Has there ever been a golden age when consumers trusted the financial services sector? I found myself pondering the question last week, as I read a comment piece in Money Marketing by Informed Choice executive director Nick Bamford.
Nick was writing about his experience at an FSA lecture, where he was told trust in the industry “no longer” existed – an issue that “needed to be addressed by more effective regulation.”
The annual cost of this regulation, according to Nick, is £500m. This helps prevent consumer detriment worth £500m a year, he says.
If I read him correctly, and I think I did, Nick was making the point that the price of rectifying the consumer detriment was the same as the damage itself, so why bother? Assuming detriment always remains at the same level, would it not be easier to do away with regulation itself, thereby saving £500m?
After all, Nick pointed out, were financial regulation to disappear overnight it would not affect the way he runs his own business in any way. He would continue offering the same consumer-focused service as before and so would the majority of IFAs that he knows.
That being so, what is the point of spending £500m on regulation? Especially given how Nick and his mates are happy to peer-review their colleagues to make sure they are on the right track when it comes to following the simple rules he’d like them to follow.
Now, I know Nick to be an original and well-respected thinker in the field of financial services, so his interesting argument deserves serious scrutiny.
The first point to note is that it is not clear exactly how much of a majority he thinks he is in. To take just one very recent example, it was the FSA that calculated up to 800 IFAs were involved in error-strewn sales of Arch cru products to their clients.
Even if we accept that many of those sales were indeed compliant, there are many more cases every year, involving hundreds of other IFAs, that are not. The misbehaving minority turns out to be a very large one.
The second problem I have with Nick’s proposed approach is over his assumption about of the purpose of regulation. Ultimately, if the FSA/FCA’s role is simply to stop existing consumer detriment, then the cost of preventing it is indeed likely to be disproportionately expensive. Oh, and by the way, like many IFAs I’ve never been entirely sure where the FSA got its consumer detriment figures from.
But that’s not really what Nick is saying: the implication of his comment in Money Marketing is that if the FSA stops regulating then the amount of consumer detriment will remain the same.
That is an intriguing suggestion. Applying the same theory in other areas of public life, one might plausibly argue that if we scrapped the current police budget and stopped sending criminals to jail, levels of crime would remain broadly the same as they are today.
After all, the vast majority of the UK population is not criminally-minded, only a small part of it. Yet we spend more than £12bn on policing in England and Wales, not to mention another £5bn incarcerating people.
The cost of, say, violent crime “only” works out at £200 or so per person and “only” affects a relatively tiny number. Surely we could just insure much more cheaply against such an eventuality and introduce a “very simple set of rules… about what constitutes acceptable behaviour?”
Sadly, the minute you apply Nick’s behavioural model in the real as opposed to the fantasy world, you begin to realise that it doesn’t really have a leg to stand on.
That’s because part of the purpose of regulation, at the end of the day, is deterrence: stopping errant sections of the financial services industry from taking even more advantage of consumers than they do now, preventing an almost inevitable free-for-all were the FSA/FCA not there. You only have to go back to the late 1980s and the pensions and endowment mis-selling scandals to see that.
Ironically, where Nick is absolutely correct is in his other point, where he questions the notion that public trust is “addressed by more effective regulation”.
It isn’t. First, because despite an implicit assumption in the words “no longer” that it must have existed at some point, I see no evidence over the past 20 years that trust was ever present in any real sense. At best there was acquiescent ignorance, shattered by the many scandals of the past few decades.
Second, because the primary point of regulation is to deter, detect and punish miscreants operating in the financial services industry, not to engender a feel-good factor among punters. Indeed, every uncovered outrage is more likely to make consumers feel worse, not better.
Where financial advisers can help develop and improve public trust is by doing precisely the things Nick and IFAs like him are doing: giving superb advice, treating clients fairly, showing in practice the value of genuine financial planning.
Until the public is won over, firms like Nick’s own will continue to pay the very real price for the actions of a minority in the sector. Unfortunately, scrapping regulation instead is not a short cut but a dead end.
Nic Cicutti can be contacted via firstname.lastname@example.org