First of all it might be good if people understood what deregulation is. Markets require certain conditions to work properly, for instance if there is only one supplier (as in a state monopoly) then there isn’t a market, if there is state cronyism then it isn’t a proper market, and so on. We all think we have a natural understanding of markets because we use them every day, from grocery shopping to eBay. But in reality they are very complex indeed. Government regulation can make markets work better by eliminating a lot of problems, such as monopolies and cartels, enforcing accurate weights and measures, eliminating fraud etc. This is probably the most important job that government does for its population. Alternatively they can make markets work worse by throttling the market, making it unfair, erecting barriers or making it inefficient. Most governments do all of these.
So what makes a good market:
- Perfect market information. This means that all the buyers and all the sellers have the same information and that they know everything. This is the only was that a fair and efficient price can be reached
- No intervention by government in the price mechanics, or supply and demand of the market
- Nobody with the power to set prices. Because then it isn’t a market. Prices are often set by governments, by monopolies and by cartels
- No barriers to entry or exit. If you have to pay a license fee to government, be a member of a guild, or need to pay a bribe in order to take part in a market then it isn’t a market
- Profit maximisation. The seller sets the price that maximises their profit. Remember that in a proper market they are competing against other sellers. So profit and competition pull the price in different directions. The market works to get to the right price
- No externalities. These are extra costs or rules that are forced on a market but which have nothing to do with the business of buying and selling. Such rules include health and safety, environmental laws and other social costs
- Equal access to factors of production. So if land is need to grow crops then you need to have the same access to land as the other people selling those crops
Each of those conditions is itself very complex. Many books have been written about each of them and you could do a PhD on just one small factor within one condition. Many people do.
When Margaret Thatcher came to office the City Of London was performing very badly, harming all aspects of our economy. It was being overtaken by other financial centres and had lost its pre-eminence in the world. All because the 7 conditions were not being applied. So Margaret Thatcher applied them in what was known as Big Bang. For instance the stock market had two kinds of people on its floor, jobbers, who set the price and brokers who bought and sold from them. Thatcher got rid of this distinction, the exchange went electronic and it then boomed like crazy.
Another horror was that many charges that the city made were fixed. So there was no price competition in financial services. Thatcher made this illegal, which you will know by now was a very good thing.
The net result of these and other reforms is that the City grew enormously to become a major contributor to the British economy. Financial services now employ over 2 million people in the UK. It contributes £180,116,000,000 Gross Value Added to the British economy. In global terms it is a phenomenon: foreign exchange trading (41% of the global total), OTC derivatives trading (49%), cross-border bank lending (17%) and international insurance (22%). Financial services pay £63,000,000,000 in tax to the British government.
This is an incredible success for Margaret Thatcher, a part of her great legacy, and came about because of her deep and non dogma bound understanding of economics. Her number one target was elitist old boys networks, who distorted the markets in order for their personal gain.
Contrast and compare with Gordon Brown. If a socialist understood economics then they would not be a socialist. So it was with Brown. He thought deregulation was like potatoes. You could have more or less of it. He didn’t realise that the exact nature of the regulations you are getting rid of is incredibly important. Brown’s deregulation consisted mainly of his “light touch”. In other words allowing people in financial services to do anything they wanted. This, as you can obviously see, and as history as proved, made the markets work far worse.
Brown freed the Bank of England from direct government control and removed the power by the Bank of England (and therefore by the government) from controlling the financial activities of banks in the UK. In 2006, new primary legislation (the Legislative and Regulatory Reform Act 2006) was introduced to establish statutory principles and a code of practice and it permits ministers to make Regulatory Reform Orders (RROs) to deal with older laws which they deem to be out of date, obscure or irrelevant. A charter for disaster.
Gordon Brown made the Financial Services Authority (FSA) responsible for the regulation of the financial services industry in the United Kingdom in 2001 to implement his “light touch”. They responded by being comatose. Yet they were supposed to be making sure that all of the following were working properly:
- Accepting deposits
- Issuing e-money
- Effecting or carrying out contracts of insurance as principal
- Dealing in investments (as principal or agent)
- Arranging deals in investments, regulated mortgage contracts, home reversion plans, or home purchase plans
- Managing investments
- Assisting in the administration and performance of a contract of insurance
- Safeguarding and administering investments
- Sending dematerialised instructions
- Establishing etc. collective investment schemes, personal pension schemes, or stakeholder pension schemes
- Advising on investments, regulated mortgage contracts, regulated home reversion plans, or regulated home purchase plans
- Lloyd’s insurance market activities
- Entering into and administering a funeral plan, regulated mortgage contract, home reversion plan or a home purchase plan
And as history as proven, they didn’t do their job. Alongside Brown’s fiscal incontinence and general mismanagement of the economy this caused a huge recession, from which, thanks to George Osborne, we have now emerged.
Part of George Osborne’s success was in getting rid of the Financial Services Authority and instituting a whole, comprehensive, series of regulatory reforms, allowing the markets to work properly and preventing the kind of excesses that Brown actively encouraged. “Light touch” was consigned to the dustbin of history. These changes are not very sexy so they don’t appear on the BBC or in your tabloid newspaper. Yet they have a huge and profound influence on your quality of life.
On 19 December 2012 the Financial Services Act 2012 received royal assent. The act created a new regulatory framework for financial services and abolished the FSA. Specifically, the Act gave the Bank of England responsibility for financial stability, bringing together macro and micro prudential regulation, and created a new regulatory structure consisting of the Bank of England’s Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority.
In addition The Competition and Markets Authority (CMA) was established, responsible for strengthening business competition and preventing and reducing anti-competitive activities. The CMA launched in shadow form on 1 October 2013 and began operating fully on 1 April 2014, when it assumed many of the functions of the previously existing Competition Commission and Office of Fair Trading, which were abolished. It is responsible for:
- Investigating mergers
- Conducting market studies
- Investigating possible breaches of prohibitions against anti-competitive agreements under the Competition Act 1998
- Bringing criminal proceedings against individuals who commit cartels offences
- Enforcing consumer protection legislation, particularly the Unfair Terms in Consumer Contract Directive and Regulations
- Encouraging regulators to use their competition powers
- Considering regulatory references and appeals
We are safe now that grown ups are in charge.