Luke Springthorpe is Head of Research for the Bow Group.
With regulation due to cost a further €10 billion for the 5 largest European banks, three of which are British, on top of €16.4 billion already provisioned of, there is a clear monetary reason for being concerned at the ever growing cost of compliance resulting from regulatory intervention. Meanwhile, while government departments cut back, the Financial Conduct Authority is swelling its coffers by 3 per cent, to just shy of half a billion pounds, this year.
The bungling incompetence that was the FCA’s botched, leaked launch of an inquiry of the insurance industry is the latest cause for concern. Yet it should come as no surprise from an organisation that has become so sure of its unbridled power over its fiefdom that its head, Martin Wheatley, has encouraged a ‘shoot first, ask questions later’ approach. This isn’t just offensive for implying that the regulator should be able to act on a whim; banning services or products before it has even carried out a thorough investigation. It’s also an attitude that stifles financial innovation (and remember, innovation isn’t just collateralised debt obligations, as the hugely popular ETF market goes to show) and dilutes the idea that the UK is a good location for international finance. They certainly shot first and asked questions later on Friday.
What the incident does emphasis is that just because an organisation has the esteemed status of being a regulator that does not mean it is any less reckless and gung-ho in its disregard for investors than the banks it regulates. Just ask shareholders in Legal & General who saw 7 per cent, or £855 million, wiped off the value of their holdings in the space of those six hours:
George Osborne was being rather modest about the whole affair when he said that it has “been damaging both to the FCA as an institution and to the UK’s reputation for regulatory stability and competence.”
The regulator’s approach also has implications for the individual investor, not least because it’s increasingly attempting to meddle in what an individual should be allowed to invest in. Last year, Wheatley said that financial services firms should not assume investors know what’s good for them.
This week saw the latest encroachment in this regard, with a host of restrictions placed on who can and who can’t invest in start-up businesses via crowd-funding platforms. In essence, an individual has to meet the criteria of being a ‘professional investor’ or otherwise restrict the portion of one’s assets invested in the sector to 10 per cent. This will impinge on the ‘crowd’ effect and simply turn some people away from making any worthwhile investment.
Not only has the rapid 600 per cent growth of the crowd-funding sector provided another source of funds for fledgling businesses to tap, but it is also encouraging an entrepreneurial approach from investors who are excited about the concept and the chance to be more intimately involved with their investment. The dangers of the approach the FCA is embarking on are highlighted in a Bow Group paper published earlier this week and appears to be at odds with Osborne’s plan to entice more investors to engage in crowd-funding and peer-to-peer lending by giving them tax-free status and allowing them to be incorporated as part of the £15,000 ISA allowance.
Sure, there are risks. Most people get that, and it’s not unreasonable to expect individual investors to demonstrate a certain level of knowledge and understanding of risks involved, such as the probability of the investment either never delivering a profit or going bust. What is wrong, however, is that investors can understand these risks and still be locked out from using their income to invest in something they have a passion for in the hope of obtaining higher returns. The group most likely to be disadvantaged by this approach is young investors – somewhat ironic, given that this age category may have a particularly good understanding of some of the niche markets that businesses on crowd platforms are seeking to engage in.
Put simply, telling individuals what investments they can and can’t invest in is a considerable deviation from what many consider to be the purpose of a regulator. Of course people want a body that roots out spivs and protects consumers, but what we currently have is an activist, bellicose regulator that embodies a ‘nanny knows best’ approach.
Thankfully, the Chancellor seems to be pushing against this. His strongly worded letter on Tuesday, in which he expressed his “profound concern” over the inappropriate manner of its conduct on Friday, is a start. He can rest assured that The City will be applauding his statement that the FCA should “holds itself to at least as high standards as it would expect of a listed company handling highly market-sensitive information.”
His actions to encourage individuals to invest in crowd-funding projects and granting greater flexibility over pensions shouldn’t be seen as isolated acts either. I hope I am right in thinking it is indicative of a Chancellor who believes that the individual knows best and that the regulator’s encroachment, beyond acting as a safeguard, needs to be checked. If this is indeed the case, he should spell it out in a public announcement. We’re not talking a ‘big bang’ moment, but such a statement would be indicative of a sea change – that the freedom of individuals to invest as they see fit is at the heart of what this Government believes, and not a prescriptive nanny state approach.