Imagine the boss of car safety regulator VCA saying “consumer engagement with cars is essential” or the boss of the Medicines and Healthcare Products Regulatory Authority saying “consumer engagement with pharmaceuticals is essential”. These bosses would first be ridiculed and then fired.
Yet the FCA’s request for input to its Financial Advice Market Review contains the statement: “Consumer engagement with financial services is essential.” Why is the FCA not being ridiculed and its boss fired? (Okay, he has been, but not for this.)
The implication of the FCA’s statement is that consumers can only expect to get good results if they “engage”. Yet no one considers engagement a reasonable requirement for buyers of cars, drugs or food. Why? Because regulators in those fields have well-defined objectives: they set policies and rules that ensure consumers are safe if they obey the law and use common sense.
You can kill yourself by driving too fast or carelessly, by taking too much of a drug or eating too much of almost anything. Regulators do not worry much about this. They require manufacturers and retailers to provide essential information and assume consumers will use this information intelligently, or at least not stupidly. They make products safe for non-stupid users.
Could you reduce the number of UK car deaths each year by requiring car salesmen to investigate car buyers’ capabilities, habits and “previous” and to base their recommendations on this? Almost certainly the answer is yes but the cost would be ludicrous, the hassle unbelievable and the forms on which would-be buyers’ lies were recorded would wallpaper hell several times over.
So why do we put up with the notion that consumer education or engagement is necessary for the financial advice “market” to work? In essence, because the regulator has chosen to regulate advice rather than products.
When regulating products, it is easy to answer the question: does it conform with the relevant laws and regulations? And does it do what it says on the tin? If it does not or the manufacturer lies (see Volkswagen), it pays up. Negative outcomes (deaths, crashes, illnesses) are evidence of failure and can be treated as smoking guns by regulators.
When regulating advice, the implicit aim is that consumers always get the right advice for them. Yet it is impossible for detailed regulation of the advice process to ensure this. Nor can regulators set rules for the outcomes of advice, as they can with products, for given the near infinite variance in personal circumstances and needs the “right advice” is idiosyncratic.
To a man with a hammer, every problem looks like a nail. While a gale blows through the roof, the FCA hammers nails into floorboards. It defines the problem as regulating advice when it could deal with many of the problems consumers face by regulating products.
Since the FCA has had its legs blown off for failing to sort out the dysfunctional annuity market, any new boss will realise the political response to another failure is likely to be lethal. I predict the regulator will first fudge the advice rules and then edge towards product regulation while pretending not to.
Chris Gilchrist is director of Fiveways Financial Planning, a contributing editor to Taxbriefs Advantage and edits the IRS Report