The failure of financial services regulation

As we get into 2018, the financial services regulations continue to grow. Government, and by extension the agencies of government, intervene in the day to day running of financial services firms like never before. The core driving principle behind the relentless command and control approach is the desire of all governments, of all political colours, to assume power over all individuals and remove their self-reliance. This drive is endemic across all areas of government – the nanny state is a useful descriptor. It is not unique to Australia but happening throughout the western world.

The history of regulation of financial services in Australia has followed broad themes over the years since the second world war and the unsuccessful attempt by the Chifley led Labor Government to nationalise the banking sector. Since then, the broad themes have been solvency management, consumer disclosure, management scrutiny and consumer needs assessment. With each phase, regulation has moved increasingly into micro-management and assumed the role of consumer judgement. With each phase, the cost of regulation has increased and product innovation has been stifled. Competition has been inhibited and consumers have been made worse off as a result. A current focus of the regulator, APRA, in superannuation is making a judgement as to whether a superannuation product is meeting the consumers’ best interests. That judgement ought to be left to the consumer. Government regulators are attempting to control who can work in executive positions and how much they are paid. That judgement ought to be left to the directors of the financial services firm.

As a consequence of this excessive regulation, all Australian consumers of financial services are worse off. You will note that instances of financial services scams and rip-offs, Company failures, cronyism and unconscious behaviour continue to emerge. This is not surprising to me. The more the regulation, the more likely it is that such failures will happen. The two best mechanisms available to guard against financial services scams are a) the fear of failure and b) consumer scrutiny and self-reliance. Government action is killing off both.

First, the fear of failure. ‘Too big to fail’ is how Governments look at most big financial services firms and at times of financial stress, will use tax-payer money to bail them out of trouble. It happened in the 2009 financial crisis. The firms know this and as a result can act in a different way – take on more risk, price overly aggressively, minimise capital reserves etc. They also know that the barriers to entry of new competitors are very high because of the regulatory arrangements and so consumers have limited power to change firms. This leads to unconscionable behaviour.

Secondly, the consumer scrutiny. Consumers have been led increasingly to believe that the Government is judging the suitability of products and the associated risks of financial services. In any event, if a firm fails, the consumers only need to complain loudly for a Government (ie tax-payer) bail out. As a result, the consumers feel less need to make their own judgements, be cognitive of risks and be responsible for their own decisions.

Government increasing regulation is driving costs ever higher, efficiency lower and inhibiting both innovation and competition.