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