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Why self-regulation for consultants – not a sledgehammer – makes for better financial regulation

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Criticism by the New York State financial regulator has led to calls for the statutory regulation of consultants working in the financial services sector. Advocates say this is the best way to ensure consultants give an independent view on the work of the institutions they investigate.

But statutory regulation is costly to set up and requires complex mechanisms to enable effective supervision and enforcement. It also relies on the belief that every future offence can be anticipated and regulated against – which it cannot. And the sheer volume and complexity of potential new regulations can create loopholes that shrewd operators can exploit. 

Leaping into statutory regulation of the consulting industry would be like using a sledgehammer to crack a nut. A more proportionate – and effective – response would be to develop a stronger self-regulatory code.

(To hear Andrew Hooke, PA Chief Operating Officer, discuss this issue on Business Daily – the BBC World Service’s international business news programme - click here.)  

Self-regulation can be developed over time to address key concerns

New regulation often needs to go through several iterations before it addresses all concerns satisfactorily. Amending the legislation, however, is difficult and time-consuming. As self-regulation is less rigid, it can be developed much more easily to fit the market need. And, if self-regulation proves to be insufficient, then statutory regulation still remains an option.

Self-regulation works in other industries

For any industry that knows it must safeguard its reputation at all costs, self-regulation can be extremely effective. Events in New York State provide a golden opportunity for the consultancy industry to develop a robust system of self-regulation, drawing on the example of industries such as engineering where self-regulation is a highly effective guarantor of quality and standards.

Using a ‘financial pot’ could guarantee autonomy 

Those calling for statutory regulation suggest that the financial link between consultants and the bodies they work with undermines autonomy. As regulated bodies such as banks pay consultants’ fees, charges of an “I’ll scratch your back if you scratch mine” relationship are understandable.

One practical way to guarantee consultants’ autonomy would be to establish a ‘financial pot’ (perhaps through levies on regulated bodies) to allow the regulator to fund consultants’ investigations directly and effectively become the client. A mechanism of this kind is already in place in the UK. Under the Financial Services and Markets Act 2000, the Financial Conduct Authority and the Prudential Regulation Authority have the power to order – and, crucially, pay for – an independent third-party review (often called a ‘S166’) of a regulated institution.

The UK regulator issued 113 review orders between March 2012 and March 2013. It might be worthwhile for US regulators to investigate mechanisms similar to S166 as a means of protecting consultants’ autonomy.

Self-regulation safeguards independence 

At PA, we recognise that any situation where consultants can be seen to be ‘bought’, or at least leaned upon, undermines the standing of our industry. Self-regulation is the most practical and effective way of safeguarding consultants’ independence and enabling consultancy firms to continue to make a valuable contribution to modern financial regulation.
To find out about our experience in developing and implementing regulation, contact us now.


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