Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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

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.


One response to “UK proposal for consumer guidance in financial services

  1. Austin February 2, 2010 at 10:41 pm

    Take a look at class action lawsuit against Whitefin Shipping Co. Limited

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