Anti-competitive regulations and the harm they cause (Part 6)
13 August 2018
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“Name one EU regulation or law you would change?”
This question is often posed to Brexiteers, usually by those who believe Eurosceptics lack detailed arguments or, worse still, didn’t know precisely what they were voting for. Though this may be true in some cases, EU-friendly commentators are also, at times, guilty of a myopia of their own – assuming that the current regulatory status quo automatically equates to ‘best practice.’
In reality, the European Union has been responsible for a raft of regulations which have caused great harm to businesses and consumers. While much is made of the compliance cost of certain regulations, less attention is generally paid to the anti-competitive harm they cause. Increasing costs for certain firms, and forcing some (especially smaller, firms) to exit the market can have the effect of raising prices for consumers and diminishing capacity. Anti-competitive regulations make it difficult for new competitors to enter the market, thereby entrenching existing companies and leading to the formation of oligopolies.
This blog series examines a number of regulations, with anti-competitive effects, to illustrate how they work and the distortions they cause.
Private Client Stockbroking
As we saw last week, EU financial regulations purporting to protect retail investors have created a number of harmful unintended consequences. Yet these same directives also strongly incentivise investors to hold their money in funds – making it harder for private retail investors to trade in individual equities and bonds.
What was the goal of the regulation?
Presumably, the regulators assume that retail clients are unable to comprehend equity investments or individual bond investments and aim to protect them from engaging in such transactions. It is more likely, however, that the banks, pension companies and insurers producing financial products have convinced the regulators that these are safer investments. Certainly, there is a financial incentive towards funds as there is no VAT charged on fund charges – unlike broking charges.
Was this regulation ever necessary?
No. When the industry was regulated by the Financial Standards Authority, the regulators were more in tune with the needs of local (UK) markets – something the EU, with its varying markets and tax systems, has struggled with. Arguably, Brussels also lacks the necessary market knowledge and financial experience. What’s more, individual investors are increasingly turning to “Contracts for Difference” and spread betting which allow them to invest in derivatives in most financial instruments as well as avoiding stamp duty.
Why is promoting funds over private client stockbroking anti-competitive?
The new regulation has led to consolidation among the smaller brokerage and advisory firms, and firms clustering under umbrella organisations. Industry experts believe these changes have raised the standards of Independent Financial Advisors. Yet, as we have mentioned before, it is private clients who are most likely to invest in start-ups, SMEs and smaller, AIM listed companies, as their share capital is too small for institutional investors. It follows that any regulation making it more difficult for retail clients to trade is likely to have a disproportionate, pernicious effect on these smaller organisations.
Improvements that must be made to UK financial regulation after leaving the EU
1. At present, MiFID requires every transaction to be reported in the same way, using the same metrics and scope, regardless of the size of the transaction. Some kind of ‘de minimus’ rule exempting smaller transactions from these burdens would be helpful.
2. Remove the requirement to issue separate “retail” prospectuses in simplistic language. A new issue should only need one prospectus.
3. Regulators should also remove rules requiring clients to be notified in writing if their portfolios have fallen in value by 10%. As electronic trading allows stock valuations to be seen on a second-by-second basis, sending out a written report in a falling market is too slow to be of any real use in protecting an investment. In practice, this requirement only panics the investor into believing that being 10% down is somehow more important than being 5% down, and consequently scares them into selling their holdings – which will of course cause the market to drop even further.
4. Requirements to send written advice to a client are overly burdensome when all telephone calls are recorded, and orders can be given verbally over the phone by the client. Sending clients written advice after the fact is unnecessarily bureaucratic and time consuming.
5. VAT should be applied evenly or better still, removed evenly. At present, no VAT is charged on fund management fees but VAT at 20% is charged on individual investment advice fees.
6. Retain the Annual Management Charge (AMC) fee transparency, and continue to make funds publish the cost and charges that are outside the AMC such as broking fees, stamp duty, audits, and publishing of accounts etc.
