It’s when the tide goes out that you discover who has been swimming naked all along”, Warren Buffett once said. That comment, unfortunately, describes for me the way in which our financial services regulators conduct their business.
Surely it’s their job to spot who could be heading for a financial deep end and hooking them before they indecently expose savers to serious financial loss. They shouldn’t let them in the water in the first place.
But for more than 26 years now, successive regulators have waited for the tide to wane until it’s too late and, as a result, we’ve had one financial scandal after another. It’s hardly surprising that we read headlines and reports about people not saving enough for their retirement. After 26 years of being stitched up, who can blame them?
Since the Financial Services Act in 1986, there have been at least four major changes of regulator. They’ve all failed miserably to protect retail investors and a series of scandals have unfolded on their watch.
The current so-called lifeguard, the Financial Services Authority, is being replaced next year by yet another massively expensive body which will claim that it’s got the answer of how to rid us of the industry’s conmen.
There’s a new buzzword, too: transparency. Apparently that’s to be introduced by something called the retail distribution review (RDR). But, sadly, two areas where we’ve seen most scandals and mis-selling – single premium investment bonds and pension plans – are largely exempt from the rules, which are being imposed at the end of the year.
Why? Somebody should ask the regulator that question, because allowing these two areas to be exempt for much of the new legislation means that its latest attempt at transparency will not work.
Having been an IFA since 1973, it strikes me that the UK savings industry must be the only one where a product manufacturer can increase market share by increasing its charges to the customer. In the last decade new savings institutions have entered the market, grabbing more than their share by doubling commissions paid to advisers. Regulators, meanwhile, sat on their beach and sunbathed.
Most advisers and investors think that because a product is badged “regulated by the FSA” it must have been subjected to proper due diligence. Nothing could be further from the truth. New products are simply rubber-stamped and when they go wrong the rest of us pick up the tab.
Today, unless regulators don’t read newspapers or watch television, they must be aware that both interest rates and annuity rates are at all-time lows. It’s at times like this that savers are particularly vulnerable to smart ideas generated to promise higher returns.
So a new wave of products has hit the market for annuitants or those reaching retirement and seeking income. They are known collectively as the “third way”. We had a presentation only the other day from one of the leading exponents of this new income retirement scheme. We were told their product was selling like hot cakes and I’m not surprised.
Why? Commission. For as long as I can remember, commission to intermediaries in respect of an annuity purchase has been 1 per cent, with a maximum of 1.5 per cent. This third way panacea pays intermediaries up to five times that, and pays an annual commission for the lifetime of the annuity. Now, who do you think’s going to pay for that? Sadly I see another mis-selling scandal a few years from now.
What I can’t understand is that, enshrined in the rule books of all regulators since 1986, there have been 11 Principles of Business, which are the perfect guide for regulators to spot future financial storms well in advance. And yet they have been ignored.
But surely one principle is sufficient – “A firm must conduct its business with integrity”. Now what could be clearer than that?
l Alan Steel is chairman of Alan Steel Asset Management
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Thursday 23 May 2013
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