The Financial Services Authority (FSA) spends over £250m regulating every aspect of the marketing, sale and provision of financial services. The cost is, of course, ultimately borne by consumers. However, the costs to consumers of financial regulation go way beyond this headline figure. There are also costs imposed by regulators on firms that are then passed on; there are costs arising from stifled innovation; and costs imposed directly on consumers themselves. Last year it took me seven weeks to finalise the investment of a very small amount of money in a personal pension. My passport and utility bills were sent up to Scotland for processing. The approach taken was probably unnecessarily bureaucratic but it illustrates an important point. The company was not focused on me, as the customer. Instead it feared the regulator and its money laundering regulations. Vulnerable low earners often cannot get financial advice: the costs are too great because of regulation. The regulatory tentacles move ever further into areas previously untouched. Mortgage and general insurance sales now come under the auspices of the FSA. If you buy a £20,000 car with a £200 insurance policy, the car is subject to standard contract and consumer protection law whereas the general insurance policy comes gift wrapped in lots of expensive regulation from the FSA. The car sales people have to become regulated insurance intermediaries. The fact that we have the lowest mortgage margins in the EU does not seem to matter: lets regulate them anyway!
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 wa