15 January 2009

The Equitable Life Farce

The government has indicated that it will pay some limited compensation to those affected by the collapse of Equitable Life after the Parliamentary Ombudsman ruled that the public were misled by a "decade of regulatory failure."

To me, this is another indication that the real problem is not the specific regulations or the people enforcing them, but the whole principle underlying financial regulation. The idea that the government can, through regulation, eradicate risk from investments is fatally flawed. All that happens is that customers stop thinking for themselves and put excessive amounts of faith in the regulator, treating the absence of condemnation from the regulator as a sign that a particular institution is failure-proof, which is never the case. At the same time, the institution will focus on satisfying the regulator rather than reassuring the customer directly that the company is sound. The inherently formalistic approach of a regulator will always leave more loopholes to exploit than scrutiny by the many participants in the market, who will seek a fairly fluid and unpredictable set of reassurances.

The stupidity of the situation is compounded by the fact that Equitable Life is a mutual, so in effect, the government will be compensating policyholders because it didn’t effectively protect them from the actions of their own company.

If the Ombudsman has concluded that the regulator has the potential to mislead the public to such an extent that they will accept risks that they wouldn’t have accepted in the absence of the regulator, there is a solid argument for reducing the role of the regulator and introducing a greater level of uncertainty and caution into the market.

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