Following Money Marketing’s article How dangerous are the Liberal Democrats earlier this week, I was asked to pen an article examining the prospects for IFAs of a Conservative victory. Some basic preliminaries are necessary. I am not a member of any political party. I have voted for each of the three main ones in past elections.
The Conservatives are unusual in being able to de-stabilise financial services regulation while in opposition. Their policy of abolishing the Financial Services Authority has damaged morale and made the recruitment of quality staff there just about impossible. While the announcement of Hector Sants’ departure from Docklands was explained by reference to a three-year plan, it is hard to avoid the suspicion that the FSA Chief did not want to run the organisation while it was being politically dismantled. Either way, the organisation cannot now recruit his successor and the handover is supposed to be a few months away.
IFAs who hate the FSA may find this hugely encouraging. Compliant ones should know better. How can an off-balance organisation that is being re-formed by politicians pursue banks for flogging investment bonds instead of independent financial advice. Big enforcement action only comes about when a regulator is self-confident. So, IFAs competing with dodgy neighbours will be operating on an uneven playing surface for as long as the regulator is unable operate dynamically with its future secure.
The Conservative manifesto and website actually says little about its much-vaunted plans for regulatory change. Prudential supervision of banks and large or perhaps all insurers will go to the Bank of England. This is in spite of the fact that the Bank has no interest or relevant expertise in insurance. When banks should be concentrating on improving standards, they will be trying to work out how to liaise with another group of regulators.
It is unclear where the Tories propose to draw the line for the transfer of institutions to the Bank. At one stage, only large depository institutions were going to be considered by the Bank. Now in its “Plan for Sound Banking”, the gravity of Mervyn King will be brought to bear on credit unions! Either way, the regulatory transfer will just involve moving the desks of one group of regulators from Docklands to premises as yet unfound. Removals companies will benefit considerably from this and other Tory proposals!
The Tories conveniently forget why prudential supervision of banks was given to the FSA. Threadneedle Street made such a mess of supervising BCCI that it had to shut the bank amid pools of fraud and financial crime in 1991. The Bingham Report on the subject may not sold millions but it should have been on George Osborne’s reading list. Nothing seems to have changed in the meantime. In 2007, Mervyn King did not call the impending bank crisis any more accurately than the FSA.
One part of the Tory plans makes excellent sense: its proposal to merge the consumer credit side of the Office of Fair Trading with the “rump” of what is currently the FSA. Any criticism of the effectiveness of the FSA always has to be countered by comparison with the mess created by the OFT. However, in order to play political games, George Osborne has to wreck a good idea by changing the name and legal identity of the FSA into the Consumer Protection Agency. This change, accompanied by sometimes justified descriptions of the current regulator’s incompetence, only makes that organisation’s difficulties worse. The CPA’s staff will be the same as that of the FSA minus the bank supervision teams if the Tories win. All that will happen is that we will have a new rulebook to learn and a period of hiatus before the new organisation acquires sufficient confidence to carry out challenging enforcement action. IFAs must understand that a new regulator without its own core will only be able to go after them as the financially weaker targets. Anyone able to put up a fight will be off the enforcement agenda.
The next alarming part of the Tories’ plans relates to the rest of the FSA. Nobody seems to have considered the FSA’s generally successful role in regulating the smoothness of financial markets, its work as the UK listing authority and above all else financial crime. There is a suggestion that this last area should go to a beefed up Serious Fraud Office. Anybody who thinks that we can have clean markets with the SFO monitoring and then prosecuting financial crime, market abuse and the like has conveniently forgotten how that organisation has to juggle its budget just to prosecute the worst fraudsters. It has no regulatory experience or interest at monitoring or supervising.
Actually, the Tories seem to be rowing back from its beefed-up SFO idea, indicating in its “Plan for Sound Banking” that the Consumer Protection Agency could deal with financial crime. They do not appreciate that consumers are not the victims of much market abuse. The same document also seems to suggest moving the market management function of the FSA to yet another new regulator, merging these functions with the Takeover Panel and Financial Reporting Council. That still does not account for the listing authority functions. More to the point, though, the Conservatives are now up to four regulators to perform the FSA’s current role.
On regulation, a desire to put one over the current Prime Minister threatens to create regulatory chaos with multiple institutions being created, each with their own addresses, staff, rulebooks and problems. If for political reasons, Osborne had to argue for transferring bank prudential supervision back to the Bank of England, that would have been silly but harmless. It might have been cancelled out by the OFT consumer credit merger with the FSA. For what looks like childishness, we face a nightmare scenario of regulatory all change. It is not clever.
The Tory tax proposals are generally too vague to be subject to scrutiny. They want to start to reverse the effect of the abolition of the dividend tax credits for pensions but cannot fund it. There are two proposals shared by the Liberals: ending the obligation to buy an annuity (neither explain how the death charge will work) and a proper Equitable compensation scheme. The last point raises questions about customers of other closed with-profit funds who probably suffered the same fate for the same reason. Payments to child trust funds will go for all but the poorest third or the disabled (the Liberals would scrap them altogether; Labour proposes to increase payments for the disabled). The raising of the IHT threshold to £1 million will be popular in the South. It will, though, reduce the demand for IFA skills in this area not to mention the overall tax take.
The Tories’ proposals on financial regulation have had them laughed out of their natural constituency, the insurance and banking industries. Only the addition of consumer credit to the FSA’s portfolio seems a good idea which the other parties do not oppose and will probably happen in the fullness of time. The rest will rightly wither in the event of a hung Parliament or Tory defeat. Vote but, compliant firms, be “very afraid” of a Tory outright win.