Does the cost of regulation outweigh the value?
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Nick Bamford's presentation at the Westminster and City Industry Forum on the Financial Advice Market Review, delivered at the Jumeirah Carlton Tower Hotel in Knightsbridge, London on Wednesday 13th April 2016.
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Does the cost of regulation outweigh the value?
- 1. Does the cost of regulation outweigh the value? Nick Bamford Chartered Financial Planner
- 2. • LAUTRO • FIMBRA • PIA • FSA • FCA
- 3. • A brief history of regulation… • 1988 • 1995 • 2012 • 2016 • 2065
- 4. • FCA • FSCS • FOS
- 5. • FCA £519m • FSCS £363m • FOS £253m • Total £1.135bn
- 6. • Who pays for regulation? • I do! • My clients do!
- 7. • Regulation is… • Expensive • Ineffective • Mushrooming
- 8. • Five solutions… • Reduce scale of FCA • Switch FSCS to product levy • Publish qualifications of FOS staff • Create a self-regulating professional body • Abolish RMAR
- 9. • Does the cost of regulation outweigh its value? • Yes!
Editor's Notes
- Good afternoon and thank you for the opportunity of sharing some thoughts with you today. These are my thoughts as a professional adviser and not necessarily those of my colleagues who may well disagree with me. Although I subscribe to the Brian Clough school of management. If a colleague disagrees with me we simply sit down and talk about it for 20 minutes and then they agree I was right Let’s cut to the chase. The question is Does the Cost of Regulation Outweigh the Value? Yes, it does, massively so! If you all agree with me then we can go to the bar or catch the early train home If on the other hand you want me to justify my answer…. Here goes
- This is what the last 28 years looks like for someone as old as I am. Constant change of the regulator or at least the regulator’s name. I have worked for firms, including my own whose rules dictated the way things needed to be done. In respect of each of them protection of the consumer was the most important of their functions Sadly the consumer of UK financial services is no better protected today than she was in 1988 I think that is a terrible state of affairs What we must not do is conflate the volume of data that is provided to a client with the degree of protection that they receive. Consumers are as exposed to risk as much under the FCA as they were under LAUTRO or FIMBRA (at least with FIMBRA they knew the risk! F&^$ it My Brokers Run Away)
- I became an Independent Financial Adviser on 1st April (no joke) 1989 but in 1998 we saw the introduction of regulation in the form of the Financial Services Act 1988. I remember colleagues telling me that IFAs were doomed and I was foolish to become one; 1995 sees the introduction of both higher standards of qualification for advisers (Level 3 Certificate level qualifications) and also the introduction of disclosure of both charges and commissions. It also saw the introduction of a very strange phenomenon of the back page of illustrations showing the commission in monetary terms disappearing from the papers given to client. I recall being told that higher levels of qualification and commission disclosure would cause the IFA to be doomed. In 2012 the regulator implemented the Retail Distribution Review following a protracted 6 year debate which started with the infamous Gleneagles speech “the advice market is broken” and culminated in higher standards of qualification for advisers (level 4 Diploma) and the abolition of commission in respect of advised products. The IFA was of course doomed!! 2016 sees the Treasury and Regulator trying to deal with the so called “advice gap” a problem that neither has had the good grace to admit was of their own making. The Financial Advice Market Review Final Report is one of the least impressive documents I have read in my 40 year career and a series of 28 recommendations that totally fail the SMART, specific, measurable, achievable, realistic and time bound criteria against which all such recommendations should be tested 2065 I predict that in the year 2065 we will have a new regulator who will cost more and be equally as ineffective in protecting the consumer
- If I sound like I don’t think we need a regulator I apologise. I absolutely believe we need a regulator. I also believe we need a Financial Ombudsman Service which can adjudicate on complaints between clients and advisers that can not be dealt with between the two parties to the consumers satisfaction. I believe that service should be free at point of use to the consumer. I also absolutely believe that we need a Financial Services Compensation Scheme so that consumers have something to fall back on in the event that they are poorly advised suffer a financial loss and their adviser is no longer around to compensate them. I just object strongly to paying for all this because of course it is not a small amount of money we are talking about.
- I took these numbers from recently published documents FCAs Business Plan 2016/17 published last week, The FSCS indicated levy for 2016/17 and the FOS Our Plans and Budget 2015/16 I don’t know about you but I think these numbers are both individually and collectively eye watering. This is after all someone else’s money. If we take the FCA figure as an example I still cannot quite get my head around why “advisers” are paying £133m of that figure and banks & lenders are paying £128m A recent industry paper published an account of the FSCS pay outs over the last six years amounting to a total of £1bn. I see that not as an indicator of regulatory success but I am afraid the opposite. Compensation payments of this magnitude should be seen as regulatory failure. At least for the simple reason that it is not the polluter who pays. Small firms like mine now contribute tens of thousands of pounds each year to compensate consumers who have been badly advised because the regulator for the past 28 years has miserably failed to regulate poor behaviour. Funding the FSCS through adviser levies is now reaching crisis point. The FCA must not delay in completing its review. It must do so with a matter of months not take another year to complete. And these figures are only the direct regulatory costs. I honestly think that indirect regulatory costs, compliance if you wish, are in the region of 20% of our turnover
- We all pay for this. It may well be that my firm pays the invoice but my clients ultimately pay because it is reflected in the pricing mechanism that we adopt. Is it any wonder that some consumers are priced out of the market? Would we be willing to pay a fair price for an effective regulator yes, of course we would So how might I describe the regulatory environment that we currently have?
- Three words spring to mind I think that the current regulatory environment is expensive £1.135bn is a shed load of money. As much as the regulator claims that they can’t prevent all failure they have in my view miserably failed in areas like the selling of UCIS products via SIPPs. It still continues I am sure today; The regulator is ineffective and has bee for 28 years And of course it is the nature of regulation to grown and grow. It is mushrooming and this fuels the excessive cost over time.
- It is easy to be the critic but I also have some solutions so here goes Reduce the size of the FCA by at least half. Move them out of London. Cut the rule book down to one side of A4 10 absolute rules for advisers (which I have already written for them Everything else is just noise. Get the FCA to recognise that they do not regulate advice, they regulate products and they simply cannot see the difference between the two things. Get rid of the ridiculous levy system and put in place a product levy. This links up with my comments about the regulatory role. If the FCA risk regulated products then applying a product levy to fund the FSCS would be straight forward. Why are FOS so afraid to publish the qualifications of their people? Do we not all have the right to be judged by our peers? Come on FOS how many of your people are Chartered Financial Planners? As an adviser I have to have a current Statement of Professional Standing and be signed up to a Code of Conduct of a professional body If the regulator regulated product they could leave me to get on an do the job for my customers Seriously what is the RMAR Gabriel system all about? The regulator doesn’t use the data for anything close to useful. All it needs to know is that I have suitable PI Insurance, suitable capital adequacy and that I have dealt with any complaints. If it needs any nnumbers about my business it can go to Companies House and get them
- Does the cost of regulation outweigh its value? Yes, of course it does Is anything I have to say or anything I think going to influence change? Not a hope!!