Thatcher: the Myth of Deregulation

Abstract

New report debunks the idea that Thatcher deregulated financial services. Summary: It is commonly believed that, during the 1980s, Margaret Thatcher presided over a substantial reduction in government regulation of financial services. Indeed, some have blamed this deregulation for the financial crash that took place nearly 30 years after 1979. ‘Big Bang’ in 1986 did remove the restrictive practices and largely private regulation that existed in securities markets. However, this involved the state unwinding systems of private regulation and was not, as such, a simple act of deregulation. Furthermore, not long after Big Bang, investment and financial markets became regulated under the Financial Services Act. This also extended detailed statutory regulation into areas of financial markets which had previously been more-or-less unregulated by the state. Retail financial products also became heavily regulated at the retail level through the Financial Services Act, whereas they had previously been regulated by contract law, professions and industry agreements. Industry agreements that had been effective in reducing ‘mis-selling’, such as the maximum commission agreement, were made unlawful. The FSA (now FCA) have been fighting to deal with the problem of commission-incentivised mis-selling ever since. Overall, from 1979 to 2010 there was an increase from one regulator for every 11,000 people employed in finance to one regulator for every 300 people employed in finance. If the rates of growth of both regulators and people working in finance seen in this period continue, the number of people working in financial regulation will overtake the number of people working in financial services by around 2070. This excludes compliance officers working for financial services firms themselves. Some attempts have been made to estimate the costs of financial regulation. However, most of the costs are indirect and result from reduced innovation and competition and cannot be calculated. In 1986, the direct cost of financial regulation was estimated to be £20m; this rose to around £90m by 1992 and £673m by 2014. In the 1980s, a reasonable estimate of compliance costs was generally thought to be around four times the direct costs of the regulatory bodies; the ‘excess burden’ arising from the reduction in innovation and competition and the distortion of prices was thought to be around four times the compliance costs. Government regulation of employment contracts, which required employers to allow their employees to opt out of occupational pension schemes, led directly to the pensions mis-selling scandal of the late-1980s/early-1990s. Once again, this was not an act of deregulation but the state prohibiting a form of private contractual agreement. Although occupational pensions became much more heavily regulated over time, this did not happen until 1995, under the Major government. Before 1979, there was very little regulation of the activities of life insurance companies. There was then a huge increase in the regulation of insurance companies in the 1980s. This came partly from the regulation of their product sales activities under the Financial Services Act, but also arose directly from the Insurance Companies Acts 1981 and 1982 and the associated regulations. These Acts allowed the Secretary of State to spawn further regulation without proper reference to parliament and led directly to the situation that prevails today of a very heavily regulated life insurance sector. Until 1980, the financial sector was regulated by private institutions, professional codes and a small amount of well-drafted and highly targeted primary legislation. Under Thatcher, private regulatory mechanisms were unwound or prohibited and replaced by state regulation. Since the 1980s, the financial sector has been regulated by statutory bodies developing thousands of paragraphs of prescriptive statutory regulation and has gradually extended its reach into new fields. It is true that Thatcher undertook certain liberalising reforms such as the abolition of exchange controls. However, state regulation of securities and financial markets became much more intrusive. The idea that the 1980s was a period of increasing regulation and not deregulation is not revisionist history. Contemporary accounts argued that, under the regulatory system that developed, the City has ceased to be a place “where you look after yourself according to a code of honour of conduct. It is a tough regulatory system”; that the regulator had a “very tough bunch of powers”; and that “There is a substantial risk, in fact, that we now have massive overkill of the supervisory structure in the financial industry”.