If there is one thing everyone in the financial industry can agree upon it is that they are buried under a mountain of regulation that makes their jobs much more difficult. It may come as a surprise to them that this is partly of their own doing.

It is not that the financial industry thinks there should be no regulation. They fully understand that there need to be rules to the game and referees. Nevertheless it seems each year brings more regulations and more belly aching about it.

Reading the article (below) “A Trading Tactic Is Foiled, and Banks Cry Foul” gives us at least part of the answer to why the government feels a need to pile on with the regulations:  the financial industry keeps finding ways to avoid them. It is the spirit of the law versus the letter of the law, and the financial industry will adhere scrupulously (usually) to the letter of the law while flouting the spirit. So, the government goes back and issues new rules to plug the hole and achieve their original aims. Rinse and repeat.

It reminds me of the first time I signed a mortgage. I figured I would go in and sign a piece of paper saying the bank gives me money to buy a house and I agree to repay it with specified terms.  Boy was I wrong. The stack of papers I signed was a bewilderingly tall stack.  After a while of signing my hand was getting numb and I asked my attorney what the deal was with all this and was it really necessary? She told me every piece of paper in there was to cover some loophole someone found at some point to stick the bank with the mortgage so the bank covers every base conceivable.  

Unfortunately I can think of no solution to this. A “play nice” law is absurdly broad.  Expecting the industry to adhere to the spirit of the law is naive. Everyone is looking for an angle to out-compete the next guy so as soon as person one bends the spirit of the law or regulation and gains an edge the next guy will do the same and then bend the rules a little more. It is a race to the bottom and only ends when they adhere as tightly as possible to the literal words of the law or regulation (and of course some few even go beyond that).  

Add to that the industry is endlessly inventive in finding loopholes and end-runs. A given individual may be hard pressed to find all the cracks but as a whole the group absolutely will find any and every niche possible in the cracks between regulations.

So, in the end the government and its regulatory agencies are in a never ending game of catch-up. It matters not whether the rules are deemed good or reasonable by the players and here is where the cycle repeats. Rule is issued, players bend the rule and the purpose of the rule is thwarted, new rule is issued, players complain about all these rules before promptly finding ways to thwart the new rule. Repeat ad nauseum.

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