Tanstaafl: the new buzzword for finance

Allister Heath
<div>THERE are few things I hate more than banning things. But one advantage of the FSA&rsquo;s decision to prevent Independent Financial Advisers (IFAs) from taking commissions for the sale of investment products, pensions and life assurance is that their costs will become much more obvious. From 2012, anybody who uses an IFA will have to pay an upfront fee; these will cease to be incorporated into the price of the product, the interest rate paid or an insurance premium. Investors who want advice will pay a realistic price for it while those who are not prepared to shell out will have to do without. And that, of course, is on top of the stated aim of eliminating conflicts of interest.<br /><br />We are also about to witness the death of so-called free consumer banking, which allows customers to pay nothing for banking when they are in credit in return for being hammered when they suffer unauthorised overdrafts. An appeal by the banks is currently going through the House of Lords; it follows rulings that the charges represent an &ldquo;unfair contract&rdquo; clause that should be regulated by the Office of Fair Trading.<br /><br />As it happens, I disagree with the legal basis of the rulings; and I don&rsquo;t think a shift should be imposed. But a change in the way banks conduct their business would probably be a good thing. As Jonathan Sumption, a QC representing the banks pointed out, the overdraft charges &ldquo;will necessarily exceed by a large margin&rdquo; how much it costs a financial institution to deal with the problem because they are &ldquo;essential to the funding of the whole current account system&rdquo;. The charges cross-subsidise the cost of running accounts; but the current system means that customers are under the incorrect impression that they cost nothing to operate. It also makes it harder for banks to charge for differing levels of service, as premium accounts look too expensive.<br /><br />It would make more sense to pay (say) &pound;120 a year for a basic bank account and reasonable fees for overdrafts rather than the current system. At present, allowing one&rsquo;s account to slip into unauthorised overdraft often costs the hapless consumer &pound;35, against the &pound;2.50 or so incurred by the bank. Those in trouble or who cannot organise themselves pay for the better-off or more sensible. A proper paid-for model would also discourage consumers from opening too many accounts and leaving them dormant.<br /><br />It was Robert Heinlein, the libertarian science-fiction writer, who coined the adage &ldquo;There Ain&rsquo;t No Such Thing As A Free Lunch&rdquo; &ndash; Tanstaafl for short &ndash; in his 1966 book The Moon Is a Harsh Mistress, now a cult classic. Nothing is ever truly for free, Heinlein correctly pointed out; the real cost is always picked up by someone, even if it is hidden or spread among large numbers of people. Tanstaafl is a key lesson of economics popularised in particular by the great, late Milton Friedman.<br /><br />In some cases, it is fine for third parties to pick up the cost of goods or services. This is true of media products such as Facebook, TV or this newspaper, where costs are met indirectly by advertisers. Cross-subsidies can also work efficiently in some other industries, such as mobile phones. But in the case of bank accounts and financial advice, those who use the product should bear its full cost and be aware that they are doing so. Tanstaafl.</div>