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Media Spotlight: Does Britain Need A Financial Regulator?

By Terry Arthur and Philip Booth

If you walk into a supermarket and buy a piece of meat, it seems fair to expect that that meat won’t poison you when you eat it.

But unless you are an expert there is no way of knowing whether it has been prepared properly, you simply have to trust that it has.

To encourage this trust there are statutory regulations to force all meat sold in the UK to be prepared to a standard. Punishment in the form of fines and possibly legal action will follow if the regulations are breached.

Such regulation brings a comfort to consumers and raises industry standards. Only independent government agencies such as the Food Standards Agency can provide this comfort.

Self-regulation led by vested interests would serve the needs of the producers far more than an independent regulator would or could. The same is true of financial regulation – the government, as a representative of society at large, must force companies to act in a way that consumers can trust.

But the Institute of Economic Affairs does not agree in Does Britain Need A Financial Regulator?. It explains why most investment markets should be self-regulating and why the Financial Services Authority and its regulatory replacements should be abolished.

The book starts by quoting Austrian economist Ludvig von Mises, who claims that the basis of any capitalist society is a stock market. But if the stock market is regulated by the government the book says society is a capitalist-socialist hybrid. The solution is to regulate privately and abolish the FSA, which will be popular with brokers, no doubt.

The theme can be summed up in one sentence from the chapter titled The Case Against Government Regulation.

“There are clearly areas where private markets will not provide the optimal level of regulation but all markets fall short of the theoretical ideal of perfect competition – as such its value as a theoretical paradigm in this context is questionable,” it says. “Governments fail too.”

The point the authors are making is that government is not a panacea and when both systems are imperfect self-regulation is more efficient.
There are plenty of examples of how the FSA has failed to regulate properly and the book insists the financial crash has made it more important that the regulator’s role is reduced.

A popular point with brokers will be the reference to unnecessary mortgage regulation despite “no evidence that UK mortgage debts had anything to do with the crisis”.

There are also arguments against the FSA’s role in disciplining individuals by imposing fines, which it says blurs the boundaries with criminal law. And perhaps most strongly it condemns the long tentacles of the FSA.

To be fair, the book is making a point primarily about investment markets and there is a case that commercial investors should be responsible for their purchases in the same way a meat investor can take the risk of buying contaminated meat.

But consumer regulation remains crucial and the wider economy must be taken into account when considering investments. There is definitely a case for macro-regulation.

This book was given to FSA chairman Adair Turner over the summer by the IEA. But he should know that while it is worth reading, the case to abolish the financial regulator has not been made.

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