In almost every country where the last financial crisis cut deep, there has been a major reorganization of the institutions of regulation. Perhaps the most dramatic changes so far have occurred in the UK. The UK’s unitary, separate Financial Services Authority (FSA ), created as recently as 2001, was abolished in 2013. It was replaced with a new regulatory structure consisting of the Financial Policy Committee and the Prudential Regulation Authority at the Bank of England as well as a separate agency, the Financial Conduct Authority. Similarly dramatic changes are envisaged in the US, though the new arrangement is still evolving. In Europe, as I write, significant changes are being envisaged for a new European Banking Union.

My instinct is that these reorganizations are akin to rearranging the deck chairs on the Titanic. None of the varied institutional arrangements at the time fared well against the iceberg of a massive boom-bust cycle. Moreover, the most elegant structures can obscure the primary objectives at the level of the financial system as a whole—one of the central themes of this book. It is understandable that in the depth of a financial crisis, with the public braying for blood, issues become personified. Politicians are attracted to, and distracted by, the “who” questions of regulation—often at the expense of “what” is being regulated and “how” it is being done.¹

While it is possible to discern clear successes and failures of financial regulation by country, they do not neatly divide by institutional organization. By virtue of escaping the worst outcomes of the Global Financial Crisis (GFC), the Canadian structure of a single regulator has been much lauded. In its case, the Office of the Superintendent of Financial Institutions, or OFSI, is separate from the country’s central bank, the Bank of Canada. For some, it has become the model of choice. Yet it is strikingly similar to the previous UK design that had been a spectacular failure. While no institutional structure existing at the time in crisis countries fared well, there are failings that are clearly rooted in institutional construction and it is possible to conceive of better arrangements. This is particularly important for emerging economies that have out-grown their existing institutional order and are looking for guidance from the experience abroad. At a minimum, given the amount of time, debate, and energy spent on getting the shape of financial regulation right, it is important to have a view on this popular topic.²

It is in the spirit of this book that we take a blank piece of paper and ask, if starting again, how we would design a system that addresses the problems that need to be solved without creating many new problems. Current regulation often seems alien to such an approach because it has evolved over a long stretch of time and has been molded by crises and the politics surrounding them. There has been little time for policy makers to dwell on what should be. Historical precedent cannot be easily dismissed either. Ordinary citizens buying stocks in private companies—some of the most volatile and uncertain of financial instruments—in a direct and unhindered manner runs counter to the spirit of much modern financial regulation. Indeed, the regulatory capital adequacy requirement of banking, insurance and pension fund institutions that hold equity assets is so substantial³ that they are being pushed out of the asset class that ordinary investors can freely buy and hold. But it would be unpopular, to put it mildly, if regulators retreated from this centuries-long practice and stopped retail investors from buying stocks so freely.

There are four important “who” and “where” questions to be addressed in this chapter. The initial issue is the vexed question of whether to have a single regulator or different regulators for distinct activities. Regulatory institutions have historically been split between bank and nonbank regulators. Securities regulation and insurance supervision, for instance, have often been separated from banking supervision, which is usually within the domain of the central bank.⁴ This is most stark in the United States, where there are a few federal regulators of banking activity— principally the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. Insurance companies by contrast are regulated separately in each and every one of the 50 states, the District of Columbia, and the five US territories that they operate in.⁵ Foreign insurance companies complain that the US regulatory structure is a barrier to competition from international insurance companies. Some would argue that is its raison d’être. Structure is as political as everything else regarding regulation.

The next and related question concerns where the perimeter of regulation lies: which companies are regulated, which are excluded, and why the lines are demarcated as they are. A subsequent issue that follows from this is what should be done about so-called shadow banks. These are institutions that are not traditional deposit takers nor regulated as banks but appear to be carrying out savings and investment activities that are strikingly similar to those done in banking. Money market funds are an example of such activities, but the perimeter of shadow banks is itself blurry.⁶ A further issue is how to position the relationship among the financial regulator, the central bank, and the Treasury or Ministry of Finance. Some financial regulators sit on their own. Other times they operate within central banks, and at times within Ministries of Finance. Often they appear to act as if they sit in each of these places simultaneously, or in none of them.⁷ I believe the “whom” and “where” questions previously outlined follow naturally from gaining clarity on “what” financial regulation is trying to achieve, and I shall briefly address this question in the next section to set our bearings straight.

What Are the Institutions of Regulation Trying to Achieve?

