A Fine Balancing Act Required

An incisive article by Peter Bruce in Business Day, “When fear and loathing trump nuance” takes a look at the bigger picture of collusion in the light of the latest probe into car component manufacturers.

He discusses the aftermath of the scandals uncovered in the bread, construction and furniture removal industries, and uses the bread makers as an example:

  • No one knows anything about the bread industry anymore. The millers left the industry association for fear of being branded colluders again. Sharing information is considered the essence of collusion.
  • The price of bread rose more than 50% in two years. While other factors may have played a role, the price increase suggests collusion, South African style, may be more about stabilising prices than raising them.
  • No new millers or bakers of any consequence have emerged since the end of the bread probe.
  • A three-year class action that tried to prove in court just how much the bread cartel had cost the consumer, ended up with a total damage calculation of R2.1m — just 6% of the fines.

But there is something deeply creepy about the way our government and its competition authorities go about chasing domestic collusion. It is a one-punishment-fits-all approach, the successes of which we have yet to enjoy.

Suspicion of collusion is now routinely followed by an old-fashioned shakedown. Pay an admission of guilt now, or we’ll chase you through the courts forever. The businesses, easily terrified, grovel and pay up. The bakers did. The builders did. The movers will.

The annual reports of the FSB and FAIS Ombud reflect far more settlements than “convictions”, which may be an indication that suspected transgressors share the same fears.

Bruce calls for a different tack to be followed to prevent collusion:

This is not to say competition law should be softened. But there is a pressing need for nuance in the way it is used and implemented. The fact is our antitrust regime is not serving the purpose for which it was intended. A little like the municipal police, it is a revenue collector rather than a public protector.

Bruce quotes from a profile written by John Cassidy in the New Yorker on French economist Jean Tirole, winner of the 2014 Nobel economics prize, who raised the following question:

“Can you design a regulatory system that offers incentives to both sides — the regulators and the firms — to do things in the public interest?”

That is absolutely the question our competition authorities need to ask themselves, but do not. Or they don’t in public.

But happen it must. Different industries face different demons, and the regulations that apply to them can only be genuinely effective if they are designed to fit specific industries.

Collusion appears not to be a problem in the financial services industry. Innovative product design and clever marketing often drives the business, although initiatives like sign-on bonuses and institutionalised churning are employed to gain an unfair advantage, often to the detriment of clients.

Outcomes-based regulation under Twin Peaks will add a moral aspect to the way we do business. The ideal is for the authorities to work proactively towards prevention, rather than punishment after the event.

What happened in the bread industry is happening in financial services as well, where the increasing cost of compliance eventually results in increased premiums.

Fear of unwittingly transgressing legislation often leads to advisors not always acting in the best interests of their clients, which is directly in contrast to the rationale for stricter regulation in the first place.

One of the major concerns raised about the pending Retail Distribution Review (RDR) is that professional advice may be limited to only those who can afford it, while clients most in need of it will have to settle for second best. Already there is talk of a different dispensation for the lower end of the market.

Bruce concludes his article as follows:

That must be the future of good regulators here: that they ensure transparency and incentivise the companies they regulate to serve the public interest, by innovation, as well as their own interest.

We are a small economy with some really big companies. We are better off with them than without them.

The financial services industry relies heavily on an endangered species called financial advisors who also needs protection for the sake of their clients, and the industry.

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