A framework for assessing the benefits of financial regulation

Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents. Oxera Consulting Ltd is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Anyone considering a specific investment should consult their own broker or other investment adviser. The Company accepts no liability for any specific investment decision, which must be at the investor's own risk. Oxera was commissioned by the Financial Services Authority (FSA) to develop a framework for assessing the benefits of financial regulation. The framework seeks to establish the following. – What to measure—the framework is designed to identify the dimensions along which financial services regulation delivers benefits by improving outcomes in the market. This provides a systematic description of the types of benefit to be measured. – How to measure—having identified what should be measured, the framework is extended to discuss how the types of benefit can be measured. Importantly, the framework distinguishes between the direct measurement of improvements in market outcomes and the indirect measurement using proxy metrics and techniques. It is the combination of both direct and indirect measurement that allows benefits to be systematically evaluated. This report should be seen in the wider context of the debate on the costs (and benefits) of financial regulation. The cost of regulation study, conducted by Deloitte on behalf of the FSA and the Financial Services Practitioner Panel, 1 has estimated the (direct) compliance costs in three markets in the financial services sector. These costs are incurred by financial services firms, but economic logic tells us that such costs will ultimately be borne by the users of the financial services—ie, private individuals and companies. The level of these costs should therefore also be considered from a consumer perspective: do the benefits of FSA rules to users of financial services outweigh the direct and indirect costs? The framework for conducting benefits measurement can be summarised as follows. – The benefits of regulation can in principle be measured as the improvements in market outcomes that result from regulation. In ex post analysis, where the aim is to evaluate the impact of regulation already in place, measurement requires comparison of actual market outcomes in a regulated world with outcomes that would have arisen in the 'counterfactual' …