When excuses are ruled out
29 Jun 09
The debate over MPs’ expenses suggests that the case for principles has never been stronger
by Douglas Nisbet
News coverage regarding the expenses claims of some of Westminster’s elected representatives has been both astonishing and depressing. We will all have our own view on what individuals should be allowed to claim for. I’ll nail my colours to the mast. If I had a moat, I’d pay my kids to clean it out of my own pocket!
It is the “case for the defence” put forward by the MPs, as much as their individual claims, which interests me. By and large, the most common explanation that I have heard has been that what they did was consistent with the rules. This brings us neatly to the central tenet of an ICAS project with which many of you are familiar – Principles not Rules: A Question of Judgement.
For the uninitiated, here’s a quick summary: regulation by rules invites compliance with the detail rather than the underlying objective and the more extensive the rules, the easier it is to lose sight of the objective. In the case of MPs, the rules could have been more effective with an underpinning principle, perhaps something like, “would I feel comfortable if this appeared in the Daily Telegraph?”
In fairness to the parties at Westminster, they now recognise that change to the expenses system is urgently required, albeit the reaction only came following media disclosure of the claims. Nonetheless, new rules will undoubtedly follow, hopefully with some strong principles attached.
Clear parallels exist with the world of business. The finance industry also seeks solutions to a crisis, and one of a greater scale. Using banking as an example, compliance with the rules was anything but helpful. Banks held capital sufficient to comply with the Basel regulations and regarded that as adequate for their business needs.
Subsequent “stress-testing” around the world suggests that previous judgements on capital adequacy were optimistic. Of course, holding less capital made the banking sector more flexible and helped to lead us to an unprecedented era of cheap credit. In hindsight, rules made the “race to the bottom” easier for these institutions.
New rules will come, in finance as well as politics. They will need to maintain stability, prevent a repeat of the banking crisis and guard against future shocks to the system. To be effective, their adherents need closer supervision than ever before, and a big part of this supervision should be the reinforcement of the principles that underpin these rules. Without this supervision, I suspect that a culture of complying with the detail, rather than the spirit, would take place.
Supervision is fundamental. In any environment, it can be hard to stay honest when you see competitors pushing the limits of regulation and profiting by sharp practice. The role of supervision should be to ensure that the principles that underlie rules are being applied evenly across industry without stifling innovation or excellent management. That would provide confidence that the behaviour of business is being monitored and that, not only should the rules be complied with, they actually serve a useful purpose to the business and its customers.
Oscar Wilde said: “I don't like principles. I prefer prejudices.”
The behaviour of some MPs and some bankers has led to lots of the latter in the minds of the public. Sorting out the mess in parliament and in finance will mean ensuring effective oversight of adherence to the former.