Regulations — The Law of Unintended Consequences

The law of unintended consequences states that often well-intended actions meant to fix a problem have a completely unintended outcome. This could be positive, negative or perverse.

“More recently, the law of unintended consequences has come to be used as an adage or idiomatic warning that an intervention in a complex system tends to create unanticipated and often undesirable outcomes. Akin to Murphy’sLaw, it is commonly used as a wry or humorous warning against the hubristic belief that humans can fully control the world around them.” — Wikipedia

After the financial crisis that hit the City of London in 2008 and the failed attempts at regulating the banks that started a global financial crisis, much pressure was and has been placed by the media, the public and the powers that be on changing the regulatory systems and banks.

Many nonsensical changes were implemented, like the creation of the Financial Conduct Authority to replace certain functions of the Financial Services Authority. Leaders of some of the so-called culprit banks were put on trial and some even stripped of the titles bestowed upon them not more than a few years previously. These changes were as much token gestures as having a false burglar alarm sign on the outside of your house. It might or might not work, but in the end, it’s all for show.

I want to highlight the unintended consequences regulations and pressure on banks have had on one business sector: Small Payments Institutions (SPIs), Money Service Businesses(MSBs). These small businesses have over the past decade created a whole new industry by helping the public and other small businesses navigate the foreign exchange markets. In short, by negotiating exchange rates with banks and then reselling these wholesale rates to the public and small businesses, it provides access to better exchange rates and potentially massive savings. It created a more efficient market by generating competition amongst SPIs/MSBs and providing an alternative to only using your bank to transfer money to or from abroad. For an individual it would typically be used to pay someone overseas and for a business, to pay or receive payment from a foreign supplier.

Since 2011 some banks have started to withdraw from this market — leaving the SPIs/MSBs to jump from one sinking ship to the next. The banks’ reasons for withdrawing from the market are that it is perceived as being high risk. Not that there could be massive risk in buying and selling physical currency. The risks are mainly reputational. One of these small businesses could potentially transfer funds for a terrorist organization or State, helping them launder money in some shape or form. Reality is that the industry is tightly monitored with regard to the electronic transfer environment, and where transfers are in cash, the amounts could hardly cause a tremor of any sort.

This week, one of the last banks active in this market has given more  than 250 SPIs/MSBs notice that their accounts will be closed within 60 days. The decision was made with a broad brush, not considering the individual businesses in question. In essence, if these SPIs/MSBs can’t find a remaining floating ship, they will sink, along with all the people they employ. This will not only have the effect that it will further damage the UK economy and an estimated 1000+ jobs and associated tax revenue will be lost, but without a doubt it will reduce the efficiency of an important market and it will reduce the global competitiveness of the Financial Sector in the City of London. At a time like this we/the UK/the City/small business can hardly afford such unintended consequences.

Rene Lans