Cobbs Paradox

Cobbs Paradox could be another descriptive for the regulation of financial services in the UK today.

Cobb’s Paradox states, ‘We know why projects fail; we know how to prevent their failure – so why do they still fail?’

Thirty plus years of regulation with five different regulators and actually, there is an answer, but the question seems to have become unpopular.

As an industry, a regulator cannot prevent every product or advice failure, but a regulator should know enough to prevent most of them if they use what they know smarter?

The use of the ‘Rumsfeld’ argument- There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know” could be an interesting starting point.

Let’s say the FCA are perfect at estimating the probability of better outcomes success. With an estimated 75% probability of success 25% are going to fail some of the time, but they can’t prevent or predict which of the individual ‘outcomes’ will ultimately fail.

So, if you can estimate the probability of success for a universe of ‘outcomes’ and your estimates correctly predict the success/failure ratio of that universe of ‘outcomes’ over time, then you have, essentially, prevented project failure to the maximum extent possible.

But you still have failed projects.

The FCA collects huge amounts of data from firms. Data holds all sorts of interesting opportunities to be explored, and not in the way most would expect.

Data can take many different forms. Regulators are often asked what they do with it all.

The answers may be obtuse, but you can be sure that data can be looked at in so many ways to throw up trends, habits, behaviors’, attitudes. It can be searched and analyzed in simple forms; it can be searched and analyzed in highly complex ways.

This all no doubt builds a very detailed picture of advisers and consumers, their attitude to service and risk management.

The FCA correctly requests data from companies in a bid to understand the markets it is tasked with regulating.

Financial services companies are of course also obliged under law to provide data to the FCA under certain circumstances. For example, under the EU Markets in Financial Instruments Directive (MiFID), financial services companies that outsource data processing activities are generally required to ensure that regulators have “effective access” to data for auditing purposes.

In future the FCA said that the data it collects will be “effectively governed and controlled” and “clearly specified”.

It said it would put review systems in place to ensure it stopped collecting data from businesses where “it no longer meets our needs”.

What all that means is not entirely clear, but to quote another ‘Rumsfeld-ism’

“If you try to please everybody, somebody’s not going to like it”.

 

www.panaceaadviser.com

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