RDR - Taking us back in time?
“Alas, the world economy is not organized in a way that makes it easy for an economist with a calculator” wrote Bill Bonner in the Daily Reckoning. “Instead, it’s infinitely complex. Turn any knob you want; you’ll get results you didn’t expect”.
And so it is for financial services regulation. The FSA turns knobs and pulls levers like a signal man on speed. And the unexpected results stack up.The answer? Pull more levers
The financial services act was passed in 1986, just in time for the new regulators to guide the speeding industry train headlong into the pensions review. Nobody had foreseen the potential for the new, government advertised, personal pensions to lead to mis-selling. The resulting review work went on for nearly a decade and cost the industry hundreds of millions of pounds.
Levers were pulled. But the industry came off the rails again in 2000 with the FSAVC review. Then it had collisions with endowments, pension fund withdrawal and SCARPS.
By the mid naughties the FSA had seen the light. The industry track was collision prone. The answer was to pull the lever that sent it the train onto the “principle based” regulatory route. FSA’s paper “Principles-based regulation - Focusing on the outcomes that matter” explained that detailed rules were to blame for the derailments. FSA needed to take a step back. ‘In a quickly changing marketplace, principles are far more durable’ they said. The “treating customers fairly” lever was pulled at the same time.
Unfortunately, with their supervision teams sitting in the buffet car chatting about principles, FSA had neglected to check the brakes. Lenders were lending like never before. Mortgage brokers were rushing to the industry to take advantage of the huge demand. FSA never looked at files anymore – no principles to be found there. The industry took their lead; files were unimportant, principles were what mattered. FSA never noticed that the train was speeding out of control.
The result was one of the most spectacular regulatory train crashes the world has ever seen. The banking sector teetered on collapse. The intermediary sector stumbled into another round of reviews and enforcements. This time it was personal pension transfers, structured products and sub-prime mortgages that stopped the train.
Who was responsible? “A storm that started in America” says Alastair Darling. But Hector Sants (FSA Chief Exec) is more specific . He told BBC five live that in a democracy people get the kind of regulation that they want. The people had, he said, wanted light touch, non-interventionist regulation. Now they want a firmer approach.
He never said which “people” he’d asked. But at least now we know who’s to blame for the smash. The passengers.
And while FSA mete out fines to a rash of small IFAs not a single regulator, minister, treasury official or banker has been subject to visible formal censure, rebuke or fine.
Now FSA have pulled the RDR lever. “No more commission” say the headlines. So instead advisers have to charge “adviser fees”. But this needn’t involve the client writing an actual cheque. For regular premium business, for example, the fee might be taken via a proportion of the contribution. We used to have a name for that. It was called “reduced allocation”.
But wasn’t reduced allocation charging one of the reasons for the pulling of the “stakeholder” lever?
If the landscape looks familiar maybe it’s because we’ve pulled so many levers that we’ve ended up right back where we started.