Last week, the think tank, Institute of Economic Affairs accused politicians of ‘jumping on the anti-finance bandwagon’ in a report[i] which reviewed the contribution finance makes towards economic life. The UK’s financial sector is one of the economy’s most productive, but it has taken quite a bashing since the previous financial crash and suspicion still surrounds the industry.

The IEA report considers several points including: is the financial sector short term oriented; is it creating inequality and is it ‘duping’ consumers and investors. The argument that financial firms are ‘duping’ or harming consumers and investors through mis-selling (e.g consumers signing for products they do not understand and would not buy if they did) has since become the justification for a large amount of consumer finance regulation in the UK.

“In 2011 alone, the UK financial regulator introduced regulation or issued guidance, advice, discussion documents or consultations totalling 4.3 million words. This is more than five times the number of words in the Bible.”

The introduction of the payday loan cap is used within the report to demonstrate how regulatory intervention is often ‘grossly miscalculated’ as the subsequent shrinking of the payday market was between three and five times more than the regulator expected.

When the FCA placed the cap on lenders, it expected the volume of loans to drop by 11% and the number of customers to drop by 21%, yet the actual figures in the first year were 56% and 53%, respectively. One can therefore conclude that consumers who benefited from borrowing have now been shut out of the market. Indeed, the typical payday borrower is now somebody who is better-off and who borrows for longer, yet for those at the lower end of the income scale who can no longer borrow but require access to credit in an emergency, have been hurt by the cap.

The report notes how “this particular regulatory intervention has had detrimental consequences because it is impossible to design regulation that only targets perceived problems, whilst leaving well-functioning parts of the market unaffected. Regulators simply do not have the knowledge to be able to distinguish between people who will benefit and those who will suffer from the regulation and the interventions cannot be sufficiently fine-tuned. This is in the nature of markets and regulators. “

Critics of the financial services sector may point to a need for increased statutory regulation, however it is simply not possible to know in advance whether regulation will improve a market as “the perfectly informed regulator is just as much a textbook fiction as the perfectly informed consumer.”

Greg Stevens

8^th March 2018

[i] https://iea.org.uk/wp-content/uploads/2018/02/Socially-Useless-f1-web.pdf