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Regulation’s poor showing

One of the most com- mon accusations against consumer-facing financial journalists is that we are always calling for tougher regulatory measures to control industry activities at the expense of common sense.

Generally, I find such comments ridiculous. The reality is that there are two fundamental – if occasionally contradictory – rules that operate at the heart of the regulatory agenda. First, regulation only exists bec- ause of a moral vacuum at the heart of the financial services community. Second, regulation tends to focus first on areas that primarily affect middle-class people. Working-class areas of financial tension tend to be at the back of the regulatory queue.

I want to look at these arguments in the context of two areas which have recently come under the control of the FSA – mortgages and general insurance.

In so far as my first point is concerned, it isn’t just held by me. Money Marketing regularly includes pieces by John Ellis, one of the Personal Finance Society’s intellectual gurus. His main thesis is that the absence of a stable professional network of advisers, able to police themselves effectively and demonstrably raise their standards without outside interference, has created a gap that is then filled by regulators.

Of course, given that his readership consists of IFAs – and that the PFS needs them inside its tent – he also needs to imply that the drive towards greater regulation is partly led by press hyenas and other assorted consumerist headbangers. But reading between the lines, you get a sense that he doesn’t really mean it.

John argues, convincingly in my view, that the only way to get the regulatory monkey off advisers’ backs is to develop credible professional structures that elevate the status of financial services practitioners. His underlying point, with which I also broadly agree, is that if advisers had been able to demonstrate professional status much earlier, their world would have been no more regulated than chartered accountancy or surveying. It will now take many years, perhaps decades, before that happy state will come to pass – if ever.

Indeed, one of the unintended consequences of a consistent lack of professionalism on the part of many advisers – and the financial damage they have caused to many millions of people – is that we get what is known as largely unnecessary regulation creep.

The most obvious area where that applies is in relation to mortgages. Broadly speaking, if there is an area where the middle classes are at their most “expert”, it is mortgages. Generally, it is middle-class people who have the greatest tendency to shift their homeloan from one provider to another every few years in the perfectly correct assumption that by doing so they will be able to save a bundle.

Equally, it is middle-class people who get most irked by the notion that no matter how great the mortgage deal, there should not be any redemption penalties for switching, certainly not beyond the period of the deal.

I recall one argument to the effect that if a punter were unwittingly trapped in a mortgage with an extended penalty, they ought to wriggle out of it on the grounds that it constituted an unfair contract. One senior newspaper executive even insisted on me writing a story about this iniquitous state of affairs in the late 1990s after he found himself stuck in a high-charging fixed mortgage that he had deliberately taken out thinking an incoming Labour Government would push up interest rates. They fell.

Mortgage regulation was, in my view, driven by middle-class people. The irony is that most mortgages, most of the time, are not rocket science. They are generally easy to understand and the advisers who recommend them are generally competent.

Even more ironic is the fact that one of the key areas where regulation is demonstrably needed, yet has been completely ignored, is that of second-charge mortgages. Typically, a second-charge loan will affect the poorest elements in society. Yet, surprise, surprise, it is the one area which the FSA has decided to leave untouched.

A similar approach applies to insurance. Here is an area that has been crying out for effective regulation. Within insurance, the issue of payment protection insurance has been a running sore for at least 10 to 15 years.

To no one’s surprise, the General Insurance Standards Council, which preceded the FSA in supposedly regulating the industry, spent years justifying some of the most scandalous practices operated by lenders and insurers. If ever there were a toothless watchdog, the GISC was it.

But because most of those conned into taking out these policies are working-class borrowers in fear of “losing” their loan, desperate not to “upset” their lenders and unaware that this kind of cover is grotesquely expensive, it is only in the last few weeks that the FSA has acted on PPI, telling insurers to improve their sales practices.

Here is an industry and a product which has creamed many billions out of the pockets of mostly working-class people, finally now coming under regulatory scrutiny – at least a decade after it should have been.

In the regulatory feeding line, it is the “huddled masses”, as the poet Emma Lazarus once called then, who are always last to benefit.

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