The financial services industry is one of the most highly regulated sectors in the world. That’s a good thing because it means that professional practitioners are held accountable for the service and advice they give to clients.
But the increase in regulation has had undesirable consequences as well as benefits. It is important that we examine whether the clients of wealth managers and investment firms are experiencing better financial outcomes as a result of regulation. And what is the impact on the health of the Scottish financial services industry in Scotland?
In 2007, the UK financial services industry was the focus for a new regulatory regime called MIFID, the Markets in Financial Instruments Directive. This directive introduced greater transparency to the industry and led to compliance departments all over the country recruiting vast numbers of graduates – called risk consultants – to manage the new regime. It also led to an expansion of the costs base of every firm.
From 2007 onwards we saw a flurry of merger and acquisition activity in the search for economies of scale, and nowhere was this more keenly felt than here in Scotland. Rathbones’ acquisition of the private client investment arm of Lloyds Banking group and the law firm Gillespie MacAndrew’s sale of their investment business to Brown Shipley are just two of many which occurred after the implementation of new regulations.
In January 2018 the UK regulator, the Financial Conduct Authority (FCA), brought into force an update to the original MIFID regulations called MIFID II, again with the financial wellbeing of consumers in mind but adding to the industry’s administrative and regulatory burden. Although well intentioned, it is questionable whether this is good for the financial services industry in Scotland, and more importantly whether it is good for clients because we are witnessing another period of consolidation.
The problem is that as the providers of financial services grow bigger, then their client investment propositions typically become more and more homogenised. A “one size fits all” investment proposition is not good for clients or their financial outcomes. Anyone who has worked in a customer facing role knows that people can be difficult and joyous, challenging and rewarding because each one is different; every client has a particular nuanced need which doesn’t fit the mould.
It is also not good for the Scottish economy. Consolidation comes at a cost and the first to bear that cost is usually the staff. Edinburgh alone has seen a significant number of highly skilled jobs disappear following the merger of Aberdeen Asset Management and Standard Life. Senior, highly skilled jobs have gone from Dundee as Alliance Trust has restructured and outsourced its investment management function. In UK financial services “big” is compliant and standardised, but it’s not necessarily beautiful. The direction of regulation means that large firms often fail to offer a truly bespoke service to clients, unless they are deemed ultra-high net worth.
A national financial services business with, say, 1500 financial planners and a similar number of mortgage advisers operating in the business has to have a rigid investment proposition that conforms to internal processes in order to remain compliant. The impact of this increased regulation is also significant on smaller financial services firms. In 2013, new rules were introduced under the Retail Distribution Review. This brought a much needed professionalisation to the industry and from January 2013 wealth managers had to ensure their advisers had a minimum qualification level to provide advice to clients. The new regulation saw a large number of businesses sold to national firms further eroding innovative and bespoke investment propositions for consumers.
Scotland needs a vibrant and progressive financial services industry. The regulators did not set out to stifle innovation and investment outcomes, but this has been an unfortunate by-product of how the industry has adapted to cope with the new rules. While the introduction of the financial services degree courses at Napier University and Glasgow Caledonian University are welcome, we need to provide the skilled and rewarding careers for these young graduates who could follow in the footsteps of the great Scottish financial entrepreneurs like Robert Fleming and create lasting businesses which endure for the benefit of the country.
Stephen Webster, chief executive, Thorntons Investments.