In Chapter 2, I argued that there are two primary objectives of financial regulation, namely consumer protection and reduction of systemic risk. Other objectives of financial regulation, such as maintaining market integrity, market confidence, appropriate incentives, or levels of transparency, can be placed under the umbrella of these two primary tasks. The main objectives are related but also separate, and the approaches required to achieve them are quite different. In broad terms, consumer protection is a bottom-up exercise, focused on protecting individuals. Its instruments are primarily a set of rules, rights, and guidelines, often resolving conflicts of interest and surrounding disclosures, as well as managing the reasonable expectations of retail buyers of financial products. It is an area rich with rights and wrongs backed by precedents and laws.

A classic example of consumers needing greater protection was the UK pension mis-selling scandal in the 1980s. Margaret Thatcher’s tax-cutting administration made the decision to shift a greater amount of pension provision to the private sector. This was incentivized by a rebate of national insurance contributions to those purchasing private pensions and by ample private incentives to the sellers. In the later scandal it was alleged that almost a quarter of the two million people who bought personal pensions (no doubt driven by commission-driven salespeople) left perfectly adequate pension schemes provided by their jobs. Of these buyers, some 90 percent were most likely unaware of the high but opaque costs of transferring out of their occupational scheme and that they would be, bizzarely, forfeiting their employer’s contribution to their fund.

Following this sandal and similar ones elsewhere, consumers that were affected received compensation, the firms involved were penalized and disclosure requirements expanded. Limits on fees and costs were also imposed and rules regarding how sellers are remunerated were tightened.⁸ Despite the huge number of consumers from the scandal in the UK, and the loss of public trust in financial intermediaries, there was no discernible systemic risk to the financial system, no stress on the payments system, and no run on financial institutions.⁹

Reducing systemic risk is a different exercise requiring a top-down approach focused on reducing concentrations of activity and connectivity. It is done through a series of incentives, often surrounding the amount of capital to be put aside for a certain activity. In Chapter 5 we discussed a typical macroprudential policy of raising the regulatory capital adequacy requirements for bank lending in a boom. These increased requirements can be on every loan or only those in the sector experiencing the boom. Another macroprudential policy is to lower the maximum loan-to-value ratios that banks can lend on a property without having to set aside greater capital. The issues addressed by a systemic regulator are macroeconomic or macrofinancial by nature and are shrouded in doubts and uncertainties. The tools are not rules of what is and isn’t permissible. Rather they are a set of incentives and disincentives that seek to tilt behavior. Riskier assets or times are addressed by higher capital charges that reduce the profitability of lending. Bans would be rare.

Incidentally, the exercise of setting macroprudential rules will have the effect of sometimes restricting access to finance, which is one of the reasons why, prior to a financial crisis, macroprudential tools were sorely unpopular. It may seem odd to us today but one reason why the authorities were slow to clamp down on the American boom in subprime lending was that back then it was seen partly as a way in which the previously unbanked were being banked. It was a measure of the success of capitalism in providing an opportunity for all.¹⁰ Who were regulators to stop that democratization of capital? This is an important riposte to those who believe, a little self-righteously, that financial crises are caused by the criminal few and by locking them up all our ills will be cured. There is no denying that there are people who did wrong and that the law should ensure that they are never allowed to do so again (see Chapter 11). However, it is worth reiterating the message of Chapter 3 that the booms that beget the busts are able to persist and swell because of the complicity of the many rather than the wrongdoing of a few.

In addition to posing a potential conflict, the skill sets and institutional and professional cultures needed are not the same for both of the primary objectives of regulators. What is required to enforce the legal protection of consumers, on the one hand, and to develop or adjust incentives that reduce the buildup of excessive concentrations and connections, on the other, is quite different. Although we are talking about issues of “professional culture”—that is, approaches and conventions rather than national culture and tastes—it still falls within the ambit of culture, which is something many economists would prefer to ignore.¹¹

A critical contribution to the failure of the UK’s old regime of putting consumer and systemic protection together was cultural. Bogged down by a wide mandate, the FSA became overly focused on enforcing legal minimums and this became the dominant professional culture. Insufficient attention was given to the culturally different task of trying to analyze where financial risks were being concentrated, transferred, or warehoused.¹²

Consequently, I believe it is judicious to have the two separate objectives of financial regulation addressed by two separate expert agencies. Each agency would have a clear mandate, effective powers, and useful instruments. There should also be provision for the agencies to reach agreement and compromise in those areas where there is a conflict concerning the effects of their instruments. We will return to this later.

