Philip Booth questions the need for financial regulation in the Parliamentary Monitor
The obvious riposte is that there is no alternative: without regulation the sharks would prevail; the uninformed consumer would be ripped off; and nobody can possibly understand the complex world of insurance, investment and personal finance. So we need the protection of a third party regulator.
But is this the case? First, take the insurance sector. Most of our big insurers were founded between the mid-eighteenth and mid-nineteenth century. Until the early 1980s, there was virtually no special regulation surrounding them at all. They had to publish their financial position and the basis used to determine it. Independent actuaries, the stock market and brokers would then analyse the financial figures and the soundness of each office. This system of market-based regulation survived a great depression, two world wars and a level of inflation (in the 1970s) not seen since the 1650s. Indeed, virtually no insolvencies occurred at all. It is literally impossible to carry out an economic analysis of British life insurance insolvencies from 1870 to 1980: there is virtually no data on insolvent companies! Of course, there was no product regulation or point-of-sale regulation either. A contract was a contract and insurance contracts were subject to the normal provisions of law.
A similar position pertained with stock market and investment transactions . One of the main purposes of a stock exchange is to provide a private regulated environment on which investment transactions can take place. Exchanges impose requirements on quoted companies. And, exchanges compete on the basis of their regulatory environments. Statutory regulators have no need to get involved. From time to time there might be specific issues where there is a demand for additional regulation, whether justified or not, such as for laws preventing insider trading. But, these issues can be, and were, dealt with by primary legislation until the mid 1980s.
The FSA has almost unlimited powers and few constraints and is certainly not accountable to consumers who bear the costs of regulation. It has more opportunities to abuse its position than any financial institution. Its first three objectives: maintaining public confidence in the financial system; promoting public understanding of the financial system; and securing appropriate degrees of protection for consumers allow it to take almost any action or impose any regulation it wishes. As a minimum we must rein in the powers of the FSA. It should be required to promote competition and it should be given specific, focused objectives. But, personally, I remain unconvinced that we need a special category of financial regulation at all. Fraud is fraud; cheating is cheating; misleading the customer is misleading the customer. The normal framework of law in which other markets operate once allowed our financial institutions to thrive. We should remove the straitjacket of regulation again.
Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at
Cass Business School, City University.