Moral expectation has as big a part to play in regulation as the rules THERE'S a great scene in the classic Humphrey Bogart film Treasure of the Sierra Madre. Bogie, playing a gold prospector, is surrounded by a bunch of tough guys who claim to be sheriffs. He asks to see their badges. "Badges?" snarls the head tough; "We ain't got no badges! We don't need no stinkin" badges!" And then the shooting starts. Right now there are a quite a few grumpy investment managers who think they don't need "no stinkin" badges" either. By the end of the year it will be illegal to manage money for private clients or give financial advice unless you have passed the right exams and can put some magic letters after your name. For many older practitioners (including me) this has come as a bit of a shock to the system. Until now, the only relevant letters after our names have been QBE: Qualified By Experience. Mostly we have buckled down, done our swotting and either sailed or scraped through the exams. But a minority of managers and advisers have taken a good hard look at this new world and decided it is not for them. So they are withdrawing from the investment business, taking with them a rich load of wisdom, judgment and integrity,. These are qualities which have been of great value to their clients - but which count for ­little under the new regime as they are difficult to prove and quantify. The declared aim of this ­policy, which is part of a ­far-reaching package of reforms, is to improve both the quality of the services being provided and, crucially, public confidence in those services. It is a curious paradox of modern life, that in many areas the grip of regulation has been tightening while public trust and respect have steadily fallen. Politicians and bankers have never been so rule-bound, and never so deeply despised. Those who set these rules argue that it is precisely because of this crisis of confidence that the rules are needed; well, I ­suppose that workers in a rules factory have a vested interest in producing rules. It is of course an old maxim that justice must not only be done, but also be seen to be done; in the modern world, it is not enough to be honest and competent, you must have a ­certificate to prove that you have passed a test in ethics and another certificate to prove that you can tell the difference ­between an equity and a bond. The difficulty with this approach is that it is in danger of confusing two very different concepts: symbol and substitute. A symbol shows that something is there; a substitute stands in for something that is not there. Someone with a powerful red sports car may think he has a ­virility symbol; the cynics might say he has a virility substitute. A battered estate car with extra child seats in the back - that's a virility symbol. If you think that compliance and regulation are about setting up written systems to ensure line by line compliance with the letter of the law, there is a risk that you confuse the question "Is this right?" with the question "Is this within the rules?" You could end up treating the rules not as symbols of your ­integrity but a substitute for it. That, after all, was a big part of the problem with MPs" expenses: no-one was very impressed with the defence that duck houses and moats were within the letter of the law. However, it would be just as unhelpful to hark back to some mythical age when professionals were bound by some unwritten but powerful code of honour and as a result enjoyed universal respect. In reality, human nature being what it is, every profession has always had its rogues and incompetents, and the struggle to root them out is never-ending. The answer must surely be that neither box-ticking nor codes of honour are sufficient in themselves. Rules and qualifications have to sit in a framework of moral expectations and pressure from colleagues as well as from the regulators to do a good job for our clients. But the clarity of black and white rules can be very positive, and it is not unreasonable for someone selling his expertise to the public to have to produce evidence that he has something to sell. After all, the guys who said they didn't need no stinkin" badges - they were the baddies. lGareth Howlett is fund ­manager director at Brooks ­Macdonald Asset Management