Key points:
1. The recent financial meltdown can be interpreted as a regulatory failure; a cornucopia of government and private agencies meant no one was in charge.
2. FINRA (the industry’s self-policing arm) understands that if it does not, a. get better and b. get better at telling people they are getting better, they are likely to be regulated out of existence.
3. The latest communication campaign takes a page from the Consumer Reports playbook and has a good chance of success.
Who’s the most important investor on Wall Street?
Before we get to that, let’s retell the story of Ian Thierman. He’s a 90-year-old California man who, by all accounts, has led a pretty disciplined life. He survived the Great Depression, so he knows a thing or two about saving. He survived World War II, so he understands how to sacrifice. And he survived Y2K, so he knows how not to get caught up in hype.
But all that experience wasn’t enough to protect Mr. Thierman from one of the best con artists in the business: none other than Bernie Madoff. After losing his life savings and being forced to abandon retirement, you’d think Mr. Thierman would be bitter. As perhaps a lesson to us all, he says he’ll make it through this, too. (And we smart Minnesotans need not look too far for our own mini-Madoff. Sleazery is not just a dished served on Wall Street.)
That said, Mr. Thierman is asking some tough questions.
Most pointedly, who is watching the proverbial hen house?
As it turns out, a variety of foxes have been put in charge.
The Securities and Exchange Commission plays a role. So does the New York Stock Exchange. The Federal Trade Commission and the Consumer Protection Agency have their paws in it, too. Throw in the Better Business Bureau and the Federal Reserve, and it’s little wonder we didn’t catch Bernie, Tom, or Denny until it was too late.
When everyone is in charge, no one is.
I am no political junkie, but even I can tell there is an inevitable push to centralize consumer financial protection. Sure, the industry will grumble, but it’s their own fault for ineffective self-regulation.
Ahead of any move by Congress, the Financial Industry Regulatory Authority (FINRA) is working hard to answer my initial question. So who is the most important investor on Wall Street? FINRA says it’s you.
And lest you think FINRA is some sort of government agency, it just sounds that way. FINRA is the successor of the National Association of Securities Dealers and an industry-spawned regulatory group. Their communication objective is quite simple: If they can convince you to trust them enough to protect your interests, the political will to impose regulation will falter. Because if the government gets into the act, FINRA’s influence—and even its legitimacy—comes into question.
Solution: the FINRA Protects campaign.
FINRA believes that the best way to protect the financial consumer is education. It is not to prevent the consumer from making every conceivable financial mistake, but making sure the consumer understands the risks, and brokers do not mislead their clients.
This latest round of communication materials goes a long way to distance itself from a broker-focused, voluntary, quasi-governmental agency and transform itself into a protector-of-the-little-guy watchdog consumer agency in the mold of Consumers Union, the publisher of Consumer Reports.
In their case, I think the strategy is working.
A few reasons: First, if you weren’t really diligent, you’d think FINRA was a government agency. The communication materials don’t really dispel that perception, although they certainly do not claim to be part of the government. Ask the average person who sees the campaign, “Is the financial investing process regulated?” and they’d likely answer “Yes.” And they would be forgiven for thinking Uncle Sam was behind it.
Second, FINRA has been working hard at licensing, testing, and publishing—all with the end goal of building transparency, much like the folks at Consumer’s Union do with automobiles, flat-screen televisions, and toaster ovens. Case in point: documenting—in detail—of nearly $1 billion in bilked money that has been returned to investors.
Finally, the industry has an incentive to see FINRA win. Government regulation is a politically messy and sometimes counterproductive process. Better to have the experts write the rules, they say.
It’s hard to argue with the overall messaging in the FINRA campaign, or the bevy of tools and resources they make available. It’s also easy to say the industry has a painful credibility gap.
Be that as it may, whatever it takes to keep the foxes out of the hen house seems like a step in the right direction to me.
Related links:
“FINRA Protects” Web site
Bernard Madoff Victims Web site
Consumer Reports summary of regulatory reform initiatives
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