Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004. He is now chairman of Flight & Partners Recovery Fund.
Eighty years ago, Albert Dicey, the famous English Jurist, defined collectivism as “Government for the good of the people, by experts or officials who know, or think they know, what is good for the people better than any non-official person or the mass of the people themselves”. Keynes put it more succinctly, defining a collectivist as “someone who wants to replace private choice by government choice”.
The Thatcher Years and government policies have gone some way to contain, if not reduce, the prescriptive role of government and the Civil Service, but the explosion of regulation has brought a substitute power, invariably acting in the name of protecting citizens from exploitation, but, in reality, installing a massive “regulator knows best” industry.
The Financial Services Authority started life in 2001 with 600 employees. Today, the Financial Conduct Authority (FCA) employs some 4,000 people, with the Prudential Regulation Authority (PRA) adding further to the numbers. The FCA has insulated its future size by creating 16 handbooks of “Conduct” which stretch to over four million words, guaranteeing the need for a huge staff to monitor their observations.
DEFRA now employs more people than there are farmers, and cascades the industry with at least ten times the paperwork and regulation which existed in 2000. We have developed the opposite of the financial regulation structure which Laurence Gower recommended to Lady Thatcher. The professor envisaged a hybrid system, with a degree of self-regulation under the overall umbrella of a central regulator.
The problem with expanding rule-based policies is not just the massive costs involved and its inherent anti-competitive nature; however, with the advice of good lawyers, the industry can go on finding ways to avoid legislative intent. What is needed is codified, principle-based regulation. I used to believe that if I ran the fund management business which Tim Guinness and I built up in a principled and ethical way, it would be extremely unlikely that we would find ourselves having breached regulatory requirements. This is no longer the case. Most of the compliance efforts and monitoring are to make sure that a business has not breached one of masses of prescriptive rules.
We now have growing regulatory prescription emanating internationally, through unaccountable bodies and requirements, such as the Foreign Account Tax Compliance Act (FACTA); from the EU’s increased financial regulation agenda, and from our own regulators still gold-plating EU and international regulatory requirements.
The investment management industry, which both played no part in the 2008/09 financial crisis and weathered it surprisingly well, has been hit with ludicrous prescriptive requirements. The net effect of this is to damage the efficient allocation of capital.
A particular example is the private client investment management industry. It is axiomatic that the sort of people that find their way to hiring the services of a private client investment manager are likely to be reasonably sophisticated and to know what they want. However, on the back of the EU’s Markets in Financial Instruments Directive directive (MiFID), the FCA imposes a requirement on investment managers to get from the client details of all their personal financial affairs, income and assets, in order to make sure this matches with the right investment risk profile.
Yet the FCA’s hierarchy of financial risk, following the established model of actuaries, is fatally flawed. It ranks cash and Government Bonds the least risky and equities the most risky. But history has shown that in the UK, as well as elsewhere, cash and Government Bonds can be, and often are, very risky over the long term in being vulnerable to periods of rising inflation and rising interest rates; well spread equity investment is usually less risky, long term.
My classics master was left £50,000 nominal of War Loan in 1948 which he, unfortunately, kept until his death in 1980. Not only had he lost two-thirds of his money in nominal terms, but, in real, purchasing power terms, he lost 90 per cent. Life companies and pension funds which have been forced sellers of equities, as a result of the risk doctrine of the Regulator, have now nearly run out of equities to sell; their customers will pay the price, doomed to miserable returns on their savings by the Regulators’ prescriptive rules.
What is wanted is principled and ethical behaviour by practitioners in the Financial Services industry with stiff penalties for unprincipled and unethical behaviour. Deep down, we all know the difference between right and wrong.