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The Life Insurance Market
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I have suggested previously that retail FS regulation should be wound down and the money saved be spent educating consumers. That radical change only makes sense if you accept that retail regulation has been complicit in the destruction of prudent personal financial behaviour in Britain.
The polite regulatory army might accept that destruction as fact, but would blame the crooked practices of the regulated, and say that without regulation, all bad practice would continue unchecked. They would have a point; but if the intervening years – all 22 of them - had seen resources focused on educating consumers abusers would find their target market of the naïve and stupid rapidly shrinking. In a landscape of properly financially educated consumers bad practice become very hard to profit from on any scale and the real conmen would stick out a mile.
It’s not too late start moving the emphasis and spend from regulation to education, but what is need to spark such change is a clear intellectual truth that requires it. Try this.
Had there been no FS regulation, the psychology that caused global economic chaos could never have existed.
Why? Well it was the tightening of US banking regulation that presented insurers in general and AIG in particular with the opportunity to arbitrage their lighter touch regulation into huge earning streams from those product areas the banks were commanded to ignore. They became proxy banks with little competition. Incredible growth resulted and in the end their greed and lack of experience destroyed the quality of their collateral and with it world finances.
Their psychology is understood. It was, “If the regulations don’t say we can’t do it, then we can and should if it makes money.” Regulation breeds that logic by replacing the moral compass with the rule book. And unless the rule book is perfect in a way it never can be, abuse is inevitable.
Of course those insurers (or more likely the banks) would still have acted as they did were there no regulation, but denied the protection of the ‘rule-book defence’ their abuse would have been challenged by competitors and press and its scale would have remained manageable and eventually withered away as bad practice does when continuously exposed.
But if bad practice can be shown to be within the rules then it cannot be stopped or effectively challenged except by a rule change. It becomes a bureaucratic race to win a regulatory argument before real damage is caused. And history shows that race is always lost by a country mile. Market critics are shut up, the argument goes back and forth at the regulator and all the while the damage being done accelerates.
From the globally disastrous sub prime loans through to the locally painful misselling of PPI, the regulator perforce acts too slowly. It always will. But an active market commentariat, unfettered by the rule-book defence and thus capable of clear moral argument can control abuse, though not root it out altogether. That failing is though far less destructive than the alternative.
When we try to make some lose into none lose, all lose. After decades of proving that point, government should accept that like many noble ideals, the freeing of financial markets from all abuse is not attainable. Better to leave it to the market, the press, the web and the educated consumer to limit that abuse.
In short, the transfer of moral hazard from practitioners to the rule book is what causes mass abuse. Accept that and “educate don’t regulate” becomes sensible policy and not radical at all. Can you?
This article appeared in the May edition of Money Marketing.
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