The cost of complying with rules enforced by the UK's financial services regulators may amount to 9 per cent of the industry's turnover, says the report by David Simpson, a professor at Heriot-Watt University.
Mr Simpson argues that a new approach should be taken, working with market forces instead of trying to oppose them.
Instead of detailed regulations that lay down procedures to be followed when dealing with customers, the information they get and what they can and cannot be sold, "vigorous competition" should be applied.
This, coupled with "effective enforcement of laws against fraud and unfair trading", would be more effective in ensuring an end to poor selling practices.
Mr Simpson's comments, presented in a pamphlet for the Institute of Economic Affairs, a right-wing think-tank, come amid increasing debate about the effectiveness of various financial services regulators.
They also follow a failure by the Securities and Investments Board (SIB), the leading City regulator, and the Personal Investment Authority (PIA), the frontline watchdog, to resolve the pensions mis-selling scandal.
A report prepared for the SIB two years ago said that up to 1.5 million people may have been mis-sold a personal pension.
Last year, the PIA said it expected the 350,000 most urgent cases to be dealt with by Christmas 1995. Since then barely a few thousand individuals have been offered compensation.
The apparent failures of the existing system have led to calls from some Labour critics for a highly centralised watchdog under statutory control, to oversee retail and wholesale markets.
Mr Simpson, an economic adviser to Standard Life, the giant Scottish mutual insurer, argues that instead of "paternalistic" investor protection, the aim of regulation should be to create a market in which consumers can deal with confidence.
Competition would promote integrity as companies recognise a reputation for integrity is a "competitive asset", he believes.
"Companies would work within a code of conduct, enforceable at law, much of which can be derived from existing laws against misrepresentation," he says.
"There would be a single regulatory body for the marketing of all personal financial services which would monitor compliance with the code of conduct, promote comparative performance data and organise a programme of consumer financial planning awareness."Reuse content