SEC Chair Advocates for Stronger Competition Between Financial Intermediaries
Commentary by Steven Lofchie
SEC Chair Gary Gensler highlighted proposed policies across various markets that are designed to promote competition, a statutorily mandated task of the SEC. He argued that consumers would benefit from greater competition between financial intermediaries.
In remarks before the SIFMA Annual Meeting, Mr. Gensler pointed out that costs of many services have declined, but that the number of competitors providing the relevant service also declined. He referred to the management of index funds, a business dominated by just four competitors. He said the fact that financial services constitute a greater share of GNP than they did in 1975 is evidence of insufficient competition.
Mr. Gensler observed that since Congress integrated monitoring competition into the SEC's mandate, the agency has implemented a variety of strategies and policies to promote the highest possible level of competition. Mr. Gensler also highlighted proposed policies across various markets that he said were designed to promote competition, including (i) new registration requirements that require liquidity providers to register as dealers and (ii) enhanced reporting requirements for private fund advisers. He said the SEC is also researching other policy areas, like best execution at an agency-wide level, for potential improvements. He argued that improving transparency and access will help promote competition, as will clear rules that treat like cases alike.
Mr. Gensler said the SEC will engage with market participants to obtain feedback on policies that would directly impact their operations.
Commentary
Mr. Gensler says competition is good, a claim unlikely to generate vigorous debate. What can be disputed is both (i) the changes that lead to increased competition and (ii) the harms Mr. Gensler believes have resulted from insufficient competition.
One point Mr. Gensler makes is that "central intermediaries [may] benefit from scale, network effects and access to valuable data." That seems true. However, one reason that scale becomes so important is that the costs of regulation (which are to a great extent fixed costs) are so great that small and mid-sized firms are forced out of the market. In this regard, it is useful to look at competition in the swaps and futures markets. After the adoption of Dodd-Frank, the CFTC's own numbers show that many FCMs dropped out of the market. Swap dealers may have done so as well. This would show that whatever are the benefits of increased regulation and transparency, an increase in the number of competitors is not one of them. In fact, this is not a surprising result. An increase in fixed costs is going to hurt small players.
Arguing for more regulation as a way to increase competition, Mr. Gensler says competition in the market for U.S. Treasuries would be increased if more firms were required to register as dealers. But, based on the results of Dodd-Frank, it would seem at least equally probable that increased regulation causes firms either to drop out of the market or to reduce their business because the expenses of the regulation make the activities no longer worthwhile. In short, it is possible that the additional regulations Mr. Gensler favors might increase competition, but it is more than likely that it will reduce competition.
Another argument Mr. Gensler makes to demonstrate that there is insufficient competition in financial markets is that finance's share of GNP has grown from 5 percent to 8 percent over a 45-year period beginning in 1975. It is not clear what this data proves. It is not obvious why a 5 percent share is better than an 8 percent share, or why 1975 should be the paradigm of how GNP is produced. For example, one might guess that finance has grown because: (i) the U.S. is a greater exporter of financial services to the rest of the world; (ii) as the country has become wealthier, managing that wealth consumes more attention; and (iii) other sectors of the economy have declined in relative importance; e.g., manufacturing.
One can completely agree with Mr. Gensler that more competition would be beneficial to financial services, and largely disagree with him as to how to achieve that end. It does not appear that Dodd-Frank increased competition, or decreased concentration; in fact, concentration seems to have increased. If so, this argues for a rethinking of strategy.