Why customers should be concerned by threats of banker licensing

The Labour party will suggest that bankers be licensed in the same way as doctor or barristers. Our politics reporter James Waterson:

Tens of thousands of City workers would be affected by the party’s amendment to government legislation, which would impose a code of conduct on all employees who exercise controlled functions.

“We want this to have a cultural effect on bankers and introduce a presumption that people will be struck off for improper conduct,” a Labour source told City A.M., drawing parallels with the British Medical Council’s tough approach to health professionals who step out of line.

(Full article)

This kind of occupational licensing sounds good on paper. We should want that those who offer a service are fit to do so, and if it were possible to sort the good from the bad, to help customers who face poor information then a policy of occupational licensing may seem a good idea. However in practice, this kind of sorting is very difficult to achieve.

Minimum standards tend to result in affected sectors offering a minimum service. An artificial restriction of supply diverts efforts into overcoming licensing hurdles, and pushes up prices.

Worse still, licensing can encourage complacency, as a plethora of checks including voluntary certification schemes and even word of mouth are to some degree crowded out by government licensing schemes. Policies that were meant to ensure quality often see other quality checks driven out.

Economist David Friedman explains why we should be alarmed at calls to introduce occupational licensing to professions we care most about:

The market is, generally speaking, the best set of institutions we know of for producing and distributing things.The more important the good is, the stronger the argument for having it produced by the market.

Both barbers and physicians are licensed; both professions have for decades used licensing to keep their numbers down and their salaries up. Government regulation of barbers makes haircuts more expensive; one result, presumably, is that we have fewer haircuts and longer hair. Government regulation of physicians makes medical care more expensive; one result, presumably, is that we have less medical care and shorter lives. Given the choice of deregulating one profession or the other, I would choose the physicians.

(David Friedman)