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Regulatory Consulting’s Insight & Foresight Newsletter – January Review 2012

  Dear Readers January was a pretty slow month for regulatory developments.  The FSA website remained stubbornly silent for much of the month.  Ministers had little new to say ahead of the First Reading of the Financial Services Bill.  So in the absence of hard developments on regulation we turn our attention to related matters.  Foremost amongst them was the announcement that Steve Gay was leaving AIFA to take up a key, senior role at the ABI.  Predictably this caused the usual outpouring of bile but we delve beneath the noise looking for some reality.  Elsewhere, simplified products and simplified advice continue to arouse speculative comment in the continuing policy vacuum.  In Westminster the Treasury Select Committee kept up its good work trying to get to the bottom of why RBS failed. The Hand that Rocks the Cradle It would be invidious to speculate about why a person widely acknowledged to be a high calibre individual should leave the top job in one organisation to join the second tier of a larger but similar one.  These decisions are personal and should remain that way.  However, now the vacancy has been created it is reasonable to look at the issues faced by AIFA’s Council in finding a successor. 2011 was a very difficult year for AIFA.  It had to reduce its headcount to reflect economic reality and it had to face up to the challenge posed by the RDR, electing to open its doors to “restricted” advisers who had formerly been independent.  The two events are certainly connected.  There is a hard core of dyed in the wool independent advisers who are very vocal in their beliefs.  Unfortunately, they seem not to have mastered the higher skills of diplomacy and have failed to mask the self-serving nature of their representations.  Furthermore, they have not grasped the realities of representational work and not understood that whilst criticising AIFA publicly is their statutory right, it might not advance the position of IFAs with influential audiences. They are not much better at understanding the economics of representational work which is, perhaps, more worrying still given that they profess to be experts on financial matters.  It takes big bucks to run an effective representational campaign over a long number of years in a highly complex regulatory environment; one that is growing in complexity and developing a strong international dimension.  Those who want an effective trade body, rather than a loud but ineffective mouthpiece, must either put up serious money or accept the subsidy of product providers. It is this lack of reality that dogs the ability of intermediaries to move forward.  It is not that the case for independence is without merit; it is just that it does not have enough merit.  The gap is the self-serving nature of the argument which politicians and civil servants can see in an instant.  What the representative bodies have to do is espouse good outcomes for consumers however they are arrived at.  If their particular brand or creed delivers that, then commercial benefits can be theirs. So what type of person should be AIFA’s next leader?  Well apart from having the patience of a saint, they will need to have strong diplomatic skills and a clear grasp of what Westminster and Whitehall expects of business in the 21stCentury.  Ideally, they would be of the industry too but realistically no such person exists.  It follows that the person will probably be an ex-civil servant or MP.  Either they should come direct from SW1 or from another trade body.  But they should only come if enough intermediary businesses will pony up enough money for an effective body and there is some willingness by the more vocal elements of the IFA community to join a looser federation.  Looks like Lord Deben has his hands full. Keep It Simple Stupid The KISS principle is attributed to an aeronautical engineer, Clarence “Kelly” Johnson, who spent a lifetime designing aircraft for the Lockheed Corporation.  He led its so called skunk works on innovative design projects.  His problem was that his colleagues tended to make things over-complicated in the drive for innovation when, in aviation, weight is a permanent constraint and complication makes things heavier. Perhaps a latter day Kelly Johnson is needed to think about the related questions of simplified advice and simplified products.  The summary of responses to the Treasury consultation on simplified products contained this statement: “The Government has listened to these views and following wide ranging discussions with financial services firms, consumer groups and others, we are now announcing next steps. A steering group will be established to draw up the governance arrangements for simple products and develop a range of products that are both appealing to consumers and a viable commercial proposition for providers. This group will be made up of representatives from consumer organisations, industry and trade bodies and I am delighted that Carol Sergeant has agreed to chair it.” This has provoked a number of comments such as OMG this is Sandler all over again and isn’t a camel a horse designed by a committee?  Others have rejected as statist the implications of simplified products, such as using compulsion to reduce acquisition costs and design by state committee. These comments all seem pertinent but it is the phrase “governance arrangements” that gives the clue.  