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Giving the CPMA a competition objective would be a mistake

Good intentions often lead to bad legislation which has unintended consequences that then require further legislation. This is the worst possible path for public policy, creating pure waste in economic terms and uncertainty. The Labour Government gave us far too many examples.

Giving the Consumer Protection and Markets Authority a competition objective would be exactly that kind of mistake.

It is true that there is a lack of competition in many areas of financial services. But in most cases, this is a consequence of regulation and Government actions, such as bank bailouts leading to bank consolidation. Where this is the case, only better or less regulation and more sensible Government action will solve the problem.

Some argue that it was because the FSA did not give enough weight to competition considerations that financial services have become so uncompetitive. I disagree – I think the FSA had a fundamentally flawed view of financial services regulation and that a competition objective would not have changed that.

Regulation of the advice process, which became the FSA’s one-shot club for all 18 holes of the retail marketplace, inevitably restricts competition in quite fundamental ways. Altering the nature of financial services regulation so that the emphasis is on regulation of products would do more to encourage competition than another windy mission statement.

Competition is an outcome of a large set of policy decisions. We take it for granted in most consumer markets because we have a set of interlocking laws, regulations and processes that encourage it. To mention just a few – the Companies Act (corporate governance), the Advertising Standards Authority (no misleading ads), the Office of Fair Trading, the Competition Commission, a very active consumer press and shopping websites giving advice on the selection of almost every type of product.

In case you have forgotten, it was the OFT and CC that beat the banks into submission on payment protection insurance, not the FSA. Market abuse of that type is pretty well covered by existing competition law, although there is a case for improvements. The PPI case took too long, so shortening the timescale for redress of such abuses would be a good idea. But giving a new authority new powers that cross-cut existing laws is a recipe for confusion, uncertainty and quite possibly delay and tiresomely long and drawn-out court cases.

If the CPMA is given a competition objective, it will start to think of all sorts of initiatives that may foster competition within the framework of the existing regime. I could think of many and probably you can too. But this is just tinkering, which is exactly what we do not want.

If we want a more competitive market in financial services, we have to remove the obstacles that prevent it happening.

The big one is the ban on people selling financial products. Under the existing regime they are defined as giving advice, which is subject to absurdly complex and heavy-handed regulation, imposing huge costs on consumers as well as providers.

As soon as we get rid of this pretence and own up to the fact that providers and distributors want to and indeed do sell products and only give advice in the same sense as a car salesman does, we can move towards a normal consumer market in which competition will emerge naturally.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Chris I agree with your comments and would add the financial services as an industry is so over regulated it’s hardly surprising fewer people are joining the industry while the banks continue to trade without any due care or consideration to best advice? My opinion is that banks and building societies should go back to bank and lending and independent financial advisors focus on financial services, and insurance brokers focus on general insurance effectively stop the idea of cross selling. This is how the job was done before the deregulation, and lastly let us not assume that the public are stupid, we all know and understand that a shoe salesman needs to sell shoes to earn a living as does a financial advisor need to sell his products, so please let everyone get on with their jobs.

    Paul Beale

  2. Paul you obviously wish that the clocks would be turned back to the good old days which is never going to happen in a month of Sundays.

    However, I think that if the N & P gets its fingers severely burned over the Keydata debacle, you may find that some of the institutions go back to doing what they are best at, banking, et al. They may start to realise that giving advice or selling products carries severe risks.

    You may also find that with the RDR they will not be able to make such huge commission for a quick sale operation; the public will hopefully see through it and think what are they doing for this money.

    However, I cannot see civil servants doing themselves out of a job in the foreseeable future. Do they really care what happens to our industry or is it all about protecting their own jobs and building their own empires. I think history proves this is the case.

  3. Chris … I find it strange that I both agree and disagree with your analysis.

    Agreed: that product and advice are two different categories, and that the adopted phrase “restricted advice” when what is meant is “restricted product range” is a clear example of where the regulators are coming at problems from the wrong direction.

    Inheritance tax planning is perhaps a good example, where advice alone (no matter the categorisation of the adviser over available products) may provide solutions – with no need for a product.

    Disagree: You mention payment protection insurance and the actions taken against past sales by the OFT and CC. What was it that was found wanting?

    It seems to me it had its roots in – your words- “… the fact that providers and distributors want to and indeed do sell products and only give advice in the same sense as a car salesman does …”.

    Agree: The OFT, not the CPMA, combined with market forces should be the way to address competition issues.

    But the past 20/30 years indicate, for me, that the OFT are far from up to the task – not least in monitoring the actions of the FSA many of which are anti-compettive.

  4. I am now more confused than I was before!

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