14th March 2011
Until the Financial Services Act of 1986 the financial markets in the UK operated much like most other sectors – they were self regulated and the market was effectively left to its own devices to run efficiently.
Since then, we have been through several regulators – Fimbra was replaced by the PIA in 1994 which was subsequently subsumed by the FSA (which itself was once known as SIB).
When the FSA is itself replaced by the Financial Conduct Authority in 2012 it will be the fourth regulator in 24 years of regulation. The cost of the re-branding alone will be mind blowing.
I am all in favour of protection for consumers, but successive regulators have failed to get it right.
The pace of regulatory change has increased over recent years and the Retail Distribution Review (RDR) is set to improve standards across the advisory industry from 2013.
However, we are still faced with huge scandals on the scale of the Arch Cru and Keydata collapses.
Many would argue that these scandals could have been avoided but for the failings of the regulator, yet the rest of the industry is still left to pick up the pieces in the form of higher levies to the Financial Services Compensation Scheme (FSCS), who provide redress and compensation to customers of failed firms.
The Freedom of Information Act has allowed some journalists to peel back many of the less tasteful aspects of our regulatory costs.
The FSA's budget in 2010 was £454 million, but did they really spend this wisely? The £638,500 bill for hospitality at their Canary Wharf offices in 2009 and the £160,000 worth of art hanging on the walls suggests not.
I also wonder whether the fact that the FSA employ 200 people who earn more than him sits well with David Cameron.
So who pays for all of this excess and failure? Consumers of course.
Maybe not in the form of direct levies, but the implicit cost of regulation is built in to the cost of all financial services – from fund management fees to the cost of product wrappers and advice, regulatory costs make up a significant portion of them all.
RDR is all about improving standards and the FSA do have to be applauded for having the guts to force this change through. However, it will also force up costs in advisory businesses which will inevitably result in consumers paying more for professional financial advice.
There is a significant minority of the financial advice community who continue to fight regulatory change and for those who are not yet prepared for the changes brought about by RDR they may well struggle.
I am however very encouraged by the new breed of advisory firm that is emerging as a direct result of the drive for higher professional standards.
If they look hard enough, consumers can now access advice from professionals who are qualified on the level of accountants and solicitors and who will charge them fees for that advice – the result being that the adviser is then paid to advise, rather than to sell a product.
The good news is that this isn't necessarily going to cost consumers more – but they should in future know exactly what they are paying for. If you are taking advice and don't understand the cost then consider taking a second opinion!
Joel Adams – is joint chief executive of LIFT-Financial Planning
Catch him on Twitter @JoelAdamsFPFS
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