FINANCIAL regulation becomes ever more onerous, as it chases its own tail. More and more, regulation mandates “best advice”, codes of ethics, legal punishment for directors if businesses go bust, mandatory offering of simple products, fines for companies if financial products decline in value instead of rise, and caps on charges and interest rates.
This complexity is itself a reflection of the complexity of the world and of the ways in which financial services – part payments system, part insurance net, part savings tool, part capital allocation mechanism – affects so many other parts of the economy. It is extremely difficult to know what are the best products for people to buy, what are the best businesses to fund, which loans consumers should and shouldn’t be taking out, and so on. Regulation in these areas does not fail because of a lack of care on the part of regulators, but because the task is very complex.
So here’s a suggestion that might help. It may seem radical, crazy even. But given how hard it seems to be to get what we’ve been doing right, a radical alternative might be worth considering.
Suppose – just suppose – we had a system in which people decided for themselves how much advice they wanted, who they wanted to get it from, and how much they wanted to pay for it. Suppose consumers decided for themselves how much they wanted to pay for their financial products and how much risk they wanted to take on board in purchasing them. And if those products went bad, consumers would lose money. Suppose that sellers of financial products decided what products they wanted to sell and how much to charge for them. And if financial companies went bust, those that lent them money would lose out.
I know, I know. Bonkers. But let’s play with the idea. If people entered into free exchange of financial products, large amounts of the information that regulators struggle to get and use now would automatically influence supply and demand and prices. We wouldn’t need to mandate firms to enter into complex information-gathering exercises with their consumers to find out which products were best for them. Instead, if consumers, say, didn’t like certain products, at a given price, demand would fall.
We wouldn’t need to have extensive reporting of the financial viability of this versus that product by companies. Instead, products that didn’t make money would stop being sold and firms that were over-dependent on those products would go bust. When demand for some products rose, firms would find it more attractive to sell those products and supply would increase in response. When businesses in some industries were doing well, demand for business loans in those sectors would rise and suppliers would charge accordingly.
In this way, the chase-your-tail challenges regulators face would be by-passed. Business practices would be regulated by supply and demand from consumers, and by the risk appetites and ethical preferences of shareholders and bondholders.
There are two main problems with putting this vision into practice. First, we’d have to reintroduce the “buyer beware” principle into financial services. If you put your money into a pension or a bank deposit, you would have to take responsibility for making a good call, just as if you took your car to a car repair workshop. And if you didn’t know much about financial services, just as with car repairs, you would have to seek advice from someone on the good or bad places to go. But ultimately, the final call would still have to rest with you. Obviously, people don’t want to do that. If their endowment mortgages or pensions fall in value, they want to say they’ve been “mis-sold” not that they themselves made a bad call.
Second, we’d have to allow sellers of products to go bust. If a bank or an insurer or a pension provider sold the wrong stuff or lent to the wrong folk or invested in the wrong things, it would have to be allowed to go bust, to the enormous inconvenience of its investors and customers – like any other business. Obviously, folk don’t want to do that either. If a bank or pension fund goes bust, people expect the government to bail it out and reimburse all the savers.
So my crazy vision can’t work, because it’s not what voters or politicians want. But if that’s you, don’t complain next time you have to read 5,000 words of compliance small-print, or next time a financial firm says it can’t offer you any advice on a certain matter, or next time a product is both inappropriate and expensive, or next time your small business can’t get a loan. The complexity of financial services is ineradicable. But the fact that that complexity is not coded up into simple signals from demand, supply and prices is not ineradicable. It’s the consequence of choices you vote for.
Andrew Lilico is chairman of Europe Economics.