Unitary or Separate-Sector Regulators?

The history of regulation over the centuries started with self-regulation by practitioners at specialist companies.¹³ Diversity of form and organization across different specialties of finance, like banking, insurance, and asset management, was therefore a defining feature of the boundaries of financial firms and their supervision. When these firms failed to protect both consumers and the financial system, many existing self-regulatory agencies evolved into statutory regulatory bodies partially government run, and then solely government run, always maintaining their preestablished specialties. Bank regulators were separate from insurance regulators, which were separate from securities regulators. If we had a clean slate and could start over, this is not where we would begin for at least three reasons.

In the modern age, the structure outlined invites institutions to cross the regulatory divide in search of an arbitrage. This behavior is commonly illustrated by analyzing the actions of AIG, a large general insurance company. AIG’s Financial Products Division originated credit default instruments. While this was effectively the same as selling insurance, because AIG appeared to the insurance regulator to be doing investment, in the form of trading marketable and highly rated securities, it was able to hold less reserves than if it had underwritten the same insurance in its insurance division, or if it had been a bank making the loans underlying these derivative instruments. When defaults arose, the losses in the Financial Products Division pulled down the entire company. Because these instruments underpinned several transactions across the industry, the possibility of a systemic collapse was raised were the company not “bailed out” by the Federal Reserve. AIG was duly offered a secured credit facility of $85 billion—the largest bailout of a private company in American history.

In similar vein to concerns about regulatory arbitrage, in terms of consumer protection it makes sense that this protection is consistent and even-handed across all financial products. Often banking products have insurance features, and insurance products exhibit investment features.¹⁴ If financial protection is inconsistent across financial products, because of enforcement by separate consumer-protection agencies for every part of the finance industry, an identical financial activity may be underprotected when sold by one institution but not another. It would be impractical, of course, to put consumer protection across all financial sectors under one roof if the underlying protection issue is different for different financial products, but essentially it is the same.

At a minimum, we must ensure that those unfamiliar with finance are given sufficient information to make the decisions that are in their best interests. It would be lamentable to have a situation where inadequate disclosures, information, explanation, or lack of reasonable understanding causes the average person to misinterpret a decision as in their best interests when the benefit really accrues to a commission-earning agent or distributor.

It is important to note that regulatory arbitrage is often driven by differential tax treatment. For tax purposes banking and insurance products are treated differently creating an incentive for the insurance industry to produce insurance products that are primarily savings products that carry a lighter tax burden since they are dressed up as insurance products. A single consumer protection agency may be better able to look through differential tax treatment to assess the underlying consumer protection issues than different consumer protection regulators in each sector.

In the wreckage postcrisis, losers always complain that they could not have known better. The old adage of “caveat emptor” or “buyer beware” looks woefully inadequate. This invariably pushes regulators to go one step further to protect consumers and impose a duty of care on distributors of financial products. Such a duty of care ensures that consumers do not purchase instruments inappropriate to their needs and that they have a reasonable understanding of the risks involved. I argued in Chapter 7 that the way consumers’ needs are assessed and the notion of asking them to identify their risk appetite does not provide them with adequate protection. A better idea, discussed in Chapter 7, is to require the seller of a financial product to assess the risk capacity of the purchaser. I merely want to reiterate here that it is both practical and desirable to have a single agency to ensure that the common underlying concerns of consumer protection are consistent and even across all financial products.

As discussed in both Chapters 2 and 7, protecting consumers of financial products is a specialized activity. Unlike buying a shirt, consumers tend to purchase only a few financial products in a lifetime, such as a mortgage, pension, life insurance, and a car loan. These decisions are potentially life changing if they go bad. Often they only go sour long after the seller has moved on and going bad has as much to do with the circumstances of the buyer as with the product. Given all of these reasons, I believe there should be a single consumer protection agency separate from the systemic regulator. It could be either a stand-alone body or a specialized department within a wider body concerned with consumer protection issues in general.

Should There Be One Systemic Regulator?

The systemic risk regulator should be a single regulator acting across the entire financial sector rather than being limited to certain types of banking risks or having responsibilities divided among bank, insurance or other regulators. I argued in Chapter 5 that the management of systemic risk in part requires incentivizing risks to flow to the place with the greatest capacity for holding such risks. That might, for instance, require incentivising liquidity risks to flow from banks with short-term deposits and therefore limited capacity for liquidity risk, to life insurers and pension funds, with multi-year liabilities and therefore a greater capacity to hold liquidity risks. The credit risks from these institutions could flow to banks that, by virtue of originating a wide amount of credit risks, can better diversify this risk.

