By Philip Booth

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.

Source: SSRN