| Two-Edged Sword |
17 November 2003
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FSA May Mis-Liberalize London Financial Markets
Britain's Financial Services Authority (FSA) has come to the realization that there is a lot of money off-shore because of the rather intricate maze of regulations in the City. To bring that money home, a new plan would divide the market into three segments for regulatory purposes: general public, sophisticated individuals and institutions. The sentiment is right, but the details are wrong.
There is a general benefit, both pecuniary and moral, in reducing regulations. However, in creating three distinct classes of investor for regulatory purposes, the FSA is creating a situation in which the rich will gain at the expense of the not-so-rich. The current proposal, for example, would let the "sophisticated" investor and institutions buy into relatively exotic things like fast-growing (for now) property funds; the average person would not.
The intention is to protect the little guy from unscrupulous advisors, brokers and other evil-doer who would talk him into investments he neither understands nor can afford. How thoughtful of the FSA. Except of course, that this flies in the face of recent experience.
The little guy lost his shirt in the recent market down turn, and in many cases, he was barred from such useful devices as short positions in falling stocks that not only would have preserved his capital but actually increased it. The high-net-worth individual and the institutions had no such obstacle. In other words, the attempt to protect the small nest eggs would up making omelettes.
By all means, deregulate, or more accurately, refine the regulations in the City. The L200 million estimated off-shore would be a boon to London's competitive position. But the FSA will be remiss if it creates a system where investors are not treated equally. The greatest protection is full disclosure of information -- if people insist on throwing their money away after that, the fault lies with them. If they are barred from potentially profitable investments because of some paternalistic belief that they might lose money, the fault will lie with the FSA.
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