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

Dear Readers Since our year-end review is a look back over the whole year to discern trends for the next, there is not enough space for every issue to gain inclusion.  So for November we include one or two issues not worthy of the final cut but nevertheless important and showed some movement during the month.  Of these the RDR was the most contentious.  The call by the director-general of the CBI to curb mis-selling claims on banks looked odd but is worth thinking about.  And then, just as the Test team won convincingly in India with