The case for explaining regulation and supervision to all

At the height of the financial crisis, a survey showed that most young adults would rather go to the dentist than listen to a banker. That’s a painful finding on various levels. Arguably the financial sector lost the trust of the general public during the crisis. But there is more to this. Nowadays, people, especially the young generations, have ample choice of where and how they get information and which sources they trust. Generally they trust those who speak to them in relatable language. Those who use unfamiliar technical jargon will not be understood and not be trusted.

There is a clear co-relation between accessible information, good explanation and speaking people’s language on one hand, and customers and businesses making informed decisions and confident choices on the other. Greater understanding leads to greater trust. That’s why regulators and supervisors also need to explain and communicate what, why and how they do what they do beyond their immediate stakeholders—banks, investors and markets. No doubt that is a challenge. Why would the general public need to know about—let alone be interested in—some new regulation or supervisory guidance for banks when the economy is humming along and the banking sector seems more or less stable? Many authorities assume that surely it is sufficient that the banks, investors and markets are informed.  But that’s not enough.

During the financial crisis, people not only lost confidence in the banks, but also in the regulatory and supervisory system. Events such as the Icesave crisis that hit UK and Dutch depositors particularly harsh or the U.S. subprime mortgage crisis that—among others—financially ruined  Norwegian municipalities,  made people doubt that the system was prepared for these global effects. The European Union responded by creating institutions on the European level to move toward a more harmonised and consistent system. It is now up to regulators and supervisors to explain the advantages of this system, the objectives and outcomes of their activities, and how it all benefits Europe’s citizens.

The public at large, which includes depositors, borrowers, savers, investors and entrepreneurs, should have a good understanding of how their banks are regulated, who keeps taps on them, and how. The more people generally understand how regulatory and supervisory institutions function, and what they do, the more they will understand what these ‘watchdogs’ are—or should be—doing during  periods of crisis. And if these institutions function as they should during a crisis, then people will come to recognize that and continue to trust them.

The often-cited appeal to “mend the roof while the sun is shining”, which in the first instance refers to policy action and crisis preparedness, can be extended to transparency and communications. Maintaining a steady flow of information and explanation to the public at large during non-crisis times, in accessible language and through engaging communications, will prepare the ground for more effective communications during periods of crisis.

Incidentally, many authorities are doing exactly that with initiatives—such as this blog by the SRB—to provide an answer to the simple question of why people should care. Efforts range from regular features explaining topics in an accessible manner – with visuals and simple language – to close cooperation with schools and universities to improve financial literacy. Digital innovation offers ample opportunities to reach different audiences, especially the younger generation. For example, in ECB Banking Supervision, we are tailoring information to newcomers via our feature “Supervision.Explained.” We also offer more contextual information to the banking industry through our “Supervision Newsletter” and we provide detailed data, documents and disclosure for the experts via dedicated webpages on core tasks such as the Supervisory Review and Evaluation Process.

Most regulators and supervisors are legally required to be transparent and accountable, effective communications, however, goes beyond what is required. They need to make an effort to understand their audiences so they can make themselves understood. That will help build credibility and trust. Of course, the decisive ingredient for any authorities’ credibility is its activities—its policies and operations. So they should do what they say and say what they do. Because the more the public understands, the better it can engage—whether it is through support or probing questions. Either way, we should welcome this engagement. Lifting public engagement on financial matters above the pain threshold of going to the dentist should be doable.

About the SRB blog: The blog is a forum, purely for informational purpose, for the views of the Single Resolution Board’s (SRB) Members , Staff (SRB) or other officials from the ECB, or EU institutions, etc. as well as of guest writers from academia, on current financial and policy issues. The views expressed are those of the author(s) and do not necessarily represent the views of the SRB. These views should not be perceived as rendering any kind of financial advice and do not imply/promote the adoption of any particular financial position/financial behaviour.