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The introduction of financial services regulation in Britain in 1870: cui bono?

Journal: Business History

Date: 2025

Author: David A. Bogle

Abstract:
Who benefits from the introduction of regulation of financial services? This article addresses this question by looking at the introduction of one of the first pieces of UK financial services regulation, the Life Assurance Companies Act of 1870 (‘the 1870 Act’). The evidence suggests that, although the policyholders and the actuarial profession obtained some benefits from the 1870 Act, the shareholders of incumbent life assurance companies did not, at least not immediately nor directly. The policyholders benefitted from the ability to block mergers occurring and the increased information about life assurance companies that was made available to them. The actuarial profession, whilst not getting everything they requested from the 1870 Act, used it as a launching pad to obtain a stronger foothold in the life assurance industry.

Link: Google Scholar

Background and Context

Historical Trigger

The collapse of the Albert Life Assurance Company in 1869, which had absorbed 26 other companies through aggressive mergers, triggered Britain's first comprehensive financial services regulation.

Research Question

The article investigates who actually benefited from the 1870 Act—policyholders, shareholders of incumbent life assurance companies, or the actuarial profession—using "cui bono" (who benefits) as its guiding framework.

Methodology

The study combines qualitative analysis of contemporary newspapers, parliamentary debates, and actuarial journals with quantitative event studies of life assurance company stock prices around key regulatory dates.

The Albert Life's Merger-Driven Collapse Exposed Industry Fragility

1838 Founded 1849-1868 26 Mergers Cost: £275,000 1869 COLLAPSE £4m Liabilities £1m Deficit 1870 Act Regulation
  • The Albert Life started small in 1838 but grew aggressively through acquiring 26 other life assurance companies.
  • Merger costs of £275,000 consumed significant policyholder funds, weakening the company's financial position over time.
  • The collapse revealed that no regulation existed to prevent such risky business practices or protect policyholders.
  • This failure directly prompted Parliament to pass the Life Assurance Companies Act of 1870.

Albert Life Policyholders Received Only 20% of Their Claims

  • Policyholders of subsidiary companies absorbed by Albert Life received their claims paid in full during arbitration.
  • Albert Life's own policyholders received only 3 shillings 11.5 pence in the pound—approximately 20% of claim values.
  • The £1.67 million in outstanding Albert Life claims dwarfed the £374,200 in available assets after shareholder calls.
  • This devastating outcome demonstrated why policyholders desperately needed regulatory protection from company failures.

Life Assurance Industry Grew Fourfold Under the 1870 Act's Framework

  • Assets under management quadrupled from £112.5 million in 1871 to £467.3 million by 1911.
  • Annual premiums also grew nearly fourfold, from £12 million to £44.7 million over the same period.
  • Despite industry growth, the number of companies declined from 109 in 1881 to 81 by 1911 through consolidation.
  • The "freedom with publicity" regulatory framework supported stable industry expansion for over a century.

Stock Prices Showed Negative Reaction to the 1870 Act's Passage

  • Event study analysis shows no significant abnormal reaction to Albert Life's collapse, suggesting it was idiosyncratic.
  • In contrast, stock prices showed persistent negative cumulative abnormal returns after the 1870 Act's passage.
  • Frequently traded companies experienced a 6-7% greater decline than expected in weeks following Royal Assent.
  • This evidence suggests shareholders did not immediately benefit from the regulatory intervention.

Policyholders and Actuaries Benefitted, Shareholders Did Not

Who Benefitted from the 1870 Act? POLICYHOLDERS ✓ • Merger veto power • Court approval required • Financial disclosures • Better failure outcomes IMMEDIATE BENEFIT ACTUARIES ✓ • Statutory valuations • Regular work stream • Professional influence • 1884 Royal Charter LAUNCHING PAD SHAREHOLDERS ✗ • Negative stock reaction • New compliance costs • No immediate gains • Delayed any benefits NO IMMEDIATE BENEFIT
  • Policyholders gained immediate protection through merger vetoes, court oversight, and mandatory financial disclosures.
  • The actuarial profession used the Act as a launching pad, gaining regular statutory work and eventual Royal Charter.
  • Shareholders saw negative stock price reactions; any long-term benefits took years to materialize and cannot be attributed solely to the Act.
  • The findings partially support capture theory—producer interests (actuaries) benefitted alongside consumer interests (policyholders).

Contribution and Implications

  • The study provides the first comprehensive analysis of who benefitted from Britain's pioneering 1870 financial services regulation.
  • Evidence shows that regulation can benefit both consumers and professional service providers, not just incumbent producers.
  • The "freedom with publicity" framework proved remarkably durable, remaining the basis of UK insurance regulation for over a century.
  • Policyholders of failed companies fared much better after 1870, receiving 50-95% of claims versus only 20% before.
  • The research demonstrates how professional bodies can use regulatory frameworks to advance their standing and influence.
  • Event study methodology offers valuable insights into market perceptions of historical regulatory changes and their distributional effects.

Data Sources

  • Visualization 1 (Albert Life Timeline): Based on narrative information from Section 2.1 describing the company's founding in 1838, 26 mergers costing £275,000, and collapse in August 1869.
  • Visualization 2 (Claims Chart): Data extracted directly from Table 2 showing claims outstanding, assets after call, and claims paid for Albert Life and subsidiary companies during arbitration.
  • Visualization 3 (Industry Growth): Data extracted directly from Table 1 showing assets under management, life assurance premiums, and number of companies from 1871-1911.
  • Visualization 4 (Event Study): CAAR values extracted from Tables 4 and 5, showing cumulative average abnormal returns during event windows around the Albert Life collapse and 1870 Act passage (values multiplied by 100 for percentage display).
  • Visualization 5 (Stakeholder Outcomes): Synthesized from qualitative findings in Sections 5, 6, and 7 summarizing benefits for policyholders, actuaries, and shareholders respectively.