By Iain Cox, Chair of the Business Sprinkler Alliance

A recent Financial Times article, written by the Governor of Denmark’s National Bank Lars Rohde, highlighted the fact that a bank’s capital buffer should work much like a sprinkler system. In other words, it exists to ensure a bank can continue to provide credit in times of crisis, much like a sprinkler contains a fire prior to the arrival of the fire and rescue service. Essentially, they both buy time, ensuring a bank or a building are back up and running within a short period with limited financial impact or damage. But how come the banking sector can appreciate the need for a buffer yet so many people and businesses fail to see sprinklers as the much needed buffer to help save a building?

Set up in the wake of 2008’s financial crisis, capital buffers enable banks to use their liquid assets in order to meet unexpected changes in cash flows whether a financial crash or as we have now, the Covid pandemic. The problem is that many banks are unable to use these buffers because they will fall foul of other regulatory requirements. The buffers, consequently, cannot fulfil their purpose. A regulatory system designed in response to the financial crash therefore does not have the outcome people expect for key assets. Reading this across to the change in fire safety regulation we have to ask the same question as to whether they will deliver the outcomes we expect for key societal, economic and environmentally important buildings.

Today’s fire safety regulations can lead to outcomes where such key buildings are totally lost to a fire and it is deemed a “success” as long as no-one is hurt. The property is not a key consideration of the regulations. Therefore, people follow regulations, and following Rohde’s thinking the buffer, sprinklers are not installed. Building regulations will not protect property from being lost in the event of a fire. Key stakeholders are then surprised by the outcome with the loss of homes, workplaces and community assets.

Rohde is clear that it’s better to have sprinklers than let your building burn, and its better to have a fire service than let the fire spread to other buildings.  In the article Rohde states: ‘when the fire alarm sounds, you want the sprinkler to start before the fire trucks arrive’, and goes on to say ‘the destruction caused by a great fire is simply too large; as history has shown.’ The thing to do is to make sure that you’re getting the outcome you want and this means putting the incentives in the right place.

Rohde goes on to say that ‘a prudent society may still want an insurance policy against potentially disastrous rare events.’  So in fact, what he’s saying is you need sprinklers, you need a fire service and you need insurance. They’re not mutually exclusive and there’s a hierarchy. Sprinklers are a buffer that make a fire in a building a non-event.  We all hear about big fires; we hear about a company’s insurance not being enough to cover the costs, but what we don’t hear about are companies who barely have a hiccup in their day because sprinklers have worked and contained a potentially disastrous fire.

Ultimately, we are looking for people to make informed decisions on the outcome they desire from the building over its life, including shock events like fires. However, frequently that view is focused on the cost of developing the building. This focus means that the long term view is often not discussed. The incentives are bringing about the wrong outcome. In other words, you have to make sure the incentives are tuned to bring about the outcome you want rather than the outcome you get.

The FT article by Lars Rohde is a timely reminder that as regulations change we need to ensure we keep our focus on the desired outcome. Otherwise the unintended consequence may see the delivery of outcomes that no one will view as a success when those regulations are tested by a fire or a banking collapse.