New report debunks myth that Thatcher deregulated financial services
25 May 2015
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New IEA research on Thatcher, and the myth of deregulation
Until 1980, the UK’s financial sector was regulated by private institutions, professional codes and a small amount of highly targeted primary legislation. Contrary to the popular narrative, Margaret Thatcher did not free the City from red tape, but unwound and prohibited a raft of private regulatory mechanisms, replacing them with state regulation.
The period saw huge changes in the financial sector. The efficiency of the City increased because of the abolition of exchange controls and tax reforms. Yet in terms of regulation, Margaret Thatcher’s premiership was characterised by increased financial regulation, moving regulatory responsibility away from markets and handing it to the state.
Major regulatory changes included:
· As a result of the Financial Services Act, retail financial products became heavily regulated, whereas previously they had been regulated through contract law and industry agreements.
· Regulation of life insurance increased hugely, being re-regulated between 1979 and 1990, as a result of both domestic legislation and the implementation of EU regulation.
· Whilst the ‘Big Bang’ of 1986 saw the removal of restrictive practices and opened the market to foreign banks, it also involved the state unwinding systems of private regulation. It was not a simple act of deregulation.
· Not long after Big Bang, investment and financial markets became regulated under the Financial Services Act, which extended detailed statutory regulation into hitherto unregulated areas. This regulation has grown almost without limit in the period since.
· Under Thatcher, government regulation prohibited employers from requiring membership of a pension scheme as a condition of employment. This was direct and retrospective interference in labour market contracts and led directly to the pensions mis-selling scandal of the late-1980s/early-1990s. What is often seen as an act of deregulation was, in fact, a government prohibition of a form of private contractual agreement.
· Additionally, bank deposit insurance was introduced for the first time in 1979, whilst the introduction of Basel I saw the first ever explicit regulation of bank capital
The legacy today:
· Between 1979 and 2010 there was an increase from one regulator for every 11,000 people employed in finance to one regulator for every 300 employed in finance. If growth continues at this rate, the number of people working in financial regulation will overtake the number of people working in financial services by around 2070.
· Since 1986, the direct cost of financial regulation has risen nearly 15 fold in real terms. Indirect costs are likely to be an order of magnitude higher.
· It is unambiguously the case that statutory regulation of financial markets increased under the Thatcher government. Furthermore, it is clear that markets are able to develop comprehensive systems of regulation when left to themselves. Indeed, it was these systems of regulation that the government prohibited because of competition policy concerns about restrictive practices that were operating within the market.
Commenting on the paper, its author, Professor Philip Booth, said:
“It is often believed that Mrs Thatcher deregulated financial services and the economy more generally. The picture is much more complex. Thatcher prohibited certain forms of regulation that had grown up within the markets because of fears that they were anti-competitive. Furthermore, in large sectors such as retail financial services, insurance and securities trading, there has been a huge growth in regulation in areas that were previously more or less unregulated”
Notes to Editors:
To arrange an interview about the report please contact Stephanie Lis, Head of Communications: slis@iea.org.uk or 07766 221 268.
The full report, Thatcher: the Myth of Deregulation, by Professor Philip Booth, can be downloaded here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
The IEA is a registered educational charity and independent of all political parties.
The period saw huge changes in the financial sector. The efficiency of the City increased because of the abolition of exchange controls and tax reforms. Yet in terms of regulation, Margaret Thatcher’s premiership was characterised by increased financial regulation, moving regulatory responsibility away from markets and handing it to the state.
Major regulatory changes included:
· As a result of the Financial Services Act, retail financial products became heavily regulated, whereas previously they had been regulated through contract law and industry agreements.
· Regulation of life insurance increased hugely, being re-regulated between 1979 and 1990, as a result of both domestic legislation and the implementation of EU regulation.
· Whilst the ‘Big Bang’ of 1986 saw the removal of restrictive practices and opened the market to foreign banks, it also involved the state unwinding systems of private regulation. It was not a simple act of deregulation.
· Not long after Big Bang, investment and financial markets became regulated under the Financial Services Act, which extended detailed statutory regulation into hitherto unregulated areas. This regulation has grown almost without limit in the period since.
· Under Thatcher, government regulation prohibited employers from requiring membership of a pension scheme as a condition of employment. This was direct and retrospective interference in labour market contracts and led directly to the pensions mis-selling scandal of the late-1980s/early-1990s. What is often seen as an act of deregulation was, in fact, a government prohibition of a form of private contractual agreement.
· Additionally, bank deposit insurance was introduced for the first time in 1979, whilst the introduction of Basel I saw the first ever explicit regulation of bank capital
The legacy today:
· Between 1979 and 2010 there was an increase from one regulator for every 11,000 people employed in finance to one regulator for every 300 employed in finance. If growth continues at this rate, the number of people working in financial regulation will overtake the number of people working in financial services by around 2070.
· Since 1986, the direct cost of financial regulation has risen nearly 15 fold in real terms. Indirect costs are likely to be an order of magnitude higher.
· It is unambiguously the case that statutory regulation of financial markets increased under the Thatcher government. Furthermore, it is clear that markets are able to develop comprehensive systems of regulation when left to themselves. Indeed, it was these systems of regulation that the government prohibited because of competition policy concerns about restrictive practices that were operating within the market.
Commenting on the paper, its author, Professor Philip Booth, said:
“It is often believed that Mrs Thatcher deregulated financial services and the economy more generally. The picture is much more complex. Thatcher prohibited certain forms of regulation that had grown up within the markets because of fears that they were anti-competitive. Furthermore, in large sectors such as retail financial services, insurance and securities trading, there has been a huge growth in regulation in areas that were previously more or less unregulated”
Notes to Editors:
To arrange an interview about the report please contact Stephanie Lis, Head of Communications: slis@iea.org.uk or 07766 221 268.
The full report, Thatcher: the Myth of Deregulation, by Professor Philip Booth, can be downloaded here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
The IEA is a registered educational charity and independent of all political parties.
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