In June 2014, the Chancellor created a Fair and Effective Markets Review (FEMR) of financial services, co-chaired by the Bank of England, FCA and HM Treasury. The report is due next month but has been widely trailed. Before we see that review, and in an effort to keep itself busy, the FCA has announced a further review covering some of the same ground, the Investment and Corporate Banking Market Study (ICBMS): “We are examining issues around choice of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services.” Each of these reviews takes a year and costs you and me hundreds of millions of pounds. The FCA spends around £480m, growing at 6% p.a., and this is their biggest single project. It must cost the industry a similar amount in dealing with the FCA’s 3,000 staff. We consumers pick up the costs: every bill from my stockbroker has a £20 “Compliance charge.” That is hardly a key issue for most electors as they vote on the government every five years, so this unrestrained incubus feeds itself.
This second review is not just duplication: neither should be necessary at all. Both arise from Treasury and FCA failure to understand how markets do and should work – and we now have the Competition and Markets Authority. It was launched only last year and could perfectly well cover financial as well as other services. I would even go so far as to allege that the financial services regulators’ adversarial approach is in part responsible for the scandals. The FSA, and now the FCA, have forced banks to close ranks to deal with what must seem to them a common enemy. As Adam Smith pointed out two and a half centuries ago, putting competitors in the same room is likely to be bad for competition.
The Bank of England, by contrast, used to preside over the sector in the manner of a kindly uncle, nudging potential miscreants away from their misdoing, but not taking on the sector as a whole. Maybe the BoE can recover that role.
The terms of reference of the ICBMS seem to indicate that the FCA suspects clients do not choose their banks and advisers in the way they should, that things are not fully transparent and that cross-subsidy of services is a malpractice.
The first of these is a remarkable suggestion: that the FCA knows how clients should make decisions better than the clients do. Enough said.
On the second, in any market, the products should indeed be fully and accurately described, as the law requires. In the case of manufactured foods, for instance, the labeling requirements are extensive. But the FCA’s brand of “transparency” implies more than just product description: it means revealing everything about the product. If it were applied to oranges, it would require not just the variety, country of origin and the terms of trade proposed, but also the name of the supplier, the date purchased and the price paid by the retailer. Markets do not work this way: competition, along with proper product description, protect buyers by enabling them to compare.
The third implication, that bundling and cross-subsidies are wrong, is the most revealing. When I buy a car, I do not expect to buy all the parts and then have to put them together. I could do that, but bundling the components is far more convenient, and cost efficient, for both parties. And if I make £1 on a dozen oranges but £2 on a dozen pineapples, are my pineapples cross-subsidising the oranges? But then if the oranges sell for 50p each and the pineapples for £2, my margin on oranges is 17% and on pineapples is only 8%. Now the oranges are cross-subsidising the pineapples. Which is the more wicked?
The reality is that every market allows the seller a maximum price whittled down by competition, every seller has different costs, and some things are therefore more profitable than others. The notion of “cross-subsidies” is fantasy.
The FCA’s meddling with financial services adds cost to the sector as a whole, in addition to the growing burden of EU regulation. And it damages competition through a failure to understand how markets work. And its antagonistic approach may even be creating a climate where malpractice is more likely. In short, it is counter-productive.