A far more radical restructure of financial services regulation is needed to ensure the mistakes of the recent past are not repeated, says Adam Smith Institute director Dr Eamonn Butler.
The Treasury is restructuring the regulatory system, moving from the tripartite model to a twin peaks structure, with the FSA replaced by the Financial Conduct Authority and the Prudential Regulation Authority, which will sit within the Bank of England.
In an interview with Money Marketing, Butler says detailed regulation is a “failed model”. He says: “The FSA should not simply be split in two. Rather, it should be closed down and salt scattered on the found- ations that nothing might grow there again.”
Butler says regulation must ensure clients understand what they are buying and ensure a return of capital if products fail to deliver what they say they will. But he says many other regulations in the retail market, including the proposed RDR ban on commission, are not required.
He says: “You need absolute clarity about what people are being sold, like any other product. If it does not do what it says on the tin, then you should get your money back and what you need is a system that will guarantee that. In terms of things like charging, they need to be transparent but how you do then say whether that is commission or whatever seems to me not to be the Government or the regulator’s problem.”
Last year, FSA chief executive Hector Sants announced that the regulator was to become more intrusive but Butler argues it was the regulator’s intrusive nature that created many of the problems exposed by the collapse of Lehman Brothers.
He says: “The FSA has helped kill competition in the financial services sector. It has had a tick-box mentality and has focused on lots of things which were completely trivial.
“Let’s face it, when the financial crisis broke, where was the FSA? They had not seen it coming at all. They were so busy on the TCF programme and asking banks to fill out forms about how long the phone rang before someone picked it up. That is ridiculous.”
At the start of this year, three European supervisory authorities began operating – the European Securities and Market Authority, the European Banking Authority and the European and Insurance and Occupat- ional Pensions Authority.
Butler says Chancellor George Osborne has decided as “a matter of principle” to hand over regulation to the EU and these bodies will eventually overshadow UK regulators.
He says: “Fundamentally, we have given financial services regulation over to the EU. That is the wrong thing to do and we are better off regulating ourselves as we have the biggest stake in getting it right. I fear that such is the way with EU initiatives it will grow and grow and it will eventually smother anything we do here.”
Last week, pensions minister Steve Webb announced proposals for a flat rate pension. Butler says this is a big improvement on the current system which will provide individuals with more certainty and encourage more people to save for their retirement.
Webb’s plans are focused on removing much of the complexity on the state pension system and Butler believes this principle should be extended to private provision.
He says: “The best way to increase saving would be to greatly simplify the pension system so people do not regard it as all gobbledegook. People need to be able to save in the ways that are right for them and I cannot really see why the Government should favour certain types of saving.”
Despite a free market mindset making him sceptical of state intervention, Butler approves of the Government’s plans for auto-enrolment due to the heavy costs to the state of people not saving enough. He says: “A default system where it is assumed you should save a proportion of your income and you can opt out if you do not want to is prob- ably a very wise policy.”
In last month’s Budget, Osborne announced a £50,000 levy for non-doms living in the UK for 12 years or more on top of the £30,000 levy already in place for people living in the UK for seven or more years. He also revealed that the current 50 per cent tax bracket should be seen as a temporary measure.
Butler says both taxes should be removed due to the message they send. He says: “Non-doms are not all super-rich and for those who are, it is not so much the money but rather, if they can do this, what else might they do? The 50p tax is not a tax on the wealthy it is a tax on becom- ing wealthy. In the 1970s, lots of my colleagues left the UK because of even higher taxes than we have now and only two or three have come back. Once you lose people from Britain, you may lose them for a very long time. That is what makes these taxes particularly damaging.”