19 November 2015

New payments regulations stifle competition


The way to defeat ISIS is to make sure that we’ve all got to pay more for our euros when we go on our summer jollies to the beaches. This must be so because this is the solution that the government has engineered and we all know that governments gets things like regulation right, don’t we?

The cause of all of this is the knickers twisted over the manner in which some few people transfer money to bad people: to the terrorists in part. The other part, probably more important to those who make the law, is the tax dodging possibilities available to those who ship money around the world unregistered. This has led to the Money Laundering Regulations and every jurisdiction now has some variant of these. The problem is that those regulations are just too expensive. Too expensive for the task at hand but also too expensive to allow a large part of the industry to keep functioning at all.

The essential set up is that each player in the chain must know, and be able to prove that it knows, that all the other people they’re dealing with follow the regulations. This has meant that the core players, the banks, the wholesale providers of foreign currency, are unwilling to have as customers the smaller and one man shops and businesses. Because the costs of ensuring and proving that to the required standard are larger than any profit that could possibly be made from a small customer.

The AUKPI, the trade body for these smaller businesses, says that 90% of all their members have been affected and hundreds are closing as a result.

The economic effect of this is obvious: if only large players can afford to be in the game then there will only be large players. We move from a vibrant free market to one more oligopolistic. And we also pretty much rule out the emergence of new companies in the trade as they would have to enter at scale, not as a small business. A problem given that innovation and productivity improvements (aka, better and cheaper service for us) come from new companies entering an industry.

Less competition, fewer new entrants, the established companies fossilised into market dominance: yes, that means higher prices for us off into the future when we want some Johnny Foreigner cash for the annual sun and sand outing.

That’ll really stick it to ISIS, won’t it? Especially given the existence of the entirely separate hawala system. The one that doesn’t register, doesn’t obey the regulations, has no official existence at all and yet is available any- and every- where in the Islamic world, as well as this country and all other rich ones.

Tim Worstall is Senior Fellow at the Adam Smith Institute