Disclosure alone is not good enough to protect retail financial industry consumers, says the chairman of the UK Financial Services Authority, Lord Adair Turner.

In a speech Tuesday, Turner stressed the responsibility that regulators have for their part in the financial crisis, and he reflected on the looming break up of the FSA into a prudential arm and a new organization to ensure consumer protection.

The creation of the new Consumer Protection and Markets Authority represents “a major opportunity to ensure that customer protection issues receive the dedicated focus they merit,” Turner said. He stressed that this focus on retail issues needs to be combined with a change in regulatory philosophy.

“The FSA’s past approach placed significant reliance on the assumption that rational consumers would make good choices provided markets were transparent and information fairly disclosed. In many wholesale markets a very reasonable assumption, and where things aren’t bust we don’t need to fix them. But in many retail financial markets, the imbalances of knowledge and power between consumers and providers are so profound, and the potential for perverse incentives so great, that even highly competitive markets and extensive information disclosure are insufficient to protect consumer interests,” Turner said.

As a result, the FSA is shifting to an approach in which it’s more willing to intervene in retail markets, Turner noted. “We cannot leave retail financial markets entirely to themselves and continue to accept the waves of mis-selling which have been such a feature of UK financial services for the last 20 years,” he said, adding, “But nor should we swing to the other extreme and attempt to ensure that nobody ever exercises free choice to make decisions they subsequently regret.”

Indeed, regulatory philosophy generally needs to change, Turner said. And, he pointed out that while the financial industry obviously helped create the crisis, so too did policymakers in thrall to the idea that markets are supreme and self-correcting.

“We do need appropriate regulation of bonuses to reduce incentives for excessive risk taking, and the FSA has been and implementing such rules, but we also need to move beyond the demonization of overpaid traders and their unnecessary CDO squareds, to recognize that, in finance and economics, ill-designed policy is a more powerful force for harm than individual greed or error, and to ensure that we address the fundamentals of what went wrong,” he said.

Turner said that the proposed new capital rules, known as Basel III, represent “a major step forward” towards improved regulation. And, he defended the new rules, which have been criticized as too soft and too slow to be implemented, although he admitted that, in an ideal world, they would probably be tougher.

“If we were philosopher kings designing a banking system entirely anew for a greenfield economy, should we have set still higher capital ratios than in the Basel III regime? Yes I believe we should,” Turner said. However, he warned that policymakers have to resist the urge to clamp down too tightly for fear of choking off the recovery. “Starting from where we actually are, the Basel III reforms will significantly improve the resilience of our banking systems without harming economic recovery.”

IE