The Evolution of Financial Services Regulation in the UK

• Author: Eva Lomnicka
• Profession: Professor
• Pages: 46-70

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THE EVOLUTION OF

FINANCIAL SERVICES

REGULATION IN THE UK

Introduction

It is only in recent times that the twin aims of nancial services

regulation – consumer protection and systemic stability – have

become the concern of legislators. It is also only relatively recently

that the three strands of nancial services – banking, insurance and

investment services – have begun to be considered not as discrete areas

of activity but, reective of development of multifunctional nancial

conglomerates, as components of a single ‘nancial service’. In the

UK this trend has culminated in a single, integrated nancial services

regulator, the Financial Services Authority (FSA), which regulates the

whole of the nancial services sector in exercise of statutory powers.

However, it took centuries of evolution for the UK to arrive at this

controversial regulatory model.

e enduring importance of self-regulation

e regulation of these three categories of ‘nancial service’ evolved

from modest beginnings.1 Very early on, long before legislators took

any interest in regulation, some segments of the market, in particular

the Stock Exchange and the Lloyds’ insurance market, saw the benets

of a degree of self-policing when it came to providing services to

their customers. e incentives to undertake self-regulation were

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e Evolution of Financial Services Regulation in the UK

obvious. In particular, the promise that practitioners would abide

by high standards was important in reassuring customers and hence

in attracting business. is was especially so where the value of the

products (securities, insurance) was particularly dependent on the

probity and competence of the providers. us, self-regulation became

an important characteristic of those parts of the UK nancial market

that chose to adopt it.

Self-regulation is voluntary and operates by consensus; if you

choose to join the club, you abide by the rules or you are expelled.

is has a number of drawbacks in comparison to regulation imposed

by legislation.2 Most obviously, in relying on powers derived from

contract law, it can have no impact on outsiders who do not join the

‘club’. e expectation is that such non-members (without the stamp

of approval of the ‘club’) will not attract clients, but the fact remains

that the self-regulatory regime is inapplicable to them. A second

drawback is that this power to exclude enables established practitioners

to maintain and expand their dominance of the market by controlling

who can join them in the ‘club’; this leads to the upholding of vested

interests by anti-competitive restrictive rules and practices. Having

established that monopoly, there is less incentive to raise standards

above the bare minimum and (more worryingly), a tendency to devise

rules which benet practitioners rather than their clients (the so-called

‘agency-capture’ problem). at said, the benets of self-regulation

should also be recognised. In giving the initiative to the regulated to

devise (and enforce) their own rules, the result is likely to be a regulated

sector which is committed and co-operative. Further, the involvement

of practitioners ensures expertise and a proper focus as well as a degree

of exibility and rapid response which is usually lacking in a regime

devised by legislators. In addition, legislators themselves often welcome

self-regulation. Self-regulation is inevitably self-nancing with no

calls on the public purse.3 Moreover, the government cannot be held

responsible when self-regulation fails to operate properly, although it

may be blamed for not taking the legislative initiative earlier.

e advantages of self-regulation both for the regulated and

the legislators have caused it to remain an important feature of UK

nancial services regulation throughout its history. Time and time