I WAS standing in a queue at a Bank of Scotland branch just before Christmas. The line of customers was moving so slowly I was able to watch a little comedy act.
Tracey and her mum had come to open a new account. Tracey had been at school with Karen, the bank employee. They were also neighbours.
Tracey and her mother were exasperated as Karen kept insisting she couldnât let Tracey open a current account, as they were offering no electricity bill or council tax receipt. "More than my jobâs worth," Karen insisted. "Why?" asked Tracey. "You know who we are, you know where we live, you know where we work."
Karen, in that flat monotone voice officials often employ, responded: "Rules is rules. You might be an international terrorist or something to do with organised crime, like."
I groaned at this little example of pointless procedure until I read of the fine of Â£1.35 million imposed on HBOS because not every Karen had questioned every Tracey. Having filters to try to deter Mr Osama bin Laden or Mr Gianfranco Corleone sounds only prudent and sensible.
But like all regulations, a good idea decays into fatuity. If I am an Islamic extremist or a Mafioso, I donât get deterred by clerks. Iâm adroit, I find ways to deal with the rules. It is the innocent Traceys that the minutiae of financial regulation hits.
Last week also saw the illustrious Standard Life tripped up by a hazard none of its leaders had imagined. Once again a financial regulation, under the camouflage of good intentions, has created a monster.
The Financial Services Authority says it is determined to "police" the financial services industries and crush the baddies. Like all bureaucratic dreams, we are not told the cost or see the competence defined.
Financial regulation takes on a life of its own, like all regulation. It has the power to neutralise. It may even stunt innovation. Scotland used to have a varied community of friendly societies. They were self-help operations, mutual societies - just like Standard Life.
Friendly societies used to operate state benefits on the basis they were far cheaper and more efficient than the civil service. Although a few valiant friendlies survive, the life has been bleached out of them by the regulator.
The need for conscientious regulation seems obvious. What about the Enrons and Parmalatâs missing billions? Yet all the great scandals have occurred under tight financial regulation.
Regulation takes on a life of its own. It has the power to neutralise, even to stunt innovation.
The regulators seem blind to the real nasties while applying pettifogging rules to the innocent. Enron happened not in spite of 4,700 pages of regulations, but arguably because such regulations allowed the baddies to hide.
One of the recent disasters in personal finance has been the near collapse of Equitable Life - now rescued by HBOS. Equitable was brought down by the lawyers seeing transgressions where there had been only an assumption that inflation would stay part of the financial landscape. Now the FSA is being sued on the assumption it had a duty of diligence to spot Equitableâs headaches.
Each new raft of regulations has unintended consequences. By a subtle process it seems markets are closed off. Only the largest outfits can afford to comply with the drizzle of new rules. To work properly, all markets need the oxygen of competition.
Not so long ago any body could set up an insurance company and anyone could ply their living as a financial adviser. Of course some flawed people survived, but the jostle itself tested competence.
Now any Scottish insurance company is hemmed in by new regulations. The entire financial services industry is being slowly squeezed. The animal spirits that keep any market moving are being anaesthetised.
Financial regulation creates a whole new patois of jargon. The Financial Services Authority creates its own dialect of technical confusion that in turn is creating a new profession - compliance officers.
I believe the HBOS senior executives were busy trying to add value to their services when poor Tracey was refused her account. The theory about teenagers as possible fronts for terrorists or criminals was a mirage nourished by the new neurosis that people might open accounts or buy insurance policies without close supervision.
The earliest act of Margaret Thatcherâs government in 1979 was to scrap a pernicious piece of financial regulation called Exchange Controls. The assumption was that if we were all free to take money out of the country for holidays, or to buy assets, Britain would in some sense be poorer. The political decision to suspend these regulations took real courage. Now few have any memory of the old exchange control regime and we all enjoy foreign travel.