Ensuring risk transfers that create systemic resilience rather than systemic fragility is nearly impossible for regulators sitting in industry silos, each with their own particular regulations, divergent risk definitions, and varying objectives. Of course, as the last crisis demonstrated, a single regulator, entrusted with guardianship over the whole financial system, can also fail. The system cannot be herded in the right direction if the destination is unknown. A single regulator operated in the UK but lacked a framework of where risks should be. Risk transfers were allowed to travel in a perverse direction with illiquid banks storing up illiquid risks and shedding credit risks to insurers who were insufficiently capitalized (or diversified) to take on those risks.

It is disturbing that post-GFC, governments have shown a tendency to address systemic risk issues by appointing the good and politically connected to “systemic risk committees.” Such committees are then asked to assess systemic risks and employ macroprudential tools based on their assessment. Throughout this book we have noted that financial crises and systemic risks arise as a result of the financial system doubling up on those activities perceived to be low risk and not those perceived to be highly risky. There is always a convincing story about why this time is different. Narratives abound about why, for instance, financial innovation has allowed risks to be better spread out than before. Other stories might argue why house prices in London, Sao Paulo, or Mumbai must always rise because supply is constrained by planners and demand emanates from an ever-increasing global elite.

Most people—including almost all those appointed to these committees—were caught up in these widespread views.¹⁵ Committees of the great and good cannot easily act as guardian angels against financial crises. This is an area where we need less discretion than previously exercised and a stricter adherence to a rule-based approach. Systemic risk regulators must specifically consider placing a drag on above-average growth in the quantity or concentration of risks that could be accumulated. They must also identify in whose hands risks are being held and assess the extent to which adequate incentives exist for a systemically resilient risk transfer across sectors. All this is vital for the creation of a financial system resilient against financial institutions that underestimate risks.

In Chapters 5 and 6 the approach discussed gave a single regulator the power to require all financial firms across every industry sector to set aside capital whenever a mismatch arose between the quantity of a certain risk and a firm’s capacity for holding that risk. The risk could be liquidity, credit, or market based. The capacity for holding risk could be by virtue of its funding or liabilities. A bank could reduce its capital requirement and boost its profitability by, for instance, selling liquidity risks to pension funds and life insurers and buying credit risk from them. This would only happen smoothly if insurers and pensions funds faced the same incentives managed by a single agency.

A systemic risk regulator could exist as a stand-alone agency or attached to the central bank. The argument for attaching it to the central bank is persuasive. The central bank is the main purveyor of liquidity in times of stress and will be at the forefront of any crisis response. In an unfurling crisis, time is of the essence. Precious time could be lost trying to get the central bank to act if it had not been, from the onset, intimately involved in both the regulation and monitoring of the failing institution from a systemic perspective.

In pursuing its other objective of setting monetary policy, the central bank will constantly make assessments and observations, and gain insights on the macroeconomy and availability of finance. This data is highly relevant to macrofinancial risk assessment. Occasionally there will be conflicts as well as complementarities between monetary policy and the management of systemic risks. Systemic risks frequently build up in times of easy monetary policy and then erupt in times of tighter monetary policy. A single entity able to wield two policy levers—interest rate policy and macroprudential tools—is better placed to strike this complex balance between the needs of the macroeconomy and those of the financial system. At a minimum, it will not act counterproductively because of miscommunication between two different sets of policy makers or a conflicting interpretation of the issues at hand.

A single systemic regulator managing institutions on the basis of their risk capacity—regardless of what they are called or what sector they claim to exist within—will capture the activities of shadow banks. When an institution is borrowing from short-term money market funds to invest in long-term loans that are unlikely to be liquid in times of stress. The regulator could demand diversification and capital to hedge this risk. However, the real challenge of considering how to regulate shadow banks is that while many appear to be doing banking, they are doing so with equity and not with retail cash deposits. This is systemically far safer than banking. It is banking with no leverage. The regulatory question is whether their clients understand that their investments are equity, and not a cash deposit, and that they can lose everything. Arguably, as long as they are not using leverage from the banking system, the concern that shadow banks are a systemic danger is overstated. Where they are using leverage from the banking system, this can be regulated from the side of the banks doing the lending. Perhaps the real issue of shadow banks has been misdiagnosed as a systemic risk problem when it is really a consumer protection issue.

