Perhaps the retail distribution review pales into insignificance in comparison but it might just be a crisis of the FSA’s own making.
So this is a plea for the regulator to regulate.
IFAs may groan and ask how can the editor of Money Marketing ask such a thing? Does he want more red tape for advisers? What on earth have the last 20 tortuous years been about?
But as I said, it is a question that needs to be asked, even in the midst of what threatens to be the biggest review of financial services in the industry’s history.
So here is the case for why this is happening and then the case for why this should not be happening.
First – principles-based regulation. Now, I know at least one compliance consultant who will say that even when the regulator says it is a principle, it is a rule.
But I am not so sure. Some believe the regulator would like to withdraw from at least some aspects of its current role, leaving other bodies to do some of the work (some might say the dirty work) for it.
For those who believe this theory, then in many ways the FSA has already retreated at least a little. It has not, for example, issued a regulatory update for some time.
The changes to the enforcement team also suggest that the FSA has brought in some top-notch legal talent but at the expense of weight of numbers in the division.
Perhaps Canary Wharf is determined to win the fights it picks and determined not to repeat the embarrassing tussles with the Legal & Generals of this world – the sorts of outfits that can afford to spend a bit on their own armies of top lawyers. But in doing so, the FSA will also need to pick its fights and that may mean it expects the professional bodies to catch any smaller fish.
So we come to that RDR again. One argument is that it is a final unprecedented intervention in a market and ultimately a bid to simply make enough room and effect enough change to ultimately withdraw to base – the regulatory equivalent of a surge in troop numbers before the pull-out.
The theory runs that if you lose the general adviser, as has been threatened, what you have left is top-end advisers and a bottom end, neither of which needs regulating tightly, allowing the FSA to concentrate on its principles. The FSA believes that the top end will behave themselves and most undoubtedly will although there is many a crook who passed an exam or two.
At the bottom there are primary advisers. The goal is that you have perhaps 50 people in the country you can nail to the nearest gatepost if things go wrong there. Advisers will be in tightly controlled groups run by banks or insurers which can compensate to their heart’s or, indeed, shareholders’ content.
There is no doubt that some people at the FSA would like to do just this. No longer would they have to put up with harassing phone calls from irate advisers. No longer would they have to worry about challenges to vexatious visits. No longer would they hesitate to review something that has gone wrong in the market for fear of putting more advisers under the compensation scheme.
Yet this is at the crux of the problem. Most advisers believe the market needs regulating. It is not perfect and there is room for improvement. Most advisers believe some advisers are kept on the straight and narrow by the fact that the regulator carries a big regulatory stick. There is some churning – the FSA is not making it up – and some of the switching in the market is against the interests of the client and is therefore misselling.
There are issues around too many onshore bonds being sold. We also have a debate surrounding self-invested personal pensions and whether clients really need the sort of investment freedom they are being given by these products. Indeed, a robust argument has taken place in the pages of this newspaper. As one adviser at a Bankhall roadshow recently said, the whole self-cert mortgage house of cards may be about to crash down around some borrowers’ and mortgage brokers’ ears.
But this is why we have a regulator. It has been judged by the Government and the industry and most advisers, for that matter, that a full free market with total caveat emptor is not in anyone’s interests. No one wants to go back to the wild west.
For all its faults and unfairnesses, many of which this paper has opposed, the FSA’s complete removal would not be welcomed by most practitioners. There are many things wrong with the regulator – the recent unwillingness to be open about Lautro mischarging is only one symptom of its arrogance – but this paper certainly has never advocated that it should not exist. But nor would we recommend the imposition of a quick fix regulatory straitjacket on advisers and then subsequent withdrawal to the nearest ivory tower.
That is why the RDR is such a missed opportunity. It could have discussed regulating better. It could have tried to define what had gone wrong in the past to allow misselling and to stop it in future. It did not.
Simply stating that commission is at fault is deeply naive. In some cases of misselling it was but many other times there were other forces at work – bad leadership, panicked management, mistaken assumptions about how far markets could fall, the belief that any stockmarket-based investment was better than none. The latter is certainly an interesting idea, given some of things said about primary advice in the RDR paper itself.
As a result, it proposed a reform that was more than one and probably two or three steps removed from the reality of the market. The strange threat to abolish general financial advisers and to corral them into primary multi-ties is actually an admission of failure. Without this threat, we might now be witnessing a decent discussion about raising standards of advice. In that situation, much of the advice industry would be able to engage with the review and consider how best to change things in the interests of regulator, regulated and ultimately and clients. Instead, what the regulator faces from most advisers is almost complete opposition.
Under the RDR, the move to principles means the regulator is managing retreat and actually giving up on the hope of a professional market for most British consumers.
There is one final point the FSA should consider in this retreat. What if something goes badly wrong before this new system is in place? It would be nicely timed. Just as the FSA tries to sort out the mortgage market, it could face some primary advice scandal on its other flank.
Yet I cannot see how this would be a problem if the regulator were prepared to do what it is supposed to do and regulate the UK’s financial services industry, just like the law says it is meant to.
This regulator should remember what it is for and that is to regulate the market it sees in front of it.