If the FSA was allowed to embrace the travel trade, we would soon see that only those with a geography degree and a pilotâs licence could sell us holidays. Of course we would need detailed protection from going somewhere we did not like, or where we might catch bugs from dirty water. Soon, officialdom would say it was altogether better we stay in Arbroath or Blackpool.
The FSA is diligent at protecting us from hazards that are largely illusory. Of course the salesman may not get sign you up for the endowment that performs best after 20 years. Of course the pension policy may not prove to be the top one when you are 65, but no body of FSA experts should admonish the rest of us for trying to guess and look into the future.
Edinburgh has by far the biggest concentration of financial expertise outside the Square Mile in London. It is vital that these money managers prosper. But how can they with ever more rules from the FSA?
We need a wholesale de-regulation to liberate not just established ventures, but small new entrepreneurs too.
On this subject, the Scottish Parliament seems both mute and powerless. All the FSA themes are "reserved" to Westminster. The only leverage I can see is the remote possibility of the MSPs deciding to lop 3p off Scottish income tax. This might prove a jolt to embolden other liberalisations.
We are seeing the piecemeal obliteration of so many Scottish financial names that soon it will only be the more modest back office roles that are performed in this country.
As future generations have far greater life expectancy, it is vital that we care for our post-work years. As matters stand, the government and the FSA collude with the crude rules saying we must all surrender our market potential by imposing obligatory retirement and then insisting on annuities we may not want or need.
I read the FSAâs powers as intellectual fashion. Capitalism is evil. Let us tame it.
The FSA is dripping with good intentions, but it is the embodiment of prissiness that is slowly shifting the smart money away from Scotland and the UK to offshore locations where the regulatory burdens are far lighter.
Naturally the FSA has nothing to say about the financial rip offs that the state provides. National Insurance is the fraudulent use of the honourable word insurance. NI is simply a tax on employment, a pyramid scheme which the FSA would pounce upon were it discovered elsewhere.
And inflation is a corruption of the currency by which 2004 money is diluted. The rate of dilution is now far less than in the past, but bobbing along at 3 per cent each year it is still an open scandal to which the FSA is obediently silent. At that rate the value of money is halved in 23 years, so your pension had better be ready for that.
Perhaps I am wrong to blame the FSA for much of the pollution of the money industries. It is only the sub-contracted agency of two greater forces - the government and the European Commission in Brussels. The EU is anxious to impose uniform regulations and tax levels across member states.
The greatest presence on the financial landscape has been the bursting of the bubble of confidence over dotcom and telephony shares. Now the market is reviving, many money service firms may be lifted off the rocks by the wave of healthier prices. They (and we) have not been helped by the new thickets of regulation.
The FSA might perform a useful role, but I suspect it is more symbolic than a matter of real detail. It is true there are a few thresholds of competence and honesty, but there is no better test of either than the market. Everyone jealousy guards their reputations. Everyone tries to perform without a blizzard of documents with boxes to tick.
The very word "Scottish" still has immense power across the world. Standard Life could key into the savings aspirations of the newly-commercial Chinese millions. Scottish Friendly could assist the millions in India suddenly prospering. There is still enough of a halo around the Scottish money houses for them to enjoy a glorious future, but it has to be as lively operators, not obedient and compliant bureaucracies.
I read the FSAâs excessive powers to be evidence of no more than intellectual fashion. Capitalism is evil. We canât quite suppress it, let us corral it. Let us tame it. Let us suppress risk. The mightiest men at both Standard Life and Bank of Scotland have been humbled this month. Am I right in my hunch it never occurred to them to fight the slow strangulation by primness? Would they dream of appointing "defiance officers"?
I assume Tracey returned with her utility bills and Karen opened an account for her - and no terrorists or drug smugglers escaped detection. The FSAâs punitive fine of the men on the Mound was savage and wrong-headed. Perhaps it is the FSA which is the true force of terror.
â¢ John Blundell is director general of the Institute of Economic Affairs.