When analyzing shadow banks and other “fringe” financial firms, a crucial challenge is deciding where the regulation boundary begins. Is it a regulated activity if you agree to lend your cousin $5,000 and ask him to repay it when he can? Surely not. But what if you have 50 cousins and decide to do the same for all of them? Several countries set 50 clients as a cutoff point above which an institution or activity must be regulated. Too low a number and regulators will be swamped with work of little impact while simultaneously making it tough to focus on activities that do impact the wider economy. Too high a number places consumers at risk. Fifty has been accepted as a reasonable cutoff point. Unfortunately, there is no scientific way of determining the correct number of clients or what the monetary threshold should be. It differs among countries depending on their level of financial development. The cutoff level used by a consumer protection agency should be far lower than that used by a systemic regulator given that the former is concerned with individual wrongs and the latter with systemic imbalance.

Finance consumers below the regulation cutoff are best protected through public education and advertising. Great faith is placed on “financial education”. However, I do not believe it offers much hope of success. In a world where highly paid, well educated, and accredited professional asset managers claimed not to understand the credit instruments they bought ahead of the last crash, what chance is there to teach ordinary folk how to better protect themselves? The only optimism arises from the anecdotal observation that ordinary people seem to have more commonsense than many professional asset managers.

Three Separate Pillars: Consumer Protection, Systemic Risk, and Financial Crime

Commentators often glibly complain that financial regulation prior to the GFC had been reduced to a box-ticking exercise. This is true, especially in the UK where some of the biggest mistakes were made. If we want that to change we need to ask why it developed in this way. During his chairmanship of the UK’s FSA, Sir Howard Davis successfully instituted substantial pay increases for supervisors. These were not, then, poorly paid supervisors left unrewarded or demotivated. Regulators and supervisors are also highly conscientious, intelligent individuals who would not actively chose a box ticking exercise. I believe a key cause of regulation becoming a box-ticking exercise has been the proliferation of the different types of risks that regulators are expected to manage. This includes the hugely expanded remit of anti–money laundering (AML) and anti–financing of terrorist activities (AFT). These activities require pervasive regulation rather than surgical strikes. Every single transaction in the banking system is potentially a suspect one.

The pervasive regulation required of that AML and AFT activities lends itself to comprehensive processes that filter everything so as to seize that one-in-a-thousand suspect transaction. Do you know your client? Is she the underlying client? Do you know the source of funds? Do you know the purpose of the transaction? Do you know whom the funds are going to? Is this transaction part of a series of transactions? Is there anything suspicious about this transaction? Regulating the financial aspect of criminal behavior is a fundamentally different process from regulating systemic risk or even ensuring consumer protection.¹⁶ Systemic risk supervision is about judging the balance of probabilities and consciously weighing up which risks could be taken without much consequence and which cannot. Being good at AML or consumer protection has no bearing on functioning as an excellent systemic regulator. Moreover, once you have engaged the pervasive approach of AML, it dominates everything, making it hard to stand back and observe the bigger picture.

Consequently, there should be a separate agency in charge of financial crime that is supported by reporting requirements and information sharing among regulators. The consumer protection and systemic risk institutions would then be left to pursue their respective tasks in a more focused and precise manner.

Conclusion

Institutional failure is often part of a crisis, and correcting the repetition of institutional mistakes may be the easiest part of crisis management. The evidence suggests that it is not helpful to have consumer protection, financial crime, and systemic risk managed in a bundle together. They are different activities with specific needs and professional cultures. Putting the lawyers in charge of systemic risk or leaving the economists responsible for consumer protection seems a guarantee of chaos. Finance has been criticized for being insufficiently regulated in the past. A more accurate characterization is that financial regulation has been ineffective, poor and with a blurred focus on objectives. Part of the blame lies with the regulators trying to do too much.

Regulating systemic risk or consumer protection by having single regulators across financial sectors rather than a separate regulator for each of banking, securities dealers, insurance firms or others would also be better than current arrangements. Not only is arbitrage reduced, especially regarding levels of consumer protection, but risk transfers across sectors that support systemic resilience are better monitored and incentivized.

