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Robert Reid: Regulation needs to be accountable and affordable

Rob Reid glasses 150

If you have not read Tipping Point by Malcolm Gladwell, some of what I say may seem questionable. 

With everything that has happened in the world of regulation, advisers have to be even more vigilant when using any product, even when we think we fully understand it.

The methods I use in due diligence owe a lot to Bob Marriott, a valued ex-colleague and good friend of mine who sadly passed away recently.

We worked closely, performing due diligence on Section 32 plans, where their approach to GMP coverage was pivotal to their eventual output if benefits were taken pre-state pension age. His approach of persisting to the point of full understanding has led me to reject some products that have subsequently proved toxic  to all concerned.

The news that the FCA budget is growing to a ridiculous level disappoints me, as did the comments attributed to Martin Wheatley, where he blamed the rise on being asked to take on more and more tasks. Well, Martin, try saying no or maybe putting some jobs off until later.

In my opinion, we will see the number of advisers fall by at least 40 per cent post-RDR. That will mean the FCA will then be overstaffed and costs should fall.

The FSCS must be reformed with the providers of products taking the bulk of the costs as should those who sold them, personally if necessary.

In my eyes, there is no difference between a car recall and a duff financial product. How Capita was let off so lightly over the Arch debacle baffles me. This is equally true of the auditors and legal advisers in Keydata.

So let us make some key changes and have an order of compensation when a product fails. This will not involve current advisers (unless they sold the products) as the eventual bill can be paid by the Government through the use of regulatory fines they pocket and then use general taxation. While we are at it, the MAS needs to find its funding elsewhere too. If it is such a benefit to the population to have the MAS, then they should pay for it.

Also, what happened to the regulatory dividend we were promised? As many advisers move to level six, the role of the professional body needs to be considered as a means to reducing regulatory costs.

This is not a time to shrug and accept more costs this is the time to call people to account so that the cost of regulation is not allowed to grow unhindered. This means a full and detailed review of how regulation works or, more correctly, rarely works effectively and at an acceptable cost.

Don’t get me wrong. I want a strong regulator but I want an economical one too, where cost benefit analysis is not mechanical but analytical.

We also need proper feedback. You cannot expect effective whistleblowing without knowing that action was taken.

Who you appoint to your committees as industry representatives need to be challenging and not there for the benefit of their ego.

Those non-execs need to challenge and to do so effectively, so an escalation procedure will be essential. Under corporate governance guidelines, no one should serve for more than, say, eight years and that should include any time on FSA committees.

Time may move on but being methodical and logical must apply to all in this sector. Doing something just because its has always been done that way is no reason for not digging deeper. I will always be grateful to Bob for teaching me that. I will miss him.

