Discusión del modelo

There are a number of types of path-dependency. This thesis focuses on rules-driven 21 path dependence where initial structures determine legal rules which in turn determine subsequent arrangements. It is possible that these subsequent developments may not be efficient but as a result of sunk cost, costs of switching or change may not be cost

effective. Change may also not occur due to the actions of those who want to maintain “rent-seeking” embedded in the existing structures and interest group politics. All this results in an “imperfect Coasian world”. It can also be due to simple “habit” where simple 22 lassitude inhibits change or pride and insularity which rejects innovations that were “not invented here”. There is also the old civil service rationale of wanting to avoid change since it may increase risk and that it may be safer to retain what is known. The 23 importance of these behavioural and institutional factors should not be ignored.

Policymakers are very conscious of the effect of unintended consequences and the need

Mads Andenas and Iris Chiu, The foundations and future of financial regulation’, (Routledge, London,

17

2013), 22

Laurence Gower, Review of Investor Protection: Report, Part 1, (H M Stationery Office, London, Cmnd

18 9125, 1984), 6 Ibid, (Gower), 6 19 Ibid, (Gower), 7 20

Lucian Bebchuk and Mark Roe, ‘A theory of path dependence in corporate ownership and governance’ in

21

Jeffrey Gordon and Mark Roe (eds), Convergence and persistence in corporate governance, (Cambridge University Press, Cambridge, 2004), 68

Ibid, 71

22

Supra, note 4, (David and Arthur)

for what has been described as the “short-sightedness of evolution” where the rationality of risk-aversion out-paces innovation. For these reasons rules established to govern 24 investment conduct of business largely formalised existing industry structures. As will be 25 discussed later, statutory conduct of business regulation of mortgages followed a similar path. As mentioned above, there are many reasons for this. No single factor dominated other than an “endowment effect”, (ie the need to protect existing large players in the market by avoiding too much disruption). How this influenced the development of 26 investment business, and hence mortgage, conduct of business regulation in the UK is considered next.

It is clear that in the 1984 Parliamentary debate on the Gower Report, the proposed

regulations were to be aimed at a narrow group of the public who could afford the services of stockbrokers and investment managers and it appears that most of the speakers in the Commons debate had either been stockbrokers or had close family who were

stockbrokers. The subsequent structure for the regulation of conduct of business largely 27 followed the pattern set out by Gower. It revolved around a series of transactions between the client and the regulated firm: the style and content of marketing and disclosure

material, the provision of “suitable advice” by honest and competent advisers who had a duty imposed on them to act in the best interests of their clients, how the investment was cared for on behalf of the client and, if matters went wrong, a process for addressing client complaints.

It is this high cost approach that was used, subsequently, as the model for conduct of business mortgage regulation affecting a much wider section of society. This model may be appropriate for a financial services business which foresees a long-term “transactional” relationship, for example, in personal banking or asset management. However, mortgages are largely “commodity” products and often processed by the computer systems of lenders

Supra note 4, (Schmidt and Spindler), 119

24

Supra note 7, (Jebens), 8

25

Lucian Bebchuk and Mark Roe, ‘A theory of path dependence in corporate ownership and governance’,

26

(1999) Stanford Law Review Vol. 52, No. 1, 127, 141

Supra note 16, (Commons debate, 16th July 1984), 49-114

with little actual human contact or intervention. Consequently, a regulatory approach 28 designed with, for example, a stockbroker or private banker in mind, may not be appropriate for the mortgage “mass market”. 29

Conduct of business regulation is designed to clarify the distinction between those whose role it is to advise customers and businesses which provide financial products. It is 30 possible to view it in class terms with the professional adviser using their skill to select the appropriate financial products provided by the “financial tradesman”, particularly bankers, who manufacture them. For example, stockbroking, with the right cultural background, 31 was an acceptable profession for a gentleman. The barrister and financial adviser were 32 much higher up the social scale than, for example, the solicitor and certainly well above the commercial banker. This was especially true since much of the banking and insurance industry in England has its origins in the trade of goldsmiths and foreign exchange dealers largely established and run by non-conformists and foreigners and mutual societies based around skilled trades and self-help associations. The socially acceptable professional 33 used their professional skill and vocation to advise their clients and did not deal with money, “the scale of professional prestige was largely determined by distance from

The term “commodity product” in this context refers to those financial products that cannot be

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differentiated other than by price. Typically firms will try to make their products “special” using marketing, branding and other non-price factors. The objective is to have products which are protected from fierce competition and can command higher margins. Mortgages are generally commoditised products dominated by their price

Financial services firm, and other types of business, will attempt to segment customers into different

29

categories in order to match costs and income. This can range from private banking and bespoke high-value lending (eg the “black credit card”) and asset management to more “mass-market” products and services with lower costs and charges. As explained above mortgages, for the most part, are commoditised products and available to all who can satisfy the credit and affordability assessments mentioned later

For example, the distinction is maintained in the FCA Handbook in which the major division is between

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“Conduct of Business” (COBS) regulation largely governing financial advice and information disclosure and the “Client Assets” (CASS) rules designed to protect client money from mis-use

The economist Sir William Petty, spoke of the “trade of banking”, Collected Works of William Petty,

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(published 1899, Charles Henry Hull (ed) as the Collected economic writings of Sir William Petty, Terrance Hutchinson (ed), Routledge, London, 1997), Vol. II, 447

David Ward, ‘The public schools and industry in Britain after 1870’,(1967) Journal of Contemporary

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History, 37, 46, notes that before the First World War the “acceptable” future professions for boys from, for example, the great public school, Wellington were the military, clergy, civil service, academia, teaching and stockbroking. Banking and insurance were not mentioned

Chapt 2, n80, (Overend and Gurney), 44-55

flagrant ‘money grubbing’”. Professionals keeping their own house in order was the 34 underlying concept behind the Gower Report, the subsequent Parliamentary debate and the self-regulatory system enshrined in the Financial Services Act 1986.

As mentioned earlier this view of how financials services are, or should be structured, has been applied by regulation to the mortgage market. Consequently, how the latter is

structured has influenced, and in turn been influenced by, conduct of business regulation. This context is important and is considered in the next section. 35