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Self-Regulation Versus Regulation

By Martin Casals Iglesias, CFP

What are the differences between regulation and self-regulation? Adam Smith and John Nash can help us.

Adam Smith’s work is guided by the idea that economic agents in the search for their own interests will eventually achieve better results for not only themselves but also society. Smith’s vision was extremely important for economic development of nations since it encourages entrepreneurship.

The point is that the search for individual goals ultimately, in many stances, addresses the social problems and imperfections. Countries have figured this situation out for some time and their governments, through their various agencies, have ruled over society by imposing limits to economic agents. The difference between countries lies in the breadth and scope that each one interacts in free enterprise in order to avoid any excesses.

The Definition of Regulation

Somehow, every type of regulation is about finding ways to limit individual behaviors that can damage other social agents, as well as the system, as a whole. The 2008 crisis is a clear example of this phenomenon. Some financial market players, when pursuing their interests, eventually caused a serious financial and economic crisis, leaving their governments with only one option: an increase in regulation.

Self-regulation may look similar to the regulation made by government bodies. And in some ways, it is; considering it imposes limits on the actions of individual agents. However, the main goal of self-regulation is not to protect customers, but to use customer protection as a means to protect the industry that generated the self-regulation.

In the fifties, John Nash, supported by studies of John von Neumann and Oskar Morgenstern, came to interesting conclusions about human behavior. Nash said there are specific cases in which economic agents in the pursuit of better results for themselves, end up generating worse results for not only others, but also themselves.

The Effects of Self Regulation

Self-regulation has to do with preventing unfair, incorrect, inaccurate, or malicious practices which may result in short term gains, but can hurt the image of an entire professional group.

Thus, self-regulation is a protection mechanism of a group that seeks to build reputation and recognition. It seeks high standards of quality, branding, and positioning. It is critical in determining the form of action of a group that intends to be guided by quality.

Thus, entities that seek to ensure the construction of a particular profession – that of financial planners – is recognized and respected by their ethical standards and quality, must look at their self-regulation codes not as obstacles or mere formalities, but as a treasure, a pillar from which reputation and brand positioning will be built.

Reputation is one of those things that takes a very long time to be built, but can be lost in the blink of an eye. And when destroyed it is virtually impossible to be rebuilt. A correct and appropriate self-regulation can be of great help.

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