Friday, 6 July 2012

How Financial Regulation "Works".

So, you're a stockbroker, and you've been in the game now for over a decade. You've got some fairly serious book-learning under your belt, and have experience across a wide range of businesses including buy and sell-side analysis, sales-trading and futures trading. You've been at your current desk for 7 years, and you guided your clients through the crash with some success.

You're not unqualified. The business is not unregulated. There was no systemic problem in the private-client stockbroking business.

However there was a crash. And lots of people lost money and are looking for someone to blame. The economy is stagnant (though this is mainly due to pre-crunch crowding-out coming home to roost). Everyone in the financial services industry without a regional accent and a job in a call-centre, is a "banker", and so "a cause of the crisis".

"Something must be done", said the politicians, without having the vaguest notion of what it was they wanted to achieve. So they asked the FSA to "do something". So the drones of the FSA, who regulated the banks so successfully over the past decade, asked the Professional bodies like the 'Chartered Institute of Investment Management' and the like, whether further regulation of the investment advice industry was needed.


"YES!" screamed the professional bodies. "All brokers need to be a member of Professional bodies [us]" they said with a straight face, "and they must all take lots of Exams [provided by us, for which we will charge many hundreds, knowing these people have no choice but to take them or lose their jobs]"

"Anything else?" Asked the failed banker with a 2:2 in media relations from Hull, who was rejected by the investment banks he really wanted to work for, instead of the FSA.

"Certainly. the brokers need to spend many hours logging their 'continuous professional development' on our system, so we can sign off their competence each year, by issuing an annual piece of paper called a 'Statement of Professional Standing', but only if they take lots of courses [provided by us, for which we will overcharge]".

"That seems a lot of work" said the FSA-wallah, overcome with sympathy for the non-problematic part of the financial-services industry which forms his bailiwick "won't that take them a lot of time they could spend blogging tending to their client's needs?"

"No" lied the professional bodies. "This will improve the customer experience. All exams are good [even though we're STILL teaching them the CAPM which is, put simply, bollocks]".

The FSA-wallah reports back to the politicians that the regulation of investment advice is in hand. "This is something", say the politicians. "Let's do it".

Thus financial regulation gets more onerous, time-consuming and expensive. Clients will see higher bills, and find it harder to speak to their broker as he will be doing his mandatory 35 hours of logged annual CPD or inputting it into his chosen Professional body's computer system. It not being worthwhile to go through the process above for small clients, if you want advice, you'd better have serious wedge to invest, or you're on your own.

If you want a perfect example of regulatory capture working against the interests of (especially less-wealthy people), this is it.

The Retail Distribution Review is the most counter-productive piece of legislation I've ever seen. It's a Vicious, savage, bureaucratic, insane, corrupt over-reaction to a problem which doesn't exist. It will virtually ban those on average earnings from receiving decent financial advice. They will be driven instead into the arms of the Banks who will sell them "products" whose performance is utterly opaque, larded with fees which will be virtually impossible to get out of. The banks will call this "advice", but you will never see or hear from the hair-gel and bri-nylon school-leaver who sold you the "product", ever again.


You think the Banks fear tighter regulation? No. They want it. They lobbied for it. They NEED it. Regulation protects them from the likes of me. Wicked.



11 comments:

Anonymous said...

It's just more corporatism...

But seeing as the Tories are utterly shit (regardless of how much you try to defend them Jackart) what else can you expect...

Jackart said...

I don't "defend them". I think the Tories are merely the shit that stinks least, who've got some of the big questions right.

No politician thinks about these issues. This is the Bureaucracy doing its thing, unchecked by the legislature or executive.

You imagine the Tories could rein in the Bureaucracy at will. They can't.

Luke said...

Not really my field, but is there really a chance in hell that an average earner (that's less than £30k pa) will ever get decent advice? They go to bank - dodgy products or mainstream unit trusts with high fees. They go to you - no disrespect but it will be very expensive to build a reasonably diversified portfolio. And have you really got the time to explain the risks of equities versus bonds etc? And questions like "your attitude to risk?" are hopeless. My answer is high when my shares have gone up, low when thwy've gone down. And for most people "low risk" means guaranteed poverty in old age, just enough to avoid means tested benefits.

I suspect you think index funds are the work of the devil, but for loads of people I don't see that they can do more
than put, say, half in a bond index fund and half in share index fund, and hope for the best. That gives you a role- you might actually give such advice, and flog
ETFs. For richer / more interested, you could advise on a few individual shares/bonds.

Jackart said...

Luke, Drop me an e-mail (link on sidebar) and I'll give you a call.

Anonymous said...

Good point Jackart - there is no democratic oversight of any of this.

What people don't see is that when the FSA was created, it was given rule making powers, outside the scrutiny of Parliament. We may not like politicians but at least they would never come up with anything as bad as the FSA Handbook.

Simon Jester said...

"No politician thinks about these issues." Some politicians do (Steve Baker and Dan Hannan spring to mind for the Tories, not to mention quite a few people in UKIP), but the current leadership of all the 2.5 major parties certainly don't.

In theory, this is the sort of thing you should be able to lobby your MP about. I wouldn't hold out much hope, but have you tried...?

"You imagine the Tories could rein in the Bureaucracy at will. They can't." As you yourself have just pointed out, the current leadership haven't even thought about trying.

Luke said...

Well, I suppose I was leading with my chin there. I'll take up your kind offer, but don't get your hopes up.

On a serious note, now that DB pensions have gone, I am interested to know how an average earner, or even someone up to say £50k is ever going to get good advice and make informed decisions.

BrianSJ said...

This is the 'cycle of error'
Tutorial in healthcare setting
http://tlcprojects.org/NEAT/CycleSafety.html

Anonymous said...

What's wrong with the CAPM?

jc said...

Anon - If it were just the case that the FSA could make rules it might be bad but it's the powers of enforcement it has that are scary and undemocratic. Imagine a State that that exercised a power to enter any home, at will, and impose fines for anything it didn't like. No laws, no precedents, no process of law, no system of appeal. You'd call that a totalitarian regime wouldn't you? But that's exactly what the FSA does. Frequently. Yet this raises no eyebrows.

Steve Hemingway said...

You should welcome this, because once stockbroking is heavily regulated, the barriers to entry that were not high enough to keep you out of the profession will be raised sufficiently that future generations of stockbrokers will be even better remunerated.

OK, so nobody earning less than £250k will be able to afford your services, but these select few will provide fees that are more than adequate to pay for all those school fees and private medical insurance.

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