There are two quotes about financial services regulation that forever stick in my mind.

The first is that ‘regulation should be no greater than is necessary to protect reasonable people from being made fools of’ (Professor Jim Gower).

The second is that the purpose of regulation was to make sure that financial services businesses were ‘honest, competent and solvent’ (The Securities and Investments Board).

Both come from simpler times – in fact, they go back more than 35 years, when I worked at The Times newspaper and one of my patches was regulation.

Believe it or not, I really enjoyed the topic.

I was reminded of both because regulation in various forms is a very live topic in the asset management industry right now. Indeed, regulation has become a vast industry in its own right.

So you have to ask – has regulation gone way beyond the two quotes above? And if so, is that a good thing or not?

Exhibit A: ESG

One very live regulatory issue dominating the industry right now concerns – you guessed it – sustainable investing or ESG.

The collective headspace of asset management CEOs around the world is filled with what their firms say about ESG and if it matches what they actually do.

The US Securities and Exchange Commission (SEC), one of the most feared regulators in the world, is hot on this topic, having recently issued fines against two giant asset management arms – BNY Mellon and Goldman Sachs.

The fines are small in SEC terms – and trivial for the companies concerned – but the negative publicity and the consequent need to explain oneself to clients are not.

Bear in mind that it is not enough to make sure that current statements about your ESG practices match reality. In the Goldman case, the SEC went back to what was happening – or rather should have been happening – in 2017.

It is a fair bet that if the SEC is going back five years or more in these cases, then there will be other asset management firms whose sustainable investing explanations fell short of reality back then.

There was certainly a widespread belief a few years ago that marketing was ahead of reality. Three years ago, one of the true pioneers of sustainable investing said in a private Citywire briefing that he thought that only a handful of firms were truly living up to their sustainable credentials.

But there are areas where regulation has become confusing and therefore counterproductive. In the case of ESG itself, there are a multiplicity of standards, depending on different jurisdictions, which make compliance extremely cumbersome and expensive. And for what real benefit to the client?

Exhibits B, C, D…

The regulators, perhaps alongside the asset managers, should get together and agree on common standards.

Nor is this limited to ESG or sustainable investing. I recently met up with a senior executive of one of the world’s largest asset managers. He explained that there were three sets of incredibly detailed rules in the UK that cost tens of millions of pounds to comply with, which the US does not see the need to have and so do not exist there. That sounds bonkers to me. And a total waste of energy, time and money.

He felt that regulation has become a case of regulating to the lowest common denominator. It regulates for the crooks but draws in the blue-chip firms, which still have to go through all the hoops.

Could we introduce differential levels of regulation whereby well-capitalised, long-established firms do not have to demonstrate themselves to the same level as a smaller firm dealing directly with the public?

It’s in the latter area where a lot of the problems arise. Based on Citywire’s experience in the UK, my view is that regulators have been, and probably still are, insufficiently street-wise and curious about what is happening on the front line with smaller firms.

We have seen this happen more than once. Citywire’s editorial team, led by Dan Grote, was way ahead of the regulator on the Woodford debacle, a fact recognised by a parliamentary committee and the three awards for his coverage.

Then we had the fiasco over British Steel pensions and the Arch Cru asset management firm, which mis-sold itself as a cautious solution for investors.

I even rang the regulator to warn them about Arch Cru following a meeting with officials who had asked me to get in touch if I heard of a firm that needed investigating. I am still waiting for a call back!

Coming back to those quotes above, this is what in my view they primarily refer to. That regulation exists to protect the general public, to protect people who are in financial services terms, naive or inexperienced.

They absolutely need to be wrapped in protection and compensated if financial services firms take advantage of them or worse. Inducement rules, value-for-money tests, banning closet trackers – these get a big tick. But what we have built as well is a massive edifice of regulation – a global industry costing billions – where most of the focus is on applying oversight to processes and areas where harm to the private investor may be remote.

The event that argues against this would be the global financial crisis, where long-established blue-chip firms sold toxic products which blew up on clients and nearly brought down the whole system. Arguably the giants failed both my regulatory tests quoted above. It’s hard to argue that they were either honest or competent and some would have struggled with staying solvent.

I certainly think there should be more joined-up thinking among regulators, harmonising rules on sustainability and also making a risk assessment of which rules are totally necessary for the bigger more substantial businesses. Let’s not have process overtake the purpose of financial regulation.

Postscript: The more we can keep politics out of regulation the better, but that can be difficult in the US where enforcers can become high-profile politicians.

Take Rudy Giuliani. You may think of him as the mayor of New York or Donald Trump’s lawyer. However, I first came across him putting Wall Street bankers in handcuffs in the 1980s. That certainly got the approving headlines about being tough on Wall Street. But many if not most of those arrested turned out not to have done anything they could be prosecuted for.

Lawrence Lever is Citywire’s executive chairman