What assumptions underlie the given that there must be special governance arrangements and that these are so important as to get pride of place in this announcement?  Clearly much water has flowed under the bridge but an aeronautical engineer might look at our system and say it won’t fly because the systems have not been integrated and the individual components are far too heavy. The DWP has just launched a campaign to promote auto-enrolment into NEST but has no equivalent plan for the self-employed or for protection.  The simplified product suite is not intended to dovetail with NEST.  The FSA has consistently set its face against simplified advice, citing various obstacles such as MiFID.  I wouldn’t want to be on the maiden flight of this particular craft but I have no choice, we are all on board.  The compulsory wearing of seatbelts may help in more ways than one. It needs to be recognized that large numbers of households have the same needs for savings and protection.  These vary over time according to fairly predictable, if not certain, life events.  It follows that a utilitarian design with internal flexibility should be made compulsory with opt out limited to specific grounds.  A strong element of compulsion would ensure broad take up and reduce search or business acquisition costs.  The industry designed such a product long ago and NEST has the auto-enrolment technology.  All the FSA need to do is get out of the road but that will need primary legislation.  In this very simple world not much advice would ne needed, the FSA’s successor could be very much smaller and the amount of social good would rise dramatically. Oh, I forgot one thing.  The Kelly Johnson’s of this world only exist in private corporations.  In the public/private sector interface that is simple products and simple advice we have steering groups of diverse interests and motives for whom making the aircraft fly is not a high priority. I’m sorry I was looking the other way officer The Treasury Select Committee examined Sir David Walker one of the grandees asked by the FSA to look into their part in the failure of RBS.  We have argued before that the RBS board probably breached no FSA rule, although with hindsight it is clear that it had trouble with FSA Principle for Business 2, acting with due skill and diligence.  However, what the FSA Board was doing is an interesting story.  Our house view remains that political overlay made it hard for the FSA to act against Scottish banks. However, Sir David Walker’s evidence to the committee shed some very odd light on what the FSA were up to.  He says that in the years 2006 and 2007 only one of 61 issues to come before the FSA Board related to banking supervision.  The others were all to do conduct issues such as TCF, Equitable Life and pensions mis-selling.  He then asserts that given the pressure to focus on conduct issues like TCF, it is quite hard to fault the board.  Further, FSA was victim of the intellectual environment (which held that banking and financial markets were stable because of the way credit risk had been swapped or insured away). The circularity of this argument quite defeats this observer.  TCF was an initiative invented by the FSA; one their current chairman considers questionable.  The conduct pressures on the FSA were of its own making and priorities.  It could have looked harder at prudential risks but didn’t.  The intellectual environment is only a slightly better argument.  It is true that politicians had their feet hard on the gas at the time: we had never had it so good and re-election was a comparatively easy business on both sides of the Atlantic.  But the clues are there that the FSA was worried about excessive build up of credit risk and believed it would all end badly. We shall probably never know who thought what and when.  But the likelihood seems that the technical concerns about bank balance sheets were suppressed and the rest is history. Oooh aaah Cantona The former Manchester United player Eric Cantona is famous for his obscure poetry which may, or may not, be profound.  The Financial Services Bill is rather like that because Parliament lost the battle for a new, clean sheet, legislative proposal and instead the Government has published an amending proposal which is very hard to follow.  Even the numbering of clauses is off putting. However, some significant but subtle changes can be discerned quite high up in the order of the clauses.  At pages 15-17 are some extensive revisions to the objectives of the new FCA.  The FCA’s proposed new leaders have won the battle to have the responsibility to have regard to competitiveness of the industry removed from their obligations.  This is an unfortunate reaction to the banking crisis and the view that light-touch regulation was a product of such a requirement.  Allowing banks to be too thinly capitalized is hardly a means of improving their competitiveness so arguments have become conflated somewhere along the line.  Nevertheless, the FCA does not get away with ignoring the industry’s interests completely.  Under the competition objective it must have regard to how far competition is encouraging innovation.  No one seems to have found a way of expressing the difference between good innovation and bad innovation which is the real issue for consumer protection. It seems likely that the passage of the Bill will be tortuous and confusing.  Tally Ho!  Yours sincerely The Regulatory Consulting Team