Britain’s Financial Services Authority is calling on consumers to take responsibility for their financial dealings, and to that end it has released a paper explaining the rationale for allowing firms under its oversight to fail.

The FSA says it will allow financial firms to fail because: it follows the general principle that consumers should take responsibility for their actions; the principles of good regulation stress the importance of facilitating competition and innovation; limited resources means it must focus on the riskiest firms; and, it is required to secure the appropriate degree of protection for consumers rather than to provide complete protection.

“While we seek to reduce the incidence of firm failure through our prudential rules, in a competitive market failure exists as the counterpart to competitive success. And occasional firm failures also reinforce market discipline and encourage customers to behave more prudently which reduces the likelihood of more severe prudential problems in the future,” the FSA said in a statement.

The FSA notes that firm failures and conduct lapses impose costs on stakeholders. “We therefore continue to aim to ensure as low an incidence of failure as is consistent with the maintenance of competition and innovation in markets,” it says. However, it also says that it is important that “stakeholders have realistic expectations of what regulation is able to deliver. This should put consumers in a position where they are better able to protect their own interests.”

The FSA concedes that the message of the paper may be unwelcome to some consumers. “The benefits of a market-based regime, such as greater choice and lower prices, may be assumed without further consideration of the competitive conditions that create this result. But in our view the overall position for consumers of having a market-based regime is a positive one,” it says.

“Our goal in increasing awareness of our non-zero failure regime is to encourage a more prudent approach on the part of stakeholders, particularly consumers, and so reduce their chances of loss,” it concludes.