Continue with the series here…
This question is often posed to Brexiteers, usually by those who believe Eurosceptics lack detailed arguments or, worse still, didn’t know precisely what they were voting for. Though this may be true in some cases, EU-friendly commentators are also, at times, guilty of a myopia of their own – assuming that the current regulatory status quo automatically equates to ‘best practice.’
In reality, the European Union has been responsible for a raft of regulations which have caused great harm to businesses and consumers. While much is made of the compliance cost of certain regulations, less attention is generally paid to the anti-competitive harm they cause. Increasing costs for certain firms, and forcing some (especially smaller, firms) to exit the market can have the effect of raising prices for consumers and diminishing capacity. Anti-competitive regulations make it difficult for new competitors to enter the market, thereby entrenching existing companies and leading to the formation of oligopolies.
This blog series examines a number of regulations, with anti-competitive effects, to illustrate how they work and the distortions they cause.
Private Client Stockbroking
As we saw last week, EU financial regulations purporting to protect retail investors have created a number of harmful unintended consequences. Yet these same directives also strongly incentivise investors to hold their money in funds – making it harder for private retail investors to trade in individual equities and bonds.
What was the goal of the regulation?
Presumably, the regulators assume that retail clients are unable to comprehend equity investments or individual bond investments and aim to protect them from engaging in such transactions. It is more likely, however, that the banks, pension companies and insurers producing financial products have convinced the regulators that these are safer investments. Certainly, there is a financial incentive towards funds as there is no VAT charged on fund charges – unlike broking charges.
Was this regulation ever necessary?
No. When the industry was regulated by the Financial Standards Authority, the regulators were more in tune with the needs of local (UK) markets – something the EU, with its varying markets and tax systems, has struggled with. Arguably, Brussels also lacks the necessary market knowledge and financial experience. What’s more, individual investors are increasingly turning to “Contracts for Difference” and spread betting which allow them to invest in derivatives in most financial instruments as well as avoiding stamp duty.
Why is promoting funds over private client stockbroking anti-competitive?
The new regulation has led to consolidation among the smaller brokerage and advisory firms, and firms clustering under umbrella organisations. Industry experts believe these changes have raised the standards of Independent Financial Advisors. Yet, as we have mentioned before, it is private clients who are most likely to invest in start-ups, SMEs and smaller, AIM listed companies, as their share capital is too small for institutional investors. It follows that any regulation making it more difficult for retail clients to trade is likely to have a disproportionate, pernicious effect on these smaller organisations.
Improvements that must be made to UK financial regulation after leaving the EU
1. At present, MiFID requires every transaction to be reported in the same way, using the same metrics and scope, regardless of the size of the transaction. Some kind of ‘de minimus’ rule exempting smaller transactions from these burdens would be helpful.
2. Remove the requirement to issue separate “retail” prospectuses in simplistic language. A new issue should only need one prospectus.
3. Regulators should also remove rules requiring clients to be notified in writing if their portfolios have fallen in value by 10%. As electronic trading allows stock valuations to be seen on a second-by-second basis, sending out a written report in a falling market is too slow to be of any real use in protecting an investment. In practice, this requirement only panics the investor into believing that being 10% down is somehow more important than being 5% down, and consequently scares them into selling their holdings – which will of course cause the market to drop even further.
4. Requirements to send written advice to a client are overly burdensome when all telephone calls are recorded, and orders can be given verbally over the phone by the client. Sending clients written advice after the fact is unnecessarily bureaucratic and time consuming.
5. VAT should be applied evenly or better still, removed evenly. At present, no VAT is charged on fund management fees but VAT at 20% is charged on individual investment advice fees.
6. Retain the Annual Management Charge (AMC) fee transparency, and continue to make funds publish the cost and charges that are outside the AMC such as broking fees, stamp duty, audits, and publishing of accounts etc.
Continue with the series here…
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Possibly, the regulators assume that retail clients are unable to recognise fairness investments or character bond investments and aim to defend them from conducting such transactions. It is more likely, but, that the banks, pension agencies and insurers generating monetary merchandise have convinced the regulators that these are safer investments. Truely, there’s a monetary incentive toward funds as there’s no vat charged on fund expenses – in contrast to dealer prices.