My proposal envisages three separate and distinct agencies—an agency for managing systemic risks, one for consumer protection, and another dealing with financial crime. Each would be responsible for their sphere of activity across the financial sector. They could be a stand-alone agencies, though I think attaching the systemic risk agency to the central bank is sensible. It may also be wise to connect the financial consumer protection agency to a body tasked with general consumer protection. The financial crime agency requires the support of other law enforcement agencies and as such should have the appropriate links. I recognize the importance of allowing discretion as to how each agency pursues its specific objective, but history suggests this should be constrained by focused, rule-based obligations.

Too much time, effort and money is wasted shuffling around the institutions of financial regulation. Few institutional structures have moderated boom-bust cycles in the past. But some institutional structures and cultures seem to have exacerbated the challenges. We should not expect to find a single institutional solution to financial regulation, but we should strive to avoid the worst features of previous institutional arrangements.

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¹The reader will recall my exposition in Chapters 3 and 4 of the “Bad apple theory of financial crashes” that is attractive to those in power at the time of a crisis.

²The world over, issues of institutional structure are always interesting at a human level, as they are about jobs and power.

³We discuss this in detail in Chapter 6.

⁴This is often the case but not always. In the case of Trinidad & Tobago, for instance, and a number of other emerging economies, the central bank is responsible for insurance as well as bank regulation.

⁵States’ rights have a strong historical and emotional resonance in the United States. In 1945, the US Congress passed the McCarran-Ferguson Act, which reserved for the states the power to regulate and tax the business of insurance.

⁶In the United States, there is a live debate as to whether large asset-management companies are shadow banks and should be required to have bank-like levels of capital.

⁷I suspect that the regulator that is perceived as treading on the edge of everyone else’s turf is doing a more diligent, if less popular job than the one that is seen to be entirely self-contained.

⁸This discussion of the pension mis-selling scandal leans heavily on Chapter 4 in my earlier book with John Plender, All You Need to Know About Ethics and Finance: Finding a Moral Compass in Business Today (Avinash Persaud and John Plender, London: Longtail, 2007, pp. 54–55).

⁹A modest case could be made that the loss of trust in financial intermediaries reinforced the popular wisdom in the UK that the best investment is real estate. It can be carried out with tax incentives and leverage and without the management of intermediaries. This persuasion may have played a role in propelling the 1988–89 housing boom and subsequent bust. History would suggest, however, that no special accelerants are needed to fuel regular boom and busts in London’s property markets.

¹⁰In Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, NJ: Princeton University Press, 2010), Raghuram Rajan makes the point that the political bargain reached in the United States, where wide access to finance was a substitute to progressive taxation and a stronger social safety net, was one of the causes of the subprime crisis.

¹¹There exists a deep and old literature on the role of professional conventions and culture in economics, but it is a minority sport that today is mainly and most enthusiastically enjoyed in Paris. For further insights, see: (1) Olivier Favereau and Emmanuel Lazega, eds., Conventions and Structures in Economic Organization: Markets, Networks and Hierarchies (Cheltenham, UK: Edward Elgar, 2002); and (2) J. C. Sharman and David Marsh, “Policy Diffusion and Policy Transfer,” Policy Studies 30 (June 2009), pp. 269–89.

¹²See Evidence of the Chairman and CEO of the Financial Services Authority to the UK Treasury Select Committee, February 25, 2009.

¹³See Jeremy Atack and Larry Neal, The Origin and Development of Financial Markets and Institutions: From the Seventeenth Century to the Present (Cambridge, UK: Cambridge University Press, 2009).

¹⁴In part to avail themselves of the advantageous tax treatment of insurance policies versus traditional savings products, a number of insurance products have a “with profits” or investment component. This requires that they periodically share investment returns with customers who pay a greater premium than they might do if the product was solely insurance.

¹⁵This is to be expected. Those likely to spot that the cozy consensus is wrong may be viewed as too independently minded for collective decision making. Perhaps the majority who got it wrong do not wish to be regularly reminded of their miscalculation by the sight of those who did not. They might believe their job impossible if they must constantly defer to colleagues who got it right in the past for a variety of reasons, including sheer good luck.

¹⁶Perhaps more accurately, the ways AML and AFT regulation are currently carried out are different from looking for financial-system fragilities. The former is heavily focused on processes and right or wrong activities rather than a judgement of the balance of risks and probabilities. That said, it is not inevitable that AML and AFT regulation become overly process oriented. It may reflect politics more than technical factors. Process is also more open to manipulation by the most powerful. See further J. C. Sharman, “International Hierarchy and Contemporary Imperial Governance: A Tale of Three Kingdoms,” European Journal of International Relations 19 (June 2013), pp. 189–207.