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The route to less regulation

Tony Meadowes’ £5,570 loan nearly cost him £384,000 bec-ause of rocketing compound interest on missed payments. Of course he did not pay. What Harvey Collis of London North Securities did in charging interest of 34.9 per cent has become known as toxic Lending.

In the rest of Europe, interest rates of this level are extremely rare. But in the UK, the Citizens Advice Bureau say the number of people inquiring about debt problems has risen by 70 per cent in the past decade to 700,000 a year.

The case raises a fundamental question about borrowing in Britain – how could this couple have got themselves into such an impossible position? Potentially, like a great number of people, Meadowes believed someone else would be made responsible if he could not cope with the fin-ancial products he had bought.

Another view may be that he failed to understand the liability he was taking on, partly due to the prevailing complexity of financial products.

Any financial company coming to the UK for the first time cannot fail to be struck by how much more highly regulated our finance industry is than in the rest of Europe. If you look at the financial services industry as a whole, you see that in 1997, the FSA issued only five consultation papers, in 1998, the figure was 12, in 1999, it was 20, rising to an average of 40 a year between 2000 and 2003.

It is entirely to the benefit of the financial sector that it is seen to operate within strictly governed regulations and therefore command the trust of the public but heavy regulation possibly affects the public in a way that most commentators have failed to recognise.

As we have all seen, there is evidence that if buyers take out a financial product and cannot cope with the demands on it, they accuse their adviser of misselling the product and claim compensation. Regulation could be seen as reducing the client’s responsibility and increasing the adviser’s responsibility.

Compensation paid to those who bought endowment policies in the 1980s could be even more than the £20bn being paid in pensions compensation, according to PricewaterhouseCoopers. Add to that the £150m paid out to people who bought precipice bonds between 1997 and 2004. It is possible that a minority of advisers let the industry down with poor compliance procedures and were “selling” products to the public rather than providing financial planning advice.

With the FSA promoting compliance led advice, will we see the end of such scandals?MLP Private Finance is a subsidiary of MLP AG of Germany and in Germany there are few rules regarding the registration or qualifications of advisers. In addition, there is minimal regulation applying to money laundering and the care of documentation.

Instead the German regulator concentrates on the lenders, insurance companies and other providers to ensure that the products and services offered meet strict guidelines.

However, it is not simply a regulatory issue. In Germany, clients take more personal responsibility for checking the quality of advice when choosing an adviser as they are assessed on performance. This ensures a competitive market and clients tend to be much more rigorous when choosing a good adviser.

The golden rule of buyer beware helps clients profit from good advice. Perhaps, once the UK industry becomes a profession with more AFPC qualified individuals and certified financial planners, we may find that clients will compare advisers more rigorously based on qualifications and experience.

Over the years, highly persuasive lobbying by German financial institutions has kept regulation at bay. Traditionally, Germans are more risk averse than their British counterparts when investing. For many Germans, their first experience of private share ownership came in 1998 with the privatisation of Deut-sche Telekom.

Enthusiasm for investing in stocks and shares drove the DAX to a high of nearly 8,000. But when it fell to 2,500 points, even though followed by a recovery to 4,000 points, private investment fell out of favour and now only 20 per cent of Germans invest directly or indirectly in shares. Because there is less chance of claiming compensation, the average European is more careful about the decisions they make.

This may strengthen trust in the financial market because people take more personal responsibility for their investment decisions.

>From the experience of MLP in the UK and Germany, our conclusion is not original but certainly simple. The best advice can be achieved through a loyal, long-term relationship between client and adviser.

In the UK, concerted campaigning by many different consumer protection bodies has encouraged a compensation culture promoted through the media. At the same time, public trust in the probity of financial services has slumped to an all-time low. The result? A need for ever more regulation at considerable cost to the public.

Comparing the approach of two nations is difficult. It is not solely regulation that is the issue, it is the quality of advice and the attitude of consumers.

We see a long road ahead to change public opinion but with well trained and suitably qualified consultants and support staff, we believe that our blossoming profession can reduce the need for regulation (and compensation) simply by doing a better job.

Frank Mesterharm is chief executive of MLP Private Finance

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