If free trade is generally desirable, then what is wrong with it in the financial sector?
Regulation seeks to reduce risk for consumers but too much of it can lead to an over-dependence by the public.
If we take the Financial Services Compensation Scheme (FSCS) as an example, the back-stop it provides, while reassuring, means that consumers have less incentive to monitor banks’ ongoing stability. Thus, banks worry less about stability and their credit rating as these become peripheral to consumer selection.
Perhaps, if we remove the safety net of regulation, we can create a virtuous cycle of increasing consumer-led due diligence on providers.
There is a general perception of regulation as a ‘free good’ but, in reality, the cost of regulation is intrinsically bundled into every financial services product.
The world of financial services is becoming increasingly complicated to navigate and understand, and not just for the most vulnerable.The Financial Conduct Authority is currently pursuing increased transparency and value for money as part of its investment and platform market studies.
So, would there be societal benefit if all financial service providers listed their charges or interest rates, with and without the cost of compliance? In a similar manner to the way prices are displayed with and without VAT. Such a move would create the basis for a debate around the balance between consumer demand and a proportionate regulatory regime that protects vulnerable consumers and is delivered at a reasonable cost.
The FCA has declared its role in promoting innovation and has done some work to achieve that aim through the domestic, regulatory sandbox and its Global Financial Innovation Network.
The sandbox provides an environment to innovate under reduced regulatory scrutiny, while the regulator benefits from earlier introduction to, and understanding of emerging business models/technology and their implication for the regime.
If the sandbox is creating an environment for innovation, and we want innovation to drive growth, why restrict the underlying conditions to the sandbox?
The FCA recently stated that lengthy terms and conditions are preventing consumers from making informed decisions.
Part of the agreed need for innovation in financial services is to improve consumer engagement.
You can see the regulator’s support in its smart client communications agenda but the onslaught of paperwork, that is in part driven by regulation (terms and conditions, key features, suitability reports, illustrations, costs and charges disclosures), is not only preventing informed decision but also pushing consumers to the point of paralysis and their own detriment.
This comes as a number of robo-advice firms (Wealthsimple, Wealthify, Moneyfarm, Nutmeg and Scalable Capital) intend to lobby the FCA for softer regulation.
That request was rebuked by industry commentators on the basis that robo-advice firms must meet the same regulatory standard as traditional advisers but, are the robo-advice firms presenting a reasonable challenge across the piece?
If the sandbox is fostering innovation through reduced regulatory burden, and innovative business models are finding it difficult to engage customers through suitability reports, it seems likely that some elements of regulation are stifling intended outcomes and are far from optimal.
The world of financial services is becoming increasingly complicated to navigate and understand, and not just for the most vulnerable.
There is, undeniably, an important role for the regulation of financial services, but the scale of regulation has become disproportionate to the need and motivation for it, and the cost of this is not transparent to consumers.
There is now an opportunity to create an innovative and thriving financial services sector if we revisit regulation, challenging its scope, while also making individuals more responsible for their own financial wellbeing.
Jonathan Warren is a consultant at Altus Consulting
