Transparency

Citizens should easily access information and data about the financial sector and its evolution – including the actual impact of regulation. Financial firms should disclose what they are financing and how much they are charging.

What’s the problem?

If you go shopping for a shirt you can see immediately if it fits, if it’s too expensive, if it has a fair trade label etc. It’s not the same with finance. How can you know what it will cost you if some of the charges are hidden, such as trading costs in an investment fund? How can you estimate the true costs of fees that compound over years? How can you know if the money you invested is funding a farm or a landmine factory? Unlike markets for everyday goods, markets in finance cross time and distance in ways that are hard to follow. Where consumers are left behind, the financial sector cleans up, or finances the wrong things.

Policymakers have a similar problem. They take care to pass good regulations but rarely know if the impact on society is positive or negative. It’s not only about unintended consequences, it’s also about looking for the wider impacts on society and reacting when they do not turn out so well. What’s more, as it’s not always easy to know how policymakers go about their business, more effective regulation would include a more transparent system of making and enforcing control over financial firms.

 

What’s so bad about that?

It means we cannot direct money as we’d like, for example to activities that have a positive social and environmental impact, as well as turning a profit.

Policymakers may not know enough about what banks are doing, where the risks are, or where investments are going.

It means we give huge amounts to financial middlemen in fees and costs, so our savings are diminished. For example, in some products paying 1% in fees could cost a millennial more than $590,000 in sacrificed returns over 40 years of saving. No wonder the financial industry pays so well!

Policymakers don’t track the full impact of financial regulation on citizens if they are only allowed to look at narrow impacts such as the price of certain investment products, or the costs to financial firms. Yet the social and wider economic impacts can be huge. Why not look at the impacts of regulation on whether people have enough money to retire on – is the gap getting better or worse? Or whether products are leading to people being evicted from their homes – is it getting better or worse? Or whether banks are lending to productive, sustainable activities – is it getting better or worse?

 

What’s the alternative?

The alternative is to demand proper transparency, the cornerstone of every market. Financial firms must disclose which areas and activities they are lending to and investing in, how much they are charging, including trading and other costs that are often hidden.

Their reporting requirements should reflect the key objectives that society, via elected representatives and stakeholders, have for the financial system and society as a whole. Their disclosures should be available for policymakers to assess the social impact of regulation on these objectives.

 

How will it help?

Better transparency and disclosure will help us as citizens and consumers to navigate the financial sector without getting ripped off or inadvertently financing landmines in warzones.

It will help policymakers to steer the development of the financial sector to better meet its social purposes.

 

What steps could we take to get started?

  • Make firms and public finance institutions disclose a lot more information about where their money goes e.g. where and to which sectors of the economy.
  • Increase transparency by ensuring carbon disclosure for portfolios (similar to France’s Article 173 rule).