Frank Furedi

Irrational fears fuel stifling regulations

The image of the deputy Labour leader walking through her constituency in a stab-proof vest generated plenty of debate last week. Harriet Harman likened it to wearing a team kit, but the picture provided easy pickings for the Conservatives. William Hague, shadow foreign secretary, asked if she wore a clown’s outfit to cabinet meetings. Harman responded that she would not take fashion tips from a man previously photographed wearing a baseball cap.
But away from the yah and boo of Westminster, the image was symbolic of the wider aversion to risk in society - a subject debated at last week’s Fund Strategy Investment Summit. Frank Furedi, a professor of sociology at Kent university, argued that attitudes have changed over the past 20 years, with pessimism and irrational fear fuelling a culture of excessive caution. In the other corner, Alistair Milne, a senior lecturer at Cass Business School, proposed that a simple application of risk management remains prudent.

Furedi won over the summit delegates. But fear of the unknown is more visible than ever in the markets. Retail investors continue to move into cautious managed and protected products, despite the long-term arguments for holding equities. A desire to mitigate risk is also apparent at a higher level, with calls in Britain and America for tighter regulation of financial services, following the failures of Northern Rock and Bear Stearns.

In particular, the influence of foreigners, from “non-dom” individuals to sovereign wealth funds is under scrutiny. While some investors have welcomed the arrival of the funds, and the estimated $3 trillion (£1.5 trillion) of funding they offer, others are cautious. In a bid to soothe concerns and pre-empt the introduction of tougher rules, two of the funds are set to adopt a code of conduct created by the British Venture Capital Association.

The financial services industry has seen such clamp-downs before. Most notably, the imposition of the Sarbanes-Oxley Act 2002 in America came in the aftermath of accounting scandals at WorldCom and Enron. The act satisfied the public outcry for action, but consigned American companies to extra regulatory burden and led to the rise of London as a financial centre. The British government will face similar pressures in the months ahead. While extra protection may be required, it should remember that over-regulation can be stifling.

First published by Fund Strategy, 7 April 2008