View more on these topics

Phil Young: Under the FCA’s all-seeing eye

Phil-Young-700x450.jpg

The concept of the panopticon – a prison with a single watchtower where inmates do not know if and when they are watched so must always assume they are – was adopted by French thinker Michel Foucault to explain how all relationships of power function.

Imagery aside, this is not necessarily a bad thing. Maintaining even the most basic form of social order requires us to assume we act and think under the gaze of some greater authority: if not God, then the Government, the police, a schoolteacher or our parents. Somewhat unwittingly, the FCA has become the panopticon for financial advisers. Not simply as a regulator but in terms of how advisers acquire their own subjectivity, which is far more interesting.

A couple of years back, an adviser summed this up perfectly when he said to me: “I’ve accepted that I run a franchise of the FCA. I own the business but pay it a fee for my licence and it controls how I market myself, how I charge and how I advise.”

Advice has always been shaped by something other than advisers. When I started out, firms were still moving from FIMBRA to PIA and it was life companies that fulfilled the role of panopticon, handing out jobs and training via its sales force, then a business model with commission and punishment through clawback. When the role of the life company dwindled, it was platforms and fund managers that handed advisers a replacement business model and charging structure in the form of ad valorem charging.

The move from PIA to FSA, which culminated in the RDR, cemented the position of the regulator as panopticon, defining what good and bad advice would look like, and what good and bad advisers looked like. This has been achieved despite a reduction in the amount of direct contact a small advice firm will have with the regulator. Examples of how it has been achieved with so few foot soldiers are as follows:

Requests for information: We have no real understanding about what happens to the huge amounts of information sent to the FCA by all parts of the industry. We suspect it cannot all be used or acted on but have no idea which parts in particular or when it is ignored.

Good and bad practice: Messrs Findlay, Gould and Percival are excellent presenters. Rory is now the single biggest draw as a speaker for any adviser event, including paid-for events, not just FCA ones. There is also constant demand for more guidance, and good and bad practice examples. Advisers are willingly defined by the FCA and want more instruction.

Interim levies: Like a thunderbolt from Zeus, interim Financial Services Compensation Scheme levies are received by advisers as severe, unpredictable and unjust. A reminder that nobody is invisible and everyone can be called to account at any time.

Information on fines: A steady stream of information about fines and bans comes direct from the regulator and is spread via the trade press.

I do not think for a second any of this was intended. Percival himself was quoted saying he would prefer advisers to think about doing the right thing by their clients instead of worrying about what the regulator thought. However, this is extremely difficult if advisers derive much of their identity from the FCA, not simply their regulatory licence. What would stand in its place?

Advisory businesses are typically small, so there is little competition for the FCA as panopticon. Less so for large financial institutions such as banks, insurance companies and asset managers. Senior management at big businesses all work under the gaze of the share price, which is the sole judge of their abilities. Moving the share price upwards is the only true objective and bonuses are paid in shares. Roles are sufficiently specialised and compartmentalised to provide for dedicated risk personnel to deal with the regulator, so that others can work without the distraction of operating under the regulatory gaze. In this context, the FCA can lose its day-to-day power over senior management, which is limited to occasional set-piece meetings. Perhaps this is the ‘culture’ that concerns regulators: too much dependency from advisers, too little from institutions?

Questions are being asked on what we as a country want the regulatory remit to be, its function and purpose, and what budgetary constraints it should operate within. Rumours about a lack of independence and clear direction without a chief executive weaken its position and need to be addressed.

The FCA’s modern role as setter, rather than regulator, of culture among adviser firms may be too subtle to be noticed. If its role or reputation is diminished further, so too might its effectiveness be.

Phil Young is managing director at Threesixty

Recommended

FCA-FSA-Building-Sky-Contrast-700x450jpg
3

FCA hit by 491 complaints in 2015

The Financial Conduct Authority received 491 complaints in the year to November 2015. The flow of complaints against the regulator was even all year, with 246 made between December 2014 and 31 May 2015, and 245 between 1 June and 30 November 2015. The FCA’s latest data bulletin says the regulator did not investigate 47 […]

FCA logo glass 3 620x430
6

FCA facing regulatory ‘overload’, Treasury committee chair warns

Treasury committee chairman Andrew Tyrie has warned the FCA and the Bank of England are facing “overload” and says regulators could be powerless in preventing the next financial crisis. Speaking during a debate on the Financial Services Bill on Monday, Tyrie said the Government’s legislative agenda – including the pension freedoms and the introduction of […]

The Downsizing Delusion: Why relying exclusively on your home to fund your retirement may end in tears

By Steve Webb, director of policy The British obsession with homeownership can have dangerous consequences. A recent survey by Barings¹ found that up to three million people of working age were planning to rely wholly on the value of their home to fund their retirement. We are not talking about people investing in buy-to-let or […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Many advisers may have chosen a path of self-determination to avoid paternalism and hierarchical structures, so it is therefore ironic that this outcome has emerged. There must come a time when external intervention becomes subject to the law of diminishing returns. There should also be some reward and recognition of effort on the part of those on the receiving end of regulatory regimes. So here`s a thought to provoke debate on a quieter Friday morning. Those advisers who achieve Chartered/Certified/Masters qualifications should be treated differently and subject to self-regulation in the same way as the ICAEW or the SRA (and subject to corresponding sanctions and punitive actions by their professional body). Such differentiation will encourage higher standards, reward achievement and reduce the FCA`s regulatory burden.

  2. “We have no real understanding about what happens to the huge amounts of information sent to the FCA by all parts of the industry.” I think we do. Damn all.

  3. Thanks for both your comments gents. A question based on both of your replies. If you were the FCA, looking to pick out where the risks were amongst advisory businesses, what specific MI would you ask for and why? Is there a series of questions or set of data (and I don’t think its the current regulatory reports) which would help pick out which firms are higher risk?

  4. Not easy, Phil (if it were, they might have tried it by now). Without wishing to be monothematic, up to date qualifications within an advisory firm at Level 6 would represent my first filter. Smaller Chartered firms constraining themselves to robust planning processes and vanilla-style products should certainly not have to trouble the scorer too much compared to lesser-qualified individuals making more esoteric recommendations. I appreciate this is not granular on the MI front, but more tangible regulatory differentiation would at least represent a start.

  5. A question the FCA might ask is “To how many clients have you sold UCIS products and do you wish to pay the fine upfront or instalments?”

  6. UCI Schemes are, of course, one of the current big issues of regulation. A question that the FCA ought to be asking of those selling them is: Do you have in place the requisite PII cover for the provision of such advice? Please send us a copy of your policy. The reason, I suspect, why so many firms who’ve sold UCIS swiftly go under when the complaints start rolling in is that they don’t and the FCA appears to have failed dismally to prevent this happening.

Leave a comment