Regulation

You have to hand it to the International Monetary Fund, they are keen to follow in a rich tradition of banking and investment oversight by seeking to cure yesterday’s ills.  After every crash, bust, crunch, etc., there are cries for something to be done.  The problem, as Alan Greenspan was fond of saying, is that booms, the natural precursor to the bust, are very difficult to spot.  Oh, I know we all think we can see them coming but if that were the case, they would never happen.  The merest hint of a boom would be diffused by us all starting to worry about the inevitable bust to follow.

When very clever people come up with an idea that eventually lands us all in hot water, whether it be the securitisation of debt or portfolio insurance, for example, many with a voice call for its recurrence to be prevented by regulation and legislation.  But this ignores two important truths.

Firstly, booms and busts have been around, probably, since mankind started to barter.  Certainly we have had to live with them since the seventeenth century.  Like the brutality of survival of the fittest and its pivotal role in evolution, this creative destruction usually results in some good, even though there will be losers.

Secondly, it would be a brave banker, indeed, who tries to sell the same type of securitised debt which is causing problems now.  No legislation will be required, you would have to be a bit of a lemon to buy it without reading the small print.  There is little the powers that be can do because they are in an IQ arms race they can never win, the boffins will have moved on to something else which may land us back in the soup in the future but we simply will not know it beforehand.

Dear Janet

In a move that most would see as self-evidently the right way forward, the FSA says that it is looking at capping commission paid to intermediaries.  I shall have to declare an interest because I am unequivocally opposed to commission for the sale of financial products but, unfortunately, restricting it is fraught with problems.  The FSA cannot, for example, restrict competition nor can it destroy an industry over night but it does seem to recognise that we will not get the financial services industry and the advice we need and deserve without a radical change to its structure.

Reducing commissions and ensuring that some products are not unfairly favoured over others would certainly be a step in the right direction even if most of us would want it to go further.

Having spent yesterday afternoon at the offices of the Financial Services Authority for a consultation session about the Retail Distribution Review, I have come away less confident about the future.  The RDR is one of those once-in-a-generation opportunities to influence the future to any degree.  The last one in retail financial services was the introduction of polarisation following the Financial Services Act of 1986.  In general, the history of grandiose schemes is not a happy one and it is questionable whether the last twenty years of regulation have delivered much of benefit to anyone.  We have, however, had some disappointing miss-selling scandals.

Most of the positive changes I see have been brought about by application of technology and firms working to meet client expectations.  Of course, it helps that the regulator guides the industry as to its expectations but I meet other practitioners every week who know of some extremely sharp practices where the client is clearly disadvantaged but the right boxes have been ticked and some organisation routinely lie.

My worries about the latest review are that; it is a sledge hammer to crack a nut; it will lead to greater customer confusion; those involved in draughting RDR are so involved that they now run the risk of succumbing to cognitive dissonance and will force it through even if there is no benefit to the consumer.

In general, I support its aims but it is in danger of being superseded by events and may just be a bridge too far for regulation.

In, about 2001, one of the first things that the newly created Financial Services Authority did was to produce CP121, a discussion paper on the future of financial advisers.  Controversially, it was proposed that Independent Financial Advisers be paid by fees.  This suggestion followed two scandal ridden decades of mis selling, poor regulation and dreadful product design, leaving the industry at a low in terms of reputation and morale.  Presented with this priceless opportunity for reform, the vested interests, including the insurance companies, AIFA (erstwhile representatives of the advisers' interests) and most IFA firms fought tooth and nail to prevent one jot of it being implemented.  This impassioned attempt to stymie progress was largely successful and the intervening years have seen much continue in the same unsatisfactory way as before.

Not all remained in the status quo ante, however.  Some advisers took their cue from the regulator and changed to a fee model and , having had a sniff of what might be, the press, the Consumers Association and many MPs remained unhappy.  Pressure for reform continued.

This year, the FSA released the Retail Distribution Review and most believe it will not be thwarted a second time.  It very much looks as if genuine advisers, as opposed to salespeople, will be required to adopt a fee charging model.  The vested interests arraigned against it are very much less united and less significant in size.  The insurance companies are by no means completely opposed and many are changing their proposition, perhaps humbled by the evidence that paying commission for the sale of policies actually loses them more money than it raises.

It is looking very likely that we will have better qualified, professional advisers in just a few year's time.