Words without teeth

A few years ago, Prime Minister Narendra Modi told a joke in Parliament, satirising the previous government's fondness for rights-based legislation. Two friends drove into the jungle to hunt a tiger. At some point, they decided to stretch their legs and take a walk before reaching tiger territory. They got out of their vehicle and were strolling around when they suddenly found themselves face-to-face with a tiger. Now, they had left their guns in the vehicle. One of them had a bright idea. He pulled out his gun licence from his pocket and showed it to the tiger. See, I have a licence.

The joke works because we all understand, instinctively, that a piece of paper has no power over a tiger. The tiger does not care about your legal rights. The tiger will do what tigers do.

The world has been talking a great deal about International Law lately. The American actions in Venezuela and the threats regarding Greenland have provoked an outpouring of commentary about sovereignty, the UN Charter and the rules-based international order. Legal scholars have written learned articles. Governments have issued stern statements. Social media is awash with righteous indignation about violations of established norms.

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I find myself in complete agreement with the substance of these arguments. The principles being cited are sound. The legal frameworks being invoked are legitimate. And yet, I cannot help feeling that much of this commentary fundamentally misunderstands what laws and regulations actually are and how they work. Too many people are waving their licences at tigers.

Here is the uncomfortable truth that applies equally to international affairs and to financial markets: words on paper have no power whatsoever. A law, a regulation, a charter, a treaty – these are merely arrangements of ink. They cannot physically prevent anyone from doing anything. They cannot reach out and stop a powerful actor from taking any action they choose.

What gives laws their force is not their eloquence or their moral clarity. It is the certainty of consequences. A law works when potential violators know, with reasonable confidence, that breaking it will result in punishment that genuinely hurts. Remove that certainty, and you have nothing but an elaborate exercise in wishful thinking.

This brings me to the world I write about every week: financial regulation in India. We have an abundance of regulations governing the sale of financial products. SEBI has rules. IRDAI has rules. The RBI has rules. These regulations are frequently updated, refined and expanded. Whenever a new scandal emerges, the response is predictable: let us have better regulations, more comprehensive disclosure requirements and stricter compliance frameworks.

Yet mis-selling continues unabated. Insurance agents continue to push expensive endowment policies on people who need simple term insurance. Bank relationship managers continue to sell complex products to customers who do not understand them. Distributors continue to recommend funds that maximise their commissions rather than serve customer needs. Stockbrokers continue to shepherd their clients towards derivatives trading, fully aware that this is a game rigged against the retail player. SEBI data showing that 90 per cent of derivatives traders lose money has done nothing to stem the flow of new victims into this casino.

Consider a post I came across on X recently. A woman described how her elderly relatives in UP, whose son works in Singapore, received some funds in their bank account. The bank immediately began pressuring them to buy an insurance policy. The son told them he was abroad and would handle the matter when he returned. The bank did not stop. Their staff went to the parents' home, demanded signatures and a cheque and left. Imagine elderly people, neighbours gathering to see what the commotion is about, stress everywhere. The pressure was so intense that the old man's health deteriorated. All this for a sales target.

This is not an isolated incident. It is standard practice. And the people doing this face no real consequences.

Why? Because the consequences of violating regulations are trivial compared to the profits to be gained. A fine here, a warning there, perhaps some paperwork – these are costs of doing business, not genuine deterrents. The calculation is simple: if the expected penalty for cheating is less than the expected profit, cheating will continue.

What would actually work is enforcement that causes real damage. We need violators to lose their licences permanently. We need the most egregious offenders to face financial ruin. We need some of them to spend time in prison, publicly and visibly. We need the consequences to be so certain and so severe that no rational actor would risk them.

In fact, if something like this bank harassment happens to someone you know, and you are a resourceful person, I would suggest bypassing the financial regulations machinery altogether. File a criminal complaint for cheating with the police. If enough 'relationship managers' have to spend even a few hours dealing with the police, explaining their actions, sitting in a thana, we might get an outsized impact. The financial regulators move slowly and impose toothless penalties. The police, whatever their flaws, can make life immediately uncomfortable.

Consider how effectively traffic rules are enforced in cities with strict automated systems and heavy fines. The rules themselves are not particularly sophisticated. What makes them work is the near-certainty of being caught and the genuine pain of the penalty. Contrast this with cities where the same rules exist on paper but enforcement is lax; the rules become suggestions that drivers feel free to ignore.

The parallel to international affairs is obvious. International Law has no global police force, no world court with genuine enforcement powers, no mechanism for imposing consequences that powerful nations cannot simply brush aside. This does not mean the principles are wrong. It means the enforcement architecture is absent.

For those of us concerned with protecting ordinary investors, the lesson is clear. We should stop expecting better regulations to solve our problems. The regulations we have are largely adequate. What we lack is the will to enforce them in ways that truly hurt.

Until a few insurance company executives face personal financial ruin for systematic mis-selling, until a few bank managers spend time in jail for harassing elderly customers, the crooks will continue to snigger at our rulebooks. Better regulations, without better enforcement, simply raise compliance costs for honest players while leaving the dishonest ones free to carry on as before.

Stop waving licences at dangerous animals. Start building cages.

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