In the aftermath of the global financial crisis, the financial industry has been constantly assaulted by a repetitive multiplication of intrusive compliance measures across each possible angle, from the client-side to the asset management, investments, all the way to the reporting to government entities.
As it is always the case with technocratic initiatives, it begins with noble intentions, wrapped in comforting labels, under the authority of science and moral virtues.
With no end in sight, they continue to add up layers upon layers on the top of each other, so that one can’t help echoing Monty Python’s absurd and silly sketch on “the Royal Society For Putting Things on Top of Other things” (Monty Python's Flying Circus, October 1970).
But unlike Monty Python’s silly sketch that had a clear benefit to society (laughers for mankind, revenue for its producers, recognition for its actors), to my knowledge there is no feedback mechanism attached to the compliance measures, no cost-benefit analysis, and, most important, no accountability whatsoever at the very-end of this process. You are rewarded for implementing the measures, making sure that they are being rigorously followed, or penalized if they aren’t, but there is no personal risk related to the quality of the measures per se.
Compliance is solving the compliance problem of being compliant, but it is not solving the real-world end-problem. A typical tick-box end station, in operation only for the sake of ticking the correct boxes!
Now, if the recent past would have demonstrated a significant benefit to all participants involved then we would raise our case, but it seems that we have achieved the exact opposite result. We might have fewer failures, but they keep getting bigger and more dramatic.
Indeed, our presumption is that the initiatives initially put into place to improve and protect the system end up having the exact opposite effect. Past a critical threshold the cure becomes way worse than the supposed disease.
Aside from the enormous cost they generate, these measures completely destabilize the system on a micro- and macro-level by diverting resources and priorities to other ends, while giving the false impression that everything is fine, because it has the label “compliant“!
In a 2020 post, “Crashing but in a compliant way“, we quoted the author Sam Vaknin, and his concept of the "passive-aggressive organization", where "means become ends and ends become means. Consequently, the original goals of such organizations are now considered to be nothing more than obstacles on the way to realizing new aims (...) the collective perpetuates its existence, regardless of whether it has any role left and how well it functions." (Sam Vaknin, Lidija Rangelovska, Malignant Self-love: Narcissism Revisited, 10th edition, 2015).
Why is it so? Let us take the case of the banking failures of 2023. In a way, we could argue that these were the first institutional victims of the lockdown measures of 2019 and their backlashes thereafter, in the form of an abrupt serie of rate increases in 2022-2023. But I digress as this is a topic for another day.
During the bank failures in March 2023, a week before that famous Swiss bank went bust, there was someone proudly posting on social media some ESG award that they had received. This anecdote was emblematic of the blindness (naivety might be a better word) affecting most of the industry, namely a total lack of priorities when running a banking institution, especially one about to go under (as the market had warned us for some time).
Now, you can be sure that everyone at these failed institutions was über-compliant. But the same can be said during the time of the Soviet Union, the GDR or the socialist regime of the third Reich. Most actors were indeed compliant, absolutely convinced to be doing good things, while reciting in unison their party's catechism. The trajectory of the ship did not matter that much, as each individual was absorbed by his tick-box bubble.
This example will take us to our other point, namely the misallocation of resources in the form of attention distraction. Whether it is DEI, ESG, sustainable this and sustainable that, compliance to infinity and beyond, or other virtue signaling exercices, these grotesque labels mislead us through a gargantuan deviation of capital (financial and human) towards ends aimed at being compliant rather than solving a real problem. Again, tick-box as a finite closed system!
It is understandably not surprising to see these measures being widely embraced, as it is easier to be bravely compliant than to solve real market issues. Moreover, there is something terribly misleading in the cozy comfort of being compliant, as it leads particpants to become complacent and loose track of the objectives necessary for the survival, let alone growth, of a business.
They could have stoped there, and that is bad enought, but no, if micro-managing the depth of uselessness wasn’t enough, wait, it gets even better!
At one point they came to the brilliant realization that the quest for micro-compliance wasn’t satisfying enough, so they decided to expend on to the other extreme of the scale, to aim at a higher calling, by redeeming humanity and the planet!
Meanwhile, busy on these two azimuths they seemed to have forgotten that they have a financial institution to run, which isn’t a small task to perform.
My point is not to make fun of this, rather it is to speculate that too big a distraction (however heroic) from your principal objective, can have dramatic consequences.
The attention being spread at the two ends of the scale, the infinite micro details, and the cosmic maco-dimension of saving the world. In between, the business of running a bank seems to have been relegated to a lesser priority, almost an annoying distraction.
We have had many demonstrations in the past of this experiment, the Soviet Union being the most prominent one. A seemingly stable system run by a group of experts can stay afloat for some time, giving the illusion of strength and linearity, but it ultimately implodes under its own weight of lies and contradictions. And no award could save them.
Friedrich von Hayek descibed it best, when ending "The Road to Serfdom"'s chapter “The end of Truth” by exposing the paradox of engineered process run by experts, ignoring individuals in favor of collectivism, eventually ending in its inevitable collapse:
“The tragedy of collectivist thought is that, while it starts out to make reason supreme, it ends by destroying reason because it misconceives the process on which the growth of reason depends.”