Tuesday’s Times brought news that the Financial Conduct Authority has managed to land itself in some hot water with the Chancellor. The FCA—set up by the Coalition Government to draw a line under the Brown-era Financial Services Authority—has been accused of “precipitating a disorderly market in insurers’ shares” by leaking to the press that it intended to review whether closed life funds have treated their customers fairly. A quick primer: a life fund becomes ‘closed’ when it stops writing new business, and instead manages in-force policies using existing assets held. Such funds tend to be bought up by large insurers and managed in bulk, typically managing insurance policies written as far back as the 1970s.
While the principle of such a review is hardly objectionable, the way in which the FCA chose to inform the public about it most certainly was. It took almost 24 hours for the FCA to issue some words of clarification over how it intended to proceed, during which time the shares of some of the players in this market—Resolution, Phoenix Group et al—took a hammering in the stock market. The Chancellor, George Osborne, has ordered a review into the FCA’s actions: he has described the leak as “damaging both to the FCA as an institution and to UK’s reputation for regulatory stability and competence”.
Lest we forget, the FCA is a State regulator: it’s part of the machinery of government. When it gets it wrong, the ramifications are all the more significant than when one individual company makes a mistake. And it’s a monopoly provider: if HMRC screw up your tax calculations, you can’t—short of emigration—take your business to another tax-collection authority down the road, in the way that you can switch from Barclays to HSBC if the former delivers a poor service.
Let’s look at some other examples of where State regulation has made things worse rather than better:
HMRC data loss (2007). This was when two discs containing the data for some 25 million people—names, addresses, dates of birth, National Insurance numbers—went missing in the internal post between Washington, Tyne & Wear and London. It transpired that proper procedures relating to data protection had not been followed, and the discs have never been recovered. Questions were asked as to why it was possible for someone to access the entire data set and why only rudimentary password protection safeguards—easily broken by those in the know—were used. Private companies dealing with data in respect of individuals would be expected to follow much stricter procedures.
The Hatfield rail crash (2000). While the train crash on the East Coast Main Line, caused by poor maintenance of the railways, happened on the watch of a private company—Railtrack—it was the State which put in place speed restrictions across the UK rail network. These crippled the network for weeks and caused rail passenger numbers to fall by almost a half. The accident rate per kilometre is some 12 times higher on the roads compared to the railways, so if people switched to driving, it’s likely that travel-related deaths would have increased.
Standard Life (2004). Once the jewel in the crown of Edinburgh’s financial sector, the then mutual insurer was deemed by the FSA to be holding too great a proportion of its assets in equities. It was then forced to divest these holdings—14% of its with-profits fund—to reduce the investment risk being run. The fly in the ointment? Stock markets were at the time recovering from following the bursting of the dot-com bubble and the September 11th terrorist attacks, meaning that Standard Life incurred massive losses in selling shares at a lower value than could have been realised had they waited. The company went through some rough times, demutualising from a position of weakness and shedding many jobs, but does still exist to this day.
Changes to MIRAS rules (1988). Back in the good old days—pre-Gordon Brown entering No 11—you could claim tax relief on the interest you paid on your mortgage under the MIRAS (Mortgage Interest Relief at Source) scheme. Alas then-Chancellor Nigel Lawson announced in April 1988 that he would remove a loophole that allowed “double MIRAS” to be claimed by co-habitees. However, this did not take effect until August 1988, leading to a huge boom as people sought to take advantage of the opportunity, followed by a slump in the market afterwards. It demonstrates how the poor implementation of a relatively minor change can have huge economic consequences.
There are too many more to list; these are intended to give a flavour for some of the mishaps the State has inflicted on us in recent years. What makes it worse than if, say, a private company were involved is the scope of the State: when it gets it wrong, it has the potential to get it wrong for the entire country. It is also fair to say that the State has very exacting standards for others, but does not always live by these principles itself. The data protection breach described above is but one example and my own hobby horse—occupational pensions—offers another. Private-sector final salary schemes are subject to oversight from the Pensions Regulator and need to be funded in advance to quite stringent levels. Alas not in the civil service schemes: they operate on a pay-as-you-go basis, whereby the taxpayer need make up any shortfall as it falls due. With an ageing population and an increasing dependency ratio, this is, shall we say, not ideal. But the State is free to do as it pleases here: not, however, the case for those who live under its regulation.
The lesson to be learned here is that the State—in all its forms, but regulatory bodies in particular—needs to be very careful in how it acts. The cost to individuals and private sector organisations when it screws up is all too high. The FCA example is but the latest example, but I suppose the problem is nothing new: after all, was it not the Roman poet Juvenal who first posed the question quis custodiet ipsos custodes?
Jonathan Galbraith is a Fellow of the Institute and Faculty of Actuaries and a member of the Conservative Party. Born and educated in southern Scotland, he now lives in Warwickshire and works in the pensions industry. He writes in a personal capacity.
Sources:
http://www.thetimes.co.uk/tto/business/industries/banking/article4051012.ece
http://www.ft.com/cms/s/0/af580884-b98b-11e3-b74f-00144feabdc0.html#axzz2xjT88W5f
http://news.bbc.co.uk/1/hi/uk/1038403.stm
http://www.theguardian.com/politics/2007/nov/21/immigrationpolicy.economy3
http://www.thisismoney.co.uk/money/saving/article-1514258/Anger-at-Standard-Life-1633bn-share-sale.html
