Cost‐benefit analysis in financial regulation: How to do it and how it adds value
| Published date | 01 April 1999 |
| Pages | 339-352 |
| DOI | https://doi.org/10.1108/eb025021 |
| Date | 01 April 1999 |
| Author | Isaac Alfon,Peter Andrews |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 7 Number 4
Cost-benefit analysis in financial regulation:
How to do it and how it adds value
Isaac Alfon and Peter Andrews
Received (in revised form): 16th September, 1999
Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS;
tel:
+44 20 7676 3152; fax: +44 20 7676 9729
Isaac Alfon is a financial economist in the
Economics of Financial Regulation Depart-
ment (Central Policy) at the Financial
Ser-
vices Authority.
Peter Andrews is a manager in the Eco-
nomics of Financial Regulation Depart-
ment, with specific responsibility for the
Financial Services Authority's work on
cost-benefit analysis.
ABSTRACT
The proposed contents of
the
planned Financial
Services and Markets Act have been revealed
in the draft bill (FSMB) that was introduced
into Parliament on 17 June, 1999 and in var-
ious announcements by the government. On
that basis, the Act is expected to require the
Financial Services Authority (FSA) to have
regard,
in discharging
its
functions, to the eco-
nomic impacts of
the
provisions it makes and to
publish a cost-benefit analysis (CBA) of pro-
posed rules and
general guidance
with
respect
to
the operation of
rules.
This paper
describes
the
technical and organisational measures that the
FSA is taking in order to fulfil the FSMB's
requirements
for CBA and
considers
the ratio-
nale
for those
requirements.
The paper suggests
that the
case
for undertaking cost-benefit analy-
sis rests on the
dangers
of
interfering
in markets
without analysing the likely
consequences
in a
rigorous and theoretically sound manner. The
paper also reviews the (so far limited) experi-
ence of applying cost-benefit analysis to finan-
cial regulation in the UK and suggests how
difficulties in the assessment of the costs and
benefits can be addressed, with a consequent
increase
in the value of financial regulation.
INTRODUCTION
These days it is hard to imagine that the
many doctors who lived before Hippocrates
tended to treat the symptoms of disease
rather than the cause. It now seems rather
obvious that it is better to find out why a
patient's right foot is extremely painful and
to treat the cause rather than to impose the
costs that would follow from simply cut-
ting off the foot. Moreover, a failure to
treat the cause might well mean that the left
foot soon becomes extremely painful. Reg-
ulation too can address the symptoms or
the cause of a problem. For example, an
outright product ban or the creation of
large barriers to the sale of
a
product might
solve a particular consumer ill, albeit at the
cost of reduced consumer choice. Neverthe-
less,
failure to address the cause of that ill,
which might be information or incentive
problems, is likely to mean that a new pro-
duct or service will soon create a similar
detriment for consumers. Applying eco-
nomic analysis to financial regulation is the
only way of getting to the bottom of these
issues. In particular, cost-benefit analysis
(CBA) is a practical and rigorous means of
identifying, targeting and checking the
Journal of Financial Regulation
and Compliance, Vol. 7, No. 4,
1999,
pp. 339-352
Henry Stewart Publications,
1358-1983
Page 339
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