The regulator walks a fine line as financial services evolve


The first time I approached an investment advisory firm was when I wanted help with stocks recently inherited from my father.

I was informed – very politely – that they could not help as the £ 80,000 wallet was too small, even though it totaled around four times the average financial wealth of UK households at the time.

That was 25 years ago, when the industry was often seen as patronizing, secretive, and lacking in transparency, especially when it came to preparing invoices.

You might think that not much has changed, given that these criticisms are still largely directed at financial services companies. And, on an even more serious note, there seems to be no end to the scandals that have plagued the name of the industry, like the 2019 collapse of Neil Woodford’s £ 3.1bn Woodford Equity Income Fund. , when more than 300,000 investors lost money.

The Financial Conduct Authority launched its latest attempt to improve standards this week, with plans for a new ‘duty to use’ principle that it says “would set higher expectations for the standard of care than businesses. supply to consumers ”.

The regulator said bluntly: “For many businesses, this would require a significant change in culture and behavior, where they consistently focus on consumer outcomes and put customers in a position where they can act and make decisions in the future. their interest. “

Note the “many businesses”. Rarely is the FCA so categorical in its criticism. It’s not about taking a few bad apples out of the barrel. It is a question of sorting the whole harvest.

But, the truth is, in the past 25 years since my failed attempt to hire an advisor, investment services have become widely available to more people than ever before, procedures have become more transparent, and costs have generally come down.

Financial services companies have collapsed to restructure in the face of regulatory pressure, digitalization and competition.

The change coincided with a revolutionary shift in the retail savings market, as the corporate pension system shifted from a defined benefit plan to a defined contribution plan. People are forced to take responsibility for their savings, whether they like it or not, and have been given new tools to manage their financial lives.

And savers jumped at the chance, especially during the pandemic, when many people had more time to spend in front of their screens, in the wake of the chills and outbursts of ultra-lively markets, including memes stocks and the crypto.

Obviously, fraudsters need to feel the full force of the law. And companies that engage in behavior that is not criminal but still breaks FCA rules must be punished. One example is the abuse of payment protection insurance (PPI) for years by the big banks. If you can’t trust Lloyds, Barclays, and HSBC to treat customers fairly, who can you trust?

Controlling such behavior is a subtle art. If we believe in the benefits of markets – in providing choice, in stimulating competition, and in enabling business success and failure – then finance must be flexible and have flexible oversight.

The retail industry is very broad in terms of risk tolerance, especially now with the expansion of day trading. With greater freedom of action comes an increased risk of financial accidents and even catastrophes. No one can be sure that the newly released investors will act in their own best interests.

The key is whether customers really understand the risks. Many unsavory financial firms profit from deregulation, globalization and growth. The FCA needs to be vigilant, as it has been, for example, in monitoring the explosive expansion of crypto.

He rightly warned investors about the risks and worked to ban the sale of crypto derivatives in the UK. With its international counterparts, it may ultimately develop a less restrictive approach. But in this case, he cannot be accused of sitting on his hands.

Likewise, he has rightly spoken in favor of a “buy now, pay later” financing regulation, where companies have circumvented credit rules by claiming that they do not provide credit. They may be right in law, but it is often a question of lending anything but name.

However, the responsibility for raising standards does not lie solely with the regulator. Financial services companies have a huge role to play, given their vast human resources, skills and capital.

As investors search for new products and new markets, businesses face challenges. If they stick to traditional approaches, they risk losing customers when customers turn to new vendors, like with crypto. But if they make it easier for their clients to race to new horizons, they run the risk of encouraging excessive risk-taking and possibly breaking regulatory codes.

Businesses work hard to maintain the right balance. One example is AJ Bell, the Manchester-based retail investment platform, which this month announced its plans for Dodl, a streamlined, commission-free trading app, which will launch early next year.

It aims to attract a younger clientele, some from fast-growing free trade apps like Freetrade and others from leading banks, where client deposits are languishing at near zero interest rates.

It will not offer the option of buying the entire stock market. Instead, investors will initially be offered a streamlined selection of 50 UK stocks and 30 funds, with a few large US stocks added later. Additionally, clients will only be able to trade once per day. In addition to keeping AJ Bell costs down, this approach could encourage clients to trade a reasonable range of mainstream stocks.

Dodl will know the difference between meeting the wishes of the new generation of active investors and protecting them from excessive risk. This may not work – thrill seekers can stick with people like Freetrade, while the cautious can stay where they are.

But it’s worth the effort, both from a business perspective and from the need to shape responsible investing.

There are many examples. And it is not naive to think that there will be more. The biggest threat to companies that break the rules is not regulatory sanction, but damage to their reputation. It can wipe out a business overnight, and for good reason.

Just look at Woodford, the star investment manager put down by the failure of his fund. Others involved in the case are now nervously watching the FCA slowly move forward with the formal investigation into the case.

It takes way too long. Having started in June 2019, the investigation has already gone on for two and a half years – and the FCA is refusing to give any sign of when it could complete the job.

Justice delayed is justice denied, especially for aged Woodford investors who can literally never live to see evildoers exposed and punished. FCA codes apply to all companies that put the right information in the right way in front of their customers. He should be doing the same right now.

Stefan Wagstyl is editor-in-chief of FT Money and FT Wealth. E-mail: [email protected]. Twitter: @stefanwagstyl


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