The freedom to innovate is an important aspect of the private sector in any free enterprise economy. It is not, of course an absolute freedom and different sectors have different models and limits to meet economic and wider social obligations.

This was brought to mind recently at a Conference. The keynote speaker referred to the “toxicity” of certain financial products. Throughout the day, other speakers and questions picked up the work toxic. So what if we thought of financial regulation like pharmaceuticals?

Borrowing models from other sectors or industries, in my experience, is often valuable because it can make explicit assumptions that are viewed within one sector as the equivalent of the “laws of Physics”. In the spirit of Star Trek “You cannot change the laws of Physics, Jim”. Michael Mainelli has written before on this topic in an article titled "Industrial Strengths: Operational Risk And Banks".

Over the last few years I’ve heard many polarised debates around derivatives and securitisation about whether they are good or bad things. Yet in pharmaceuticals we know that a dose of x is efficacious, but y might be lethal. Rephrase the issue as follows; at what dose does securitisation of sub-prime mortgages become unsafe?

I find this interesting because it may well be that there is an answer, say 10% at which this is a good way to manage risk, but at 20% might be an additive or systemic risk.

There is an interesting concept of LD50, which is the lethal dose at which 50% of animals die. Instead of claims about an investment being low or medium risk consider the claim over a leveraged buyout. An investor who willingly investment in an LD90 (90% of these fail) could not claim to be unware of the risks involved.

We can also say that certain products should not be taken with others, the issue of side effects.

So selling derivatives of securitised sub-prime mortgages might be risky even if both were inside normal safe limits.

The key is that in pharma we start from a “safety first” approach. Imagine if we could not “inject a new product” into the financial system without an ethical clinical trial. Are you horrified or intrigued?

In pharma, the focus is on regulating the products, not the companies per se. Clinical trials are complex, expensive and time consuming. The problem that I see with financial regulatory reform is a focus on organisational regulation. Modern finance companies are so complex and borderless that this approach seems to me to be bordering on the hopeless on a good day.

In medicine there are even good precedents for handling exceptions. A clinician can prescribe a drug on a “named person” basis outside the proven area. The responsibility lies with the clinician and the patient must make an informed choice.

Let us imagine how such a “clinical trial” might work in Finance. Imagine a group of clients want a way of treating an emerging problem. A group of wiling participants could set up mechanisms to test a possible solution. This would be monitored and a peer-reviewed paper would be submitted to regulatory bodies outlining for whom and under what circumstances this product was safe.

Of course, some clinical trials might be conducted through simulations, as is done today with stress testing of banks.

Post approval other trials might add or test the limits for an initial license. Issues such as side effects could be noted and subject to research and inspection.

The lack of trust in the institutions of finance has been exacerbated by the lack of transparency and accountability in current models (for instance “why has no banker gone to jail?”). It is worth thinking through, I believe, the regulatory model to support this approach. I draw your attention to work of Long Finance with the BSI on Voluntary Standards Markets.

I have noted many conferences since 2008 on an ethical basis for Finance. What lessons, good and bad, could be learned from pharma?

Now does this sound far-fetched? The introduction of a mortgage cap where a bank can have no more than 15% of its mortgage book at greater than 4.5 times loan-to-income is for me a nod towards this safety-first paradigm. It is an approved dose model!

So what might be the upside of such a shift? It is 60 years since the tragedy of Thalidomide which individuals and the company Distillers are still paying for financially and societally. We have had no similar scandal or tragedy on such a scale since. Despite the sensitivity of health and medicine, we have made enormous progress in treating many conditions that back at the time of Thalidomide were seen as hopeless.

So my question, given that this is about Long Finance is this: “What would be the value to the City of London of a period of 60 years without a major product safety scandal?”

Imagine if in the next 60 years, Finance could make the same strides that Pharma has done in the last 60 years. The benefits to the economy and society could not be doubted. Why not?