The credit crunch is a sudden implosion caused by badly managed and overly complex financial instruments at the highest levels. The level of debt at the lower levels was high and likely to cause some economic indigestion but not catastrophic collapse.
The FSA have been quick enough to exploit the hysteria to their own ends with calls for greater manpower and greater authority. Instead of displaying strength why not display intelligence, instead of light-touch and heavy-touch regulation, how about intelligent regulation? That may have avoided many of the anomalies now found in the financial market, especially at retail level.
In the early 1980s, there were over 150 active insurance companies, now there are probably only 20 to 30.
There were hundreds of building societies. Other than Nationwide, how many are there now of decent size?
There were very many more advisers, both independent and direct, serving a wide strata of the public. In general, IFAs now look after the rich because it is uneconomic to do otherwise. The RDR is likely to reinforce this process.
Competition seems to be a bad word in finance and the results are starting to show.
The Times reported recently that a mortgage in Ireland provided by Halifax costs 2.74 per cent and RBS is charging 2.95 per cent. In the UK, the equivalent rates are 6.14 per cent and 5.99 per cent.
Why the difference? Because, according to Halifax and RBS, the Irish market is more competitive.
In general, the market will regulate itself on a comm- ercial level. If healthy profits are available, providers will normally enter that market with the effect of increasing competition. Products will be created that reflect what can be sold and at a price that can be sold.
One would expect the role of the FSA to be to maintain a reasonably level playing field through enforcing transparency since this would be beneficial to competition and consumers. However, that is not one of their three main stated objects although there is a reference to competition between financial firms at the end of the considerations’ list.
Regulation is a high-cost process and if made as obscure as the FSA has made it, a major deterrent to new entrants. What we have now is something more akin to a cartel.
There has been a significant outcry about the level of profit on payment protection insurance. In a normal commercial market, one would expect other companies to come into the market to share in the profits and improve the terms of the contract but this does not appear to be happening. The only apparent explanation is the level of FSA intrusion in the market. The recent ruling cover cannot be sold with the product may determine the extent of the market or it may just demonstrate that selling a product is necessary. We await stories about people suffering because they did not take out PPI.
There appears to be a serious distortion of the financial market in Britain.
I am tempted to wonder if the lack of competition in the insurance company market is an explanation for the consistently poor level of administration, but, having been in the industry for a long time, I have to say there has been no real change. Now there should be a challenge for any regulator.
There is an urgent need to review what the regulator is doing and how it is impinging on the financial markets. What value are the public getting for regulation? Has regulation created enough serious improvement in the markets to justify itself?
The FSA is the only major Government organisation in the UK that is not answerable to an official controlling body.
There should be research by academics into the effect of regulation on the market.
Regulation has let us down very badly. The FSA are historians reacting to what has happened, so its rules deal with old concepts. The credit crunch demonstrates that financial innovation at the highest levels is far too sophisticated for the regulatory structure.
The current regime is based almost on opinion of what is and is not effective rather than solid fact.
It is time for the Government, the FSA and the financial industry to start to put fact before opinion in the regu- latory area.
Before one starts a journey it is important to know where one is. At present, there are too few basic statistics about the industry, for example, how many financial advisers are there, how many financial transactions there are annually, what is the proportionate cost of fraud, of negligence, of incompetence, what sectors cause what problems? If there is a lack of confidence in the industry, is the FSA a cause or a cure? People do not like change but that is what they are getting from the FSA.
It may then be possible to see how to make steps forward, rather than merely walking in circles. We may also find the industry is not as bad as media headlines make it out to be. That would be a nice surprise.