Essay – claims about ‘regulatory burdens’ need de-bunking

Yet another report has been published critiquing regulation. Coverage of that report can be found here: We need to do something about bunged-up Britain | Financial Times (

Of course, claims that regulation is a burden, that it stifles innovation and competition, that well-meaning firms are tied up with red tape, and that regulators are not properly scrutinised are nothing new.

The so-called Brexit ‘regulatory dividend’ 

But, recently the deregulation agenda has gained momentum with claims that the UK economy could benefit from a Brexit regulatory dividend. For example, finance industry lobbyists have been relentless in pushing for regulatory reform to ‘free up’ insurers and pensions to fund net zero, support economic growth and recovery, and even levelling up.

Sounds great, you might think. But, who stands to benefit from this regulatory dividend? The reality is very different to the spin. For example, the government with the support of Labour, the main UK opposition party, is pushing through very risky financial deregulation that would weaken financial system defences, undermine the security of peoples’ pensions, and allow financial institutions to extract even more value from peoples’ pensions and savings. See: Submission to HM Treasury Review of Solvency II consultation | The Financial Inclusion Centre

This deregulation would not even require financial institutions to fund net zero or stop financing climate harm at scale as a quid pro quo for undermining peoples’ pensions. See: The Devil is the policy detail – will financial regulation support a move to a net zero financial system? | The Financial Inclusion Centre

Politicians from both sides are also supporting an initiative promoted by the finance industry called personalised financial guidance (PFG). The industry is taking advantage of the opportunity provided by the review of a critical piece of EU regulation called MiFID.

The finance industry claims it wants to close the financial advice gap in the UK. There is an advice gap in the UK. But, it is not caused by restrictive regulation. The main reason is the economics of access which means the finance industry cannot serve millions of consumers on terms that make sense for both the industry and consumers.

This PFG initiative is very risky. It would blur the definition of regulated financial advice and, worryingly, reduce the protections consumers have against misselling and reduce access to redress. Rather than encourage the industry to target lower income households, it is more likely that this deregulation would just enable less scrupulous investment companies to target better off consumers with higher risk, high fee products knowing that they would be less likely to be held to account.

Debunking the ‘regulatory burden’ claims

The Financial Inclusion Centre is primarily concerned with financial deregulation. But, what happens in other sectors matters to household finances and consumer financial wellbeing. There is a wider deregulation agenda. Politicians have accepted industry arguments that regulation is holding firms back from meeting consumers’ needs, innovating to make the UK economy more internationally competitive, and supporting national climate, economic, and social policy goals.

These claims by industry lobbies really do need debunking. The idea that we have too much regulation, or that regulators aren’t scrutinised just doesn’t stack up.

A reminder of why we have comprehensive regulation

The first thing to remember is that the primary reason we have an established body of regulation is that the market, left to its own devices, cannot be relied on to treat people (consumers and workers) fairly and safely, behave responsibly and with integrity, and not harm the environment and so on.

If markets behaved responsibly, we would not need comprehensive regulation. Markets are powerful. Regulators exist to level the playing field between those markets and consumers. It has been necessary to build a comprehensive system of consumer protection across a number of economic sectors. We have had to create a system of rules that codifies what we should expect from well run businesses. That is a sad state of affairs.

Independent campaigners believe that, far from being too intrusive, existing regulation in key sectors needs to be even tougher and more interventionist. But, it is not just the obvious consumer protection aspects we need to consider. We need to think about the way vulnerable citizens are exposed to detriment due to the nature of market-based provision of services.

Markets are amoral, and allocate value and preferential treatment according to economic power and influence, not on the basis of peoples’ needs. That is not a criticism of markets, it is just a description of the essential nature of markets. The economic textbook notion that markets are populated by sovereign consumers exercising choice to drive good corporate behaviour is rather naive.

