Ross Gittins, “Small sin tempts born-again Govt,” The Sydney Morning Herald, May 25, 1981, p. 11.
The Fraser Government’s Razor Gang report was a bit like a man making a public decision at a Billy Graham meeting. Mr Fraser repented of 350 bad habits and resolved to give them up.
But the problem with being a born-again Smaller Government man is that the devil is always putting temptation in your way.
Federal Cabinet faces its first temptation tomorrow, when it will consider a submission to license insurance brokers and begin regulating their activities.
And, as always, there are Doubting Thomases watching the new convert, wondering about the depth of his commitment and whether he really understands the faith he has professed.
The blandishments of the flesh are invariably tempting. There has been a number of well-publicised crashes in the broking industry in recent days and the two industry groups are pressing the Government to begin licensing and regulating.
But already a warning light should be flashing. Businessmen are supposed to be opposed to Government regulation and all the red tape it produces. How come the brokers are demanding Government intervention in their affairs?
Arguments for the licensing of occupations are always couched in terms of protecting consumers from the few bad apples in the industry — the unqualified, the dishonest, the incompetent.
But, in the words of a leading economist in this field quoted in a recent paper by Dr Peter Swan of ANU: “As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”
In the case of insurance brokers, they have gained an influential ally in their quest for regulation. Their cause has been joined by that fount of all wisdom, the Australian Law Reform Commission.
The commission has recommended that, to protect consumers from loss, brokers should be licensed. Licensed brokers should be required to take out professional indemnity insurance, made to hold clients’ money in a separate trust account and be prohibited from investing those funds.
It is a highly interventionist remedy, typical of the legal mind. It ignores many of the economic issues involved and falls back on the lawyer’s conviction that all of the world’s problems could be solved if only we had the right laws.
Finding a lawyer who understands and respects market forces is as hard as finding a babywear manufacturer who understands and respects celibacy. The legally trained mind cannot grasp that it is never possible to defeat market forces, only to distort them so that they pop up in unexpected ways.
From the economist’s point of view the recent collapse in the industry arises not from the lack of regulation but from oversupply of brokers. There are too many brokers chasing too little insurance business.
Oversupply is rough on brokers, but it acts in the interests of consumers by keeping competition keen and prices low. A few consumers have lost out in the collapse of some brokers, but all consumers have benefited from the lower commissions that the brokers are being forces to charge.
It’s not hard to see why the brokers’ lobby groups — representing the better-established and better-run brokers — want to be regulated. They want fewer competitors and also barriers to the entry of other firms in their industry. This would reduce competition and allow them to increase their prices. Stringent licensing would achieve all these objectives.
Dr Swan points out that the significance of the insolvency has been exaggerated by the lawyers. The known insolvency losses totalling $7.3 million over the 10 years to 1979 are quite small in comparison with the $1.1 billion annual turnover of brokers, and even in comparison with the brokers’ debts to insurers of $329 million. The additional losses in recent months do not significantly change those comparisons.
Dr Swan makes the further point that most of the “consumers” who deal with insurance brokers are actually businesses. “Very few clients of insurance brokers are naive little old ladies in need of protection against themselves, but rather many are mature businessmen used to making rational informed decisions.”
There doesn’t seem to be many of these business customers urging the Government to license the brokers.
Licensing the brokers would not doubt ease the (probably temporary) problem of insolvencies and losses within the industry. But it would do so by permanently reducing competition and shoring up the profits of the brokers.
The temptation for the Government is that by committing a small sin against the doctrine of Smaller Government it could do a favour for a vocal interest group under the guise of protecting consumers.
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