Economists publishing their research in Economic Affairs*, the journal of the Institute of Economic Affairs, have heavily criticised the UK's system of financial regulation. The study covers all aspects of regulation of pensions, insurance and banking regulation and examines the regulation of the sale of financial products as well as the regulation of the solvency of financial institutions.
Chris O'Brien, a former Appointed Actuary and the Director of the Centre for Risk and Insurance Studies at Nottingham University Business School, argues that the current solvency regime used by the FSA for insurers, may mean that firms appear significantly less solvent than they really are. This is troubling particularly in the current low solvency climate. A better approach would involve a more transparent regulatory regime for solvency and the provision to customers of critical information that is too often obscured by regulatory requirements under the current regime. The reliability of current regulations is called into question by the trends in life insurance companies free asset ratios. On average they have fallen by over 80% since 1985: but Chris O'Brien shows that the free asset ratio for a particular company when a policy is bought bears no relation to the ratio later in the policy life. Also required free asset ratios do not reflect effectively the investment risk taken by the insurer.
David Simpson, a former academic and Economic Adviser to Standard Life, Deborah Cooper, Senior Research Actuary at Mercer Human Resource Consulting and Philip Booth, Professor of Insurance and Risk Management at the Cass Business School are highly critical of the British pension system. Booth and Cooper describe the tax system for pensions and the associated regulation as economically incoherent. It complicates pension provision to such an extent that consumers opt out of pension provision altogether. They propose a radically simplified tax code different from that recently proposed by the government. Simpson suggests that the FSA's regime of prescriptive regulation of pension products has been an expensive failure. He proposes that the pensions industry should be withdrawn from the supervision of the FSA and that the OFT should enforce a regime of vigorous competition. Indeed, Professor Paul Klumpes of Nottingham University Business School shows, through detailed analysis, how pensions regulation in the UK has benefited financial intermediaries and regulators with the costs falling on employers and consumers the reverse of the intended result!
These studies, supported by analysis of the banking industry by Professor Geoffrey Wood of Cass Business School, suggest strongly that it is time for a complete reappraisal of financial regulation with a view towards increased transparency, simplicity, enhanced competition, a significant reduction in the amount of regulation and a return to regulation based on sound economic principles.