Robert Reid is managing director of Syndaxi Chartered Financial Planners

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Comments

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

  1. It would be difficult to disagree with what Mr Reid says because he splashes his paint over such a wide area. What I would question is the specific relevance of most of what he has said.
    As we know Tipping Point was a readable re-write of Catastrophe Theory, written by a British Author in 1980. I make the point because Tipping Point became cult because its American Author “put himself about”, whilst the nice, shy British author didn’t. Whilst there was more up to date examples in Tipping Point it didn’t make many more relevant points than the original.
    And there is the problem. Talking about the same old things doesn’t get the job done, though it may gain publicity for the publicist.
    The FSA/FCA get away with constant waffle because they have unaccountable power. The Institutions get away with it, to an extent, because they are rich and powerful, and have factored the bribes (generally called fines) into the pricing model.
    Advisers are not powerful, are not, in general, rich, and are not, currently, loved. So they are unlikely to make too much of an impact with general blether. E.g. obviously advisers would like people on committees who are there for the benefit of the people they represent rather than their egos, but that is not the type of people who will stand for committees. I am not implying that every committee member starts out with the sole motivation of ego, but it will generally be present, and I have little doubt that exposure to committee and power will move the balance away from service to ego. I suspect that in many cases the process is so subtle, the change is never recognised. So if you want something different you have to change at least part of the game.
    How about doing something that Harry Katz was talking about recently – putting information into context. Carefully undermining the very basis on which a lot of financial regulation is based. For example, is the current regulatory set-up relevant.
    The current regime is based on the perception created by the media. One little old lady is mugged so we have a social crisis – according to the media. And politicians will then follow like sheep. Half a dozen unnecessary pieces of legislation later they can say they are doing their jobs.
    No one actually knows whether or not a similar situation is occurring within the financial industry. In any walk of life there will be a “normal” level of deviancy that will never be eradicated. There will always be MPs fiddling their expenses, accountants fiddling their clients’ books, lawyers running off with client money. That does mean those professions are corrupt, merely that some of the people are corrupt. So rules are imposed to a) keep honest people honest, b) catch the habitual delinquent and c) discourage the marginal delinquent.
    The fundamental assumption is that most people are honest, so resources are concentrated on the none and partially honest sections, which is likely to be a very small portion. Resources are concentrated were they are likely to get value for money.
    But that scenario does not appear to apply to the financial sector. Why? One reason could be that nothing is put into context.
    For example, the FSA presented information to the Treasury Select Committee that indicated that the annual detriment to individuals from bad advice was around £500m. This sounds like a very big figure. If we assume that this is 10% of the market, which would be a serious level of deviance, we would have a financial service sector of £5,000m; 1% would put the sector at £50,000m; .01% puts the sector at £500,000m. I can’t find a reliable statement of the size of the retail financial sector, but I believe it is costed in Bns rather than Ms.
    This suggests that, whilst loss is important to an individual, there is little evidence, based on FSA figures that there is generic malfunction. Which then calls into question the extraordinary focus on that sector.
    To put the FSA figures into further perspective, they originally estimated that the annual cost of RDR would be £250m, or 50% of the level of deviancy. This is an high level of comparative cost. Factor in the prospect that, whatever the scenario, it would be unlikely that the level of deviancy would fall by more than 50% (check that with a sociologist if you like) then the cost of deviancy is matching the cost of regulation. So no practical benefit to the consumer.
    We’ll ignore the initial estimated cost of £1.5bn (now reported to be £2.5bn) since that just confuses things. And the consumer will never know they are paying it – unless someone gets up and tells them.
    It would be fatuous to say there are no problems in the retail financial sector, and that standards should not be raised, but using a sledgehammer to crack a nut is likely to have its own adverse consequences – no nut!
    The problem goes further than that, as the FSA have implicitly agreed. By concentrating resources and attention on a relatively minor level of deviancy, they have let an elephant size problem into the room – because they were looking the wrong way.
    The fact that they are incompetent at their job will not have a detrimental impact on the FSA/FCA’s impression of themselves. Being unaccountable means they are free to rationalise their failings in any way that is suitable to them. Media pressure, which I have to say is very weak, will merely drive them further in the Group Think mode, resulting in yet more of the same.
    So for the retail financial sector to produce more of the same in return, is likely to be like water off a duck’s back. To continue a poor analogy, what is needed is to slowly remove the ducks feathers, one by one, until it becomes sensitive.
    To me the one way to do this it to start to put figures on what the retail marker does and make sure they are ina context that the public understand. To take the FOS figures and place them in context. For example, if there are 100 upheld complaints against again IFAs, put them in context with the millions of annual transactions. That 99.999% (or whatever the correct figure is) of all IFA transactions are good is a better message than there are 100 bad pieces of advice.
    Introducing the concept of good statistics into the debate with the FCA may have the consequence of the FCA using at their own statistics to find the fracture lines before they become catastrophe lines.
    Far too much of the financial industry is run on blether and fairy tales. Frighten yourself, and the regulator, by introducing facts and figures in order to argue a reasoned case. And more importantly, make those facts and figures available to the public. Eventually people will start to question the current message if it does not co-incide with the facts. Anyone can counter waffle – facts present a more difficult problem.

  2. I too worked with Bob Marriott in the past – indeed at the time when he initially became ill. Like Robert, I had a great deal of time and respect for Bob and am saddened by his passing.

  3. Money Marketing – can you give Glen McKeown his own column please?

  4. Glen

    I have to say there is not a lot I disagree with in your evaluation – spot on !

  5. Robert & Glen, very good points and regarding the tipping point if there looks to be a 25 to 40% reduction in IFA’s, 50% reduction in Bank Advisers and over 75% of AR mortgage brokers have gone with a corres

  6. Phil Netherwood 20th April 2013 at 11:16 am

    You don’t have to be an Einstein to know that the way the FCA, MAS & FSCS are currently funded is unsustainable & unfair. If our new regulator doesn’t listen any better than the last one it’s time more of us wrote to our MPs to ask that work (as a professional adviser helping consumers) always pays without reducing access to the service for those that need it & to put fairness back in the system by making those who actually cause failures pay for them, not be bailed out by the rest of us. Sound familiar?

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