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Call to ease financial policing

Financial regulation is overburdensome and counter-productive in areas ranging from retail financial services to derivatives. Regulation should be replaced with greater disclosure, according to a series of essays published today by the Institute of Economic Affairs, a free-market think- tank.

Jim Stretton, UK chief executive of Standard Life, says Britain's new arrangements for supervising retail financial services through the personal investment authority are "wrong, muddled and dangerous", lead to unachievable expectations, and prevent healthy developments in the market.

Standard Life was one of the last big institutions to join the PIA, because of these reservations. Mr Stretton says that regulation of the life assurance industry needs fundamental review. "We simply cannot continue the vicious circle of impossible expectations which lead to breaches of those expectations, and which then induce regulators to increase the extent of their activities and create even more impossible expectations."

The theme that regulation is harmful is taken up by Harold Rose, visiting professor of finance at the London Business School. Prof Rose argues that regulation often simply helps keep new competitors out of the market. He recommends replacing controls on financial institutions with greater disclosure, and relaxing libel laws to allow franker press comment.

Some support for the theory that regulation simply protects vested interests is provided by Donald Brash, governor of New Zealand's central bank. Mr Brash describes the changes New Zealand is in the process of making to its banking supervision arrangements. Concerned that the existing arrangements were too costly and reduced the effectiveness of market disciplines, New Zealand is introducing instead quarterly disclosure requirements. The only objections to the changes, according to Mr Brash, have come from the banks themselves.

Additional disclosure is seen as the key to protection from derivatives disasters by Maureen O'Hara, professor of finance at Cornell University. "What is needed to protect the financial system is not so much greater regulation as greater disclosure of trading information."