The financial services industry undoubtedly forms a key part of the Scottish economy. However, the burden of ever-increasing regulation since the global financial crisis has the potential to curtail its growth and raise barriers to entry for new businesses. Ten years on from the global financial crisis (GFC) we need to ask whether increased regulation is truly addressing the causes of the GFC and what else can be done with a view to protecting investors from failings in the existing system.
Firms have been working hard to comply with the deluge of regulatory change in recent years requiring, amongst other matters, improved disclosure of performance and costs to investors, changes to how firms pay for research, greater clarity as to the fee arrangements of financial advisers, enhanced reporting requirements, an increase in individual accountability for senior managers, and compliance with increasingly stringent rules regarding the protection and use of personal data.
These recent regulatory changes are intended to increase transparency, accountability and strengthen investor protection. These intentions are encouraging and, given the fallout we have seen from the GFC, it is clear that taking no action was simply not an option. However, there are significant costs of implementing such changes, not just in monetary terms but also in terms of resource being deployed by financial services companies to ensure compliance with new rules. This resource is then not available to help focus on servicing existing clients, product (and business) development, innovation and improved performance. Often this additional financial cost is ultimately borne by investors.
If the benefits of new regulations are clear then there is clear merit in making these changes. However, in some cases, the benefit is not always clear, as is evident from the new ‘key investor documents’ (KIDs) required to be produced for certain financial products. These are designed to make it easier for investors to understand and compare different investment products. However, the industry itself has struggled to get to understand the KID requirements with many believing the illustrative costs and performance projections to be potentially misleading. Even the FCA’s Chief Executive Andrew Bailey has expressed concern about these new rules. How can ordinary investors be expected to understand and process information which is provided to them if the rules are themselves so complex (and potentially inconsistently applied) that the industry itself struggles? Unless the new requirements have discernible benefit and satisfy their objectives in practice, it is only right to question their use.
Given some of the concerns highlighted above, we should consider whether a proportion of the costs and resources deployed in addressing ongoing regulatory changes may actually be better utilised (and lead to better investor protection) if they were directed at improving financial education. Education enables and empowers investors to better understand the products and services which they use (whether that be bank accounts, mortgages, pensions or direct investment portfolios) and so hold their suppliers within the industry to account. What better way to protect people but to give them the tools to improve their own knowledge and understanding of risks and so take steps to protect themselves in tandem with industry taking measures to protect investors too?
The Government (both UK and Scottish), private foundations and some businesses are taking steps (including at an early stage in schools) to improve financial knowledge. However, these initiatives are dwarfed by the resources being committed to regulatory compliance and still the vast majority of individuals do not appear to have sufficient appreciation of different investment opportunities, risks and potential rewards. In an increasingly interconnected and fast paced world where it is hard for regulators to keep pace with developments (particularly given their own budget and resource constraints), we believe that more education not just regulation is really required if investors are to be properly protected.
David Clark, senior associate, funds and regulatory team, Dickson Minto