A flawed approach to better consumer protection

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In Britain, as in the US, the new government elected after the financial crisis promised that better consumer protection would be central to a new regulatory regime. In Britain, as in the US, that aim has been steadily watered down.

The Consumer Protection and Markets Authority will now be the Financial Conduct Authority. The change in name is appropriate, since its objective will be “protecting and enhancing confidence in the financial system”. Really?

The mission of the Medicines and Healthcare Regulatory Agency is to “enhance and safeguard the health of the public by ensuring that medicines and medical devices work, and are acceptably safe”. If the MHRA is successful in that endeavour, the public is likely to have confidence in the healthcare system. But it is that way round. “Protecting and enhancing confidence in the pharmaceutical industry” is the duty, not of its regulator, but its trade association.

The distinction between confidence and justified confidence is critical. In practice, the MHRA most often engages with medicines in which a segment of the public has confidence, but which do not work or are not safe. This is an even greater problem in financial services. The new economy bubble, the sale of complex asset backed securities, the scale of Greek debt; these problems arose not because consumers did not have enough confidence in the products, but because they had too much.

Fraudsters are called confidence tricksters, and part of the job of the police and other regulators is public disillusionment. The “naming and shaming” of large companies that had abused their reputations by mis-selling products has probably been the most effective regulatory action the Financial Services Authority has taken in support of consumer protection.

The government at first proclaimed that the new agency would be a consumer champion, but now resists the notion that it should be a consumer advocate. Rightly: the barrister who makes the best case for a guilty client is an advocate, but a regulatory agency should champion the interests of consumers overall rather than individual consumers. But this real distinction seems to have been elided into the idea of regulatory authority as arbiter between the conflicting interests of consumers and producers.

The medicines analogy is helpful again here. The MHRA is expected to balance the conflicting interests of consumers in product safety and the rapid and cheap dissemination of new drugs: pharmaceutical companies’ profits are subordinate, and incidental, to the welfare of the public. This distinction is sometimes hard to maintain under industry pressure, but the principle is clear.

The analogy between medicine and financial services should not be taken too far. The wrong medicines can kill people, the wrong financial products only impoverish them. The offering of new financial products should not be subject to prior regulatory approval, as is the case with new drugs: it is arguable that the present regulatory regime for medicines goes too far in slowing access to beneficial new products. It is sufficient that the new authority will have powers to ban products (powers it is unlikely to use) and will move away from the assumption that if you give your customers enough information that exhausts your responsibilities to them.

But the priorities of the new agency are skewed by implacable resistance to the promotion of competition as regulatory objective. This is the product of a broader unwillingness to recognise that control of structure is a more powerful regulatory tool than the monitoring of behaviour: it is more effective to give incentives to serve consumers well than to supervise the way in which they are served.

We know from experience what the likely result of such supervision will be. The activities of the Financial Conduct Authority will be even more extensive and intrusive than those of the FSA, and yet ineffective, as they will consist mainly of form-filling and box-ticking with little impact on what businesses do. Consumers deserve better. They’ve paid for it.

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