Many people disagree with my assertion in my last column that regulation of financial products will be better for the mass market than regulation of advice. So here is some more food for thought and a mantra for politicians and regulators.
I start with a question you must have a good answer to – If you believe that product regulation is good for cars (safety), food (safety) and drugs (safety), why is it bad for financial products?
For historical and cultural reasons, legislators and regulators had a bias against regulating financial products and 20 years ago started down the “regulate sales and advice” route. As several commentators on my last column have pointed out, this leaves the liability for bad outcomes from bad products with the adviser/distributor rather than with the manufacturer.
We would not accept that with cars, drugs or food, we would regard it as fundamentally unjust.
Left to themselves, manufacturers of food, cars and drugs would lie to us about the safety of their products. They still lie to us about other things but we do not mind because we know that regulation means they will not lie to us about what is really important.
Perhaps medicines are the closest to financial products. They are complex and can be life-preserving or life-threatening. Imagine if there were no safety standards and doctors had to do their own research to try and find out how safe a medicine was. How many people would die?
There are many medicines you can buy in any pharmacy. These are mainly basic products that have been in existence for many years, such as aspirin, and have a huge literature of research on their use and dangers. We allow any adult to buy these things off the shelf and assume they will read the product leaflet that tells them what not to do.
But when it comes to medicines for cancer or heart disease, we do not allow that. We require someone to consult a doctor and you have to have a prescription from a doctor to get the medicine. Do we think this is an over-complex, impossible-to-police, nanny-state system? No. Most of us like it and would not want to change it for anything else.
I am advocating a similar approach to financial products. Simple products that pass simple safety tests go on the shelves at banks or supermarkets and websites. You can buy them with or without advice from a salesperson and they are salespeople, not advisers. They may give advice about a product but their job is to sell things.
If you think you need a proper diagnosis of your financial situation and some advice, then you have to consult a professional, an IFA.
IFAs can recommend any financial product they consider suitable, including complex ones you cannot buy at the bank. In their case, it is the advice process that is regulated, just as it is with doctors, lawyers or accountants. If their advice is at fault, you can get compensation.
Like doctors, IFAs may recommend the equivalent of aspirin or off-the-shelf cough medicine. But they may also prescribe financial solutions that, like steroids or statins, could ruin you if you do not use them carefully.
Safety standards for financial products would have eliminated the potential for every one of the misselling scandals of the past 15 years, scandals that regulation of sales and advice failed to prevent.
The mantra for politicians and regulators is – Safety standards save lives. Even canaries can sing that.
Chris Gilchrist is director of Churchill Investments and editor of The IRS Report