UK proposal for consumer guidance in financial services

The UK has put out its proposals for financial regulation reforms, but many people expect the current government to lose the elections next year and believe that the new government will push regulations in a totally different direction.

The Governor of the Bank of England has been on a confrontational path with the government and some believe that he is already more concerned about his relationships with the next government than with the current one. He has been arguing for more powers to go with the Bank’s mandate for financial stability complaining that

So it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials.

I thought therefore that the following passage in the government’s proposal was telling the governor to get on with his sermons and stop complaining.:

One of the existing key responsibilities of the Bank of England, which will continue to be a significant feature of its new role, is to analyse and warn of emerging risks to financial stability in the UK, principally by means of its Financial Stability Report, published twice-yearly. It is important that the Bank retains this independent voice, to warn publicly of risks facing banks and financial markets in the UK.”

What I found more interesting than all this petty politics is the set of suggestions on consumer education and protection:

• “While financial services and food are clearly very different classes of consumer products, there may be important lessons to be learned from food labelling for improving the transparency of financial products ... However, there is a risk that a voluntary scheme would not work – for products which would be rated as complex or expensive, there would be a strong incentive on providers not to provide a rating at all. The Government is therefore inclined to work towards a compulsory scheme.”
• “ The Government therefore invites views on the case for legislating to ... introduce some form of collective action through which consumers can enforce their rights to redress.” This looked exciting but the actual proposal is quite dull and very different from the US class action mechanism.
• The big ticket item in terms of cost is the money guidance service for “making impartial generic financial advice on a wide range of personal finance issues accessible to all.” The government estimates that over the next 52 years, the cost (present value) of providing this service will be £1.3 - 2.7 billion. It believes however that the benefits will be ten times as large. Personally, I think that the money made clear web site run by the FSA is a good service, but the proposals go far beyond a good web site: “ This service offers impartial help that consumers can trust, safe in the knowledge that Moneymadeclear advisors will never try to sell them anything. People can access the service in a way that suits them – through the website or by speaking to trained advisors on the phone or face to face, who can give information and support that is tailored to individuals’ needs and circumstances.” For this kind of service, the cost estimate appears ridiculously low.

One distressing element in the cost benefit analysis is the claim that arming the FSA with greater powers to curb short selling would bring benefits of up to £9 billion over the next ten years in present value terms. I think the upper bound here should be zero and the lower bound a large negative number.

Posted at 5:01 pm IST on Thu, 9 Jul 2009         permanent link

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