In terms of the relationship between providers and consumers, the prevailing idea is that providers in a market are forced to compete for consumers and this drives up standards, quality, and innovation.  But, for many consumers, the reality is that they are in competition with other more powerful consumers and with powerful providers to get utility from market resources and transactions.

Markets sort people into winners and losers.  The poorest people with the greatest need, or people considered to be a ‘high risk’ can end up paying more for essential services, face discrimination, or are simply denied access altogether.

In key areas eg. financial services, utilities, telecoms, and digital services, far from being ‘burdened’, private sector providers are actually subject to few meaningful social policy obligations to protect vulnerable people from market dynamics. Market principles still prevail.

Is regulation too intrusive?

What about the approach to regulation? Do regulators have too much power, are there really too many rules and regulations? Do regulators stifle the market, particularly on innovation?

There are some very effective consumer protection and conduct of business rules in place across a number of sectors. Yet, regulators’ powers to directly intervene to control market behaviours are actually still quite limited. Regulators rely mainly on promoting competition, switching, and consumer education to make markets work rather than the demonstrably more effective direct interventions such as product regulation, product banning, and price capping. And, as mentioned above, regulated firms have few social policy obligations.

This limited use of direct market interventions is partly down to regulators not having the right powers. It is also partly a self-limiting cultural issue with regulators. The major UK regulators still default to textbook economic theories about the benefits of competition.

Contrary to the portrayals of regulators as bureaucrats keen to stifle the buccaneering spirit of the market, most senior regulators we engage with have a very strong belief in the ability of the market to deliver and have little appetite for interfering in the functioning of  market competition. If anything, regulators need to be more willing to actively shape markets not just try to create the conditions for competition to work.

Regulation and regulators are often accused of stifling innovation. Yet, much innovation has little social utility, is designed to meet the marketing needs of firms, and can create more harm than good. Good regulation does not stifle socially useful innovation. If anything, regulators (and legislators and policymakers) are too permissive, only intervening to protect consumers from toxic innovation when there is evidence of harm that cannot be ignored.

Yes, in some areas there are many rules. Why is this? We would argue the main reason we have so many rules is that many firms do not trust themselves to interpret high level principles, and demand detailed rules and guidance. We have tried principles based regulation, and outcomes based regulation before. But, industry struggles with this and seeks certainty in detailed rules and guidance. We always lay down a challenge to industry. Point out which pieces of regulation go further than is expected of well run businesses and we will support their removal.

Corporate interests need more scrutiny

Regulators already face a great deal of scrutiny from politicians, industry lobby, civil society, and the media. Yes, regulatory governance and oversight could be better. But, the problem here is that civil society is seriously under-represented in policy development and decision making. Industry lobbies dominate the process of policy development and regulatory working groups. There is little regulatory transparency due to the protection given to commercial interests. It is not regulators that need more public scrutiny, it is powerful corporate interests.

Recognising where responsibility lies for market failure

Regulators should be held to account for failures within their remit that they should have reasonably been expected to stop. But, too often, blame is heaped on regulators for failing to deal with issues that are outside their control. That is the fault of politicians and government for not giving regulators the right powers and tools to do the job, or being too slow to include risky new products within the regulatory perimeter.

We also need to appreciate the scale of the task facing regulators especially in complex markets such as financial services.  They cannot supervise every market activity with the same intensity to prevent every case of market failure. Regulators have to prioritise. Regulators are, at the same time, blamed for too much ‘nanny state’ regulation and for too little regulation accused of being ‘toothless watchdogs’ and being ‘asleep at the wheel’.

The UK economy is not burdened with regulation

So, let’s drop this idea that the UK economy is ‘burdened’ with regulation or that it stifles innovation. This narrative is hindering our ability to have a much needed objective and rational debate about how to enhance the effectiveness of regulation, to make markets work better and more accountable. We actually need a tougher approach in those areas that are currently regulated. Moreover, we’ve done very little to stop financial institutions and real economy corporations harming the environment or big tech/data harming vulnerable people. There is so much more to be done.