The past couple of years have seen big scandals that the regulatory system failed to pick up, in particular BCCI and the Maxwell pension funds. These are clear failures, and it would have been astounding if the regulators concerned did not find themselves under attack.
But up to now these attacks have been remarkably ineffective. The regulators have been damaged to some extent, but they have been able to escape with the odd superficial dent: the structure is intact. The attacks over BCCI have tended to come from MPs, who themselves are open to the criticism that they are merely trying to score political points. The attacks on Maxwell have come from the press, which with the odd exception (like, to be fair to us, this newspaper) failed to challenge the chap while he was still alive.
Now comes a new and potentially much more effective line of attack. This is not to say that the regulators were dupes, but that they did not give value for money. The challenge comes in a new report* from the London Business School. This is part of a series of research papers that the LBS is preparing on the future of London's financial service industry, funded by the City Corporation. The first paper looked at the financial services industry's relative position in the world, the second at London's transport system.
The nub of this study is that the regulators are heading in the wrong direction. Instead of seeking to correct market failures, they are providing a consultancy service and introducing regulation where either there is nothing wrong, or where there is something wrong, it could be put right by the industry itself.
Britain's regulatory system is expensive, though not in total more expensive than that of the US or France, but we are probably not getting value for money. The authors suggest that a public body such as the National Audit Office should look at the costs of the system to see that it is cost-effective.
It is very hard to quarrel with this judgement. When Andrew Large, head of the SIB, passes his own report on the future of the regulatory system to Norman Lamont, he will probably have come to similar conclusions.
The Bank of England, meanwhile, has beefed up its system of banking regulation. In as far as you can be sure of anything in Britain, there will be further reform in the next couple of years which will both simplify and strengthen securities market regulation.
It is important that this happens for one oft-overlooked reason. Over the next 10 years there will be a big shift of emphasis from deposit-type financial services to securities-based ones.
To explain: for 40 years there has been steady growth in the range and variety of financial services built around deposit-taking. The building societies developed an extremely efficient mechanism for collecting retail savings deposits, and the banks have sought to match these. People have been introduced to credit cards, and educated to the concept of the APR - even if they do not know what it stands for, they know that if they borrow money it is the best way of comparing interest rates.
In a period of high inflation and hence high interest rates, deposit-based services are particularly important. Though equity yields were generally higher than yields on cash, the latter were high enough to appear attractive. Now they are not. So people have rushed into various types of security - bonds, utilities, investment trusts - to maintain their yields. Assuming that the long-term trend of inflation and interest rates remains down, people will continue to look to these products.
From the point of view of the regulators this shift might seem irrelevant. Their job is to regulate both the BCCIs and the Maxwell pension funds of the future: from their point of view they have to get both the banks and the securities market operators right. But from the point of view of the market that they serve, the customers who will ultimately pay for the regulation, it is important that the growth markets receive the greatest attention.
Regulating securities markets is a complex process quite different to regulating banks or building societies. It is not a question of making sure that the bank does not go bust; it is much more a question of ensuring that the products are appropriate for the purchaser and sold in a fair manner.
It is fascinating that it has been the Office of Fair Trading that has attacked the lack of disclosure on the costs of life assurance products - a view accepted by the Pru. (The Pru's chief executive, Mick Newmarch, has been excellent on this, consistently attacking the industry's foot-dragging approach to regulation.) This was one of those securities market issues that screamed for attention, yet the whole expensive SIB structure has so far failed to respond.
Ultimately, good regulation ought to be good business. Not only should it increase consumer confidence; it should impose a useful discipline on the producers. Apply the test of cost-effectiveness to City regulation and it is clear that the present system is, to put it politely, sub-optimal.
* The Costs and Effectiveness of the UK Financial Regulatory System, Julian Franks and Stephen Schaefer, LBS, published by Corporation of London.Reuse content