neill defines them above, are thus put into evidence when an organization and its people work to assure that they are in fact?delivering?the good outcomes that they are competently, reliably, and honestly seeking to produce. And we witness such benevolence in their "willingness to check whether and challenge when" their proclaimed performance standards go unmet.

Failing the trust test

By such measures it seems abundantly clear today that, in many jurisdictions worldwide, the public and their elected representatives have concluded that regulators are failing the trust test.

The UK's Financial Conduct Authority (FCA) offers two recent examples. Earlier this month, the House of Lords Financial Regulation Committee?delivered a stinging rebuke to the FCA's plan to "name and shame" firms under investigation, calling the plan "an abject failure." The criticism comes at a particularly sensitive time, with the regulator already facing pressure from ministers who claim that it is stifling economic growth through overweening regulatory burden.

Adding fuel to the fire, last week the FCA?announced a controversial new email retention policy, under which it will begin to delete most staff emails after 12 months. While the regulator maintains this change would allow it to retrieve important emails more efficiently, a leaked internal document suggested that the new policy was instead intended to reduce the "legal and reputational risk" that the regulator faces. Critics argue that the policy would intentionally frustrate efforts to hold the agency accountable for its decisions and actions.

In sum, the FCA's plan to name and shame firms is deemed to be malevolent. Its plan to delete potentially incriminating emails is taken to demonstrate its dishonesty. And while the FCA stands accused by some of its own workforce of tolerating a "toxic" culture, some Members of Parliament?contend that the regulator is so unreliable and incompetent that it should be wound down.

The FCA is not alone, of course.

In the weeks since Donald Trump took office in the US, the Consumer Financial Protection Bureau (CFPB) has been?ordered?to stop work. The administration is reportedly looking to split up, shut down, or to otherwise?reorganize?both the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Meanwhile, there is open speculation that the Federal Reserve Board of Governors may?retire the role?of Vice Chair of Supervision.

In the US, the Equal Employment Opportunity Commission, the National Labor Relations Board, and the Securities and Exchange Commission are also?in the crosshairs. And in the UK, the head of the Financial Ombudsman Service recently quit her post, the Chair of the Competition and Markets Authority has just been?ousted?for a perceived failure to embrace the Starmer government's push for growth and competitiveness, and Business Secretary?Jonathan Reynolds?is said to be exploring scrapping or merging various financial regulators.

I hate to be an "I told you so" …

It has long been true that the regulatory pendulum traces a steady arc between zealous and lenient. Deregulatory fervor is on the rise?in Europe?as well, we note, as today's popular demand for growth and competitiveness has overtaken yesterday's post-GFC emphasis on safety and stability. But what we're seeing now — across the globe — is less so antipathy towards regulation and more so animosity towards regulatory bodies and regulators themselves. Why?

In our 2024 Deeper Dive report, "Physician, Heal Thyself," we warned that stakeholders are increasingly demanding that regulators demonstrate the same standards of accountability that they assert among those who lead the institutions that they oversee. This includes demands that those institutions demonstrate "good cultures," as Onora O'Neill would define such.

How, then, to explain the culture?crisis that enveloped the FDIC last year? Or criticisms regarding staff burnout and questions concerning operational effectiveness raised by staff at the European Central Bank? Or parliamentary findings that the Australian Securities and Investments Commission (ASIC) acts with?insufficient transparency? The list goes on.

In our?"Physician, Heal Thyself"?report,?Fed Governor Miki Bowman rightly argued that?"Accountability is no less important for bank regulators than it is for banks."?Regulators must model the ‘good culture' that they insist others demonstrate, and they must produce the good outcomes that they were constituted to deliver. It is right that they be held to account when they fail, whether in the spirit or in the flesh.

"It's great to have colleagues with a strong sense of public duty — but that is simply not enough,”?past FCA Chair Charles Randell ?observed?in our report. "And confronting a regulator with evidence of its impact (or lack of it) can help to move the culture from feeling good to doing good.”

In the 15-years since the Financial Crisis, financial sector regulators have perhaps grown used to the belief that their public service mission draped them in sufficient presumptions of legitimacy. But as recent events demonstrate, such legitimacy must be continually earned and re-earned.

"Life gives you ample opportunity to learn and relearn the lesson of humility," Fed Vice Chair for Supervision Michael Barr remarked last September, after?conceding over-reach and capitulating on his deeply unpopular proposal to raise capital standards on US banks. "It's time to fight back," JP Morgan CEO Jamie Dimon insisted last October. "We don't want to get involved in litigation just to make a point, but if you're in a knife fight, you better bring a knife and that's where we are."?Last month, Barr?stepped down from his Fed Vice Chair role.

If I had any friends, they’d tell you I’m terrific

The defenestration of regulators appears far from a passing fad. Indeed, recent events seem to betoken?far more to come?in days near at hand. What might be called?Operation Clean Sweep?is ostensibly aimed at promoting?economic growth. But it is less clear to me that this is what current efforts will in fact achieve — and the risk of backfire is enormous.

Economic vitality requires investment, and investors grow timid amidst overmuch uncertainty. Markets thus place a premium on tools and systems that work to reduce uncertainty and to provide assurance to those who would put their capital at risk. Imagine bond markets without ratings agencies, consumer credit issuance absent credit scoring mechanisms, stock pricing where company accounts go without independent audits.

Without such assurance mechanisms, every transaction would require more extensive due diligence, every commercial relationship would demand additional verification, and every financial innovation would face heightened skepticism. This "trust tax" would act as a drag on precisely the kind of economic growth that critics of regulation are seeking to promote.

Regulators play a critical role in maintaining such systems of assurance and contributing to what economists refer to as the "transaction efficiency" that such assurance mechanisms afford — the ability to conduct business rapidly and confidently because core questions of institutional soundness have been credibly addressed by trusted overseers.

If regulators (or regulatory bodies) are deemed to be failing in this function or, worse yet, acting at cross-purposes with it, then it is wholly understandable that stakeholders would react with frustration and demand change. But what we are seeing today is not a move towards reform and revitalization but, rather, bloody-minded mobs bearing pitch-forks and torches at night.

Politicians may win points with an aggrieved public through their current regulator-bashing. But after spleens are fully vented, what then?

If history is anything to go by, once the?meddlesome?regulators are removed, the public (and the markets) will continue to?seek?assurance mechanisms, and they will rightly look to those who tossed regulators onto the ash-heap.?This will leave the political class exposed to?accountability for the inevitable future failings.

But politicians enjoy the perks of the bully-pulpit and can be counted on to deflect future public ire away from themselves and onto the nearest obvious target: the leaders of the private firms who are today celebrating the demise of their bothersome regulators.

Many may be just fine with that and those of a more libertarian bent will no doubt argue that this is just how things should be. But I’m betting that more thoughtful corporate chiefs will prefer that some?doughty?regulator stands between them and the red maw of political predators.?

Closing the Assurance Gap

As we've argued previously, the post-Crisis regulatory framework was built on public trust that has eroded significantly. Rebuilding that trust will mean more than structural reorganization or political repositioning. It will demand a fundamental rethinking of how regulators operate, demonstrate their value, and earn the "social license" to continue providing their essential economic function.

Regulators must therefore seek to rebuild trust across the four dimensions discussed above:

• Restoring perceptions of honesty will require the adoption of transparent, defensible metrics by which regulatory performance can be assessed for impact rather than intent. As Charles Randell argued in our Deeper Dive report cited above, regulators must move beyond feeling good about their mission to demonstrating concrete positive outcomes that would not have been achieved absent fulfillment of the regulatory function.
• Benevolence must be demonstrated through actively seeking to develop collaborative relationships with supervised institutions while maintaining appropriate independence. The current adversarial dynamic serves neither regulators, the regulated, nor the aggrieved constituents and consumers who are increasingly exasperated with both.
• Reliability is called into question when regulators hold themselves to standards of conduct lesser than those which they impose upon others. That such gross unfairness would be permitted suggests that any number of other absurdities might also be. Rather, regulators must demonstrably embody the culture and conduct standards that they assert.
• And competency requires a focus on core responsibilities where regulatory expertise is most valuable and can be most clearly demonstrated. This, in turn, will demand that regulators seek to develop a more trustworthy means of evidencing their trustworthiness, and we’ll have more to say about that in the coming months.

Achieving the foregoing will require fundamental cultural change among regulatory agencies — the very type of cultural transformation that they frequently demand of others. But without such, we risk entering a period of decreased regulatory effectiveness precisely when economic and geopolitical uncertainties demand the opposite. No one will benefit by that.