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A law unto itself

I would like to pose a question or two for the regulator and for the regulated. How far should a regulator be able to change things simply to make its life easier?

And should a regulator adhere, at least in spirit, to the standards it expects of the regulated?

Now, I may be wrong but I am sure somewhere in the maze of legislation creating the FSA there is at least an implied rule that it cannot make life so difficult for the regulated that they pack up their bags and leave.

On this thinking, the FSA should not make it so difficult for fund managers to exist by, say, making their businesses so expensive to run, that they all retire to the Cotswolds and leave it to cheap and cheerful or, in some cases, simply cheerful tracker funds.

But it would, of course, make the FSA’s life easier.

Turning to IFAs and whole-of-market advisers, should the regulator be allowed to force small independent businesses into much bigger businesses because they are too difficult to regulate? I would argue no. It is wrong in almost all circumstances unless it can be shown that the channel risks much more consumer detriment than others.

In the case of the RDR, the consumer detriment argument has been shown to be less through this channel than others and the insurance company interest should not be confused with the consumer interestIf you dumped responsibility for everything that has gone wrong with financial services in the last 20 years in IFAs’ laps, maybe there would be justification but the ombudsman’s complaints statistics disprove that.

So should the FSA be able to use capital adequacy, screeds of exams or even the simple threat of abolition of the new category of general financial advisers to make its life easier? Again, I say no. It is wrong in the context of a regulated market for a regulator to do so.

The bar to professional financial planner is set too high to allow many advisers to get there. The amount of capital is either too much or accelerated too fast. It is meant to make life uncomfortable for general advisers.

The prudential paper does not make a solid case for change. It is all over the place in its arguments and assertions – RMAR data or not. At least the case should be remade and adjusted with decent numbers to back it up and some suggested levels of cap ad, too. In this state, it is justification for nothing.

Yet for the moment, the FSA is determined to proceed and, in my opinion, is breaking every unwritten rule of what regulation is about.

Here we come to the second question. Should the FSA have to adhere at least in principle to the standards it expects of those it regulates?

I suggest that regulation is an odd thing. It brings a type of morality to business and businesses that we often only expect of human beings.

Whatever the SRI and corporate governance people say, business is mostly about profit. Whether that is best served by proper treatment of customers or overcharging them would be up to firms to decide in a free market. The regulator tries to ensure the former thinking prevails.

To achieve that, the regulator requires fairness, transparency and consideration for the customer and client. These apply in vastly different ways to plcs, privately owned giants, partnerships, owner-managed businesses and sole traders.

What the FSA is asking for is a degree of moral behaviour as set out by the FSA itself. It should follow its own lead.

The RDR, prudential papers and statements are contradictory, uninformative and badly put together. The regulator does not like unjustifiable sales spin in marketing brochures, so why is it prepared to use those tactics in its documents?

This reform is the regulatory equivalent of misselling, mismarketing and also of the sort of botched admin that has seen advisers hauled over the coals by the ombudsman.

So the answers to my questions are that a regulator should not be able to change things just to makes its life easier and it should have to adhere to its own standards.

Otherwise it risks becoming so unprincipled that it is not a principle-based regulator but an arbitrary one. It will have no moral force, just force alone.

John Lappin is editor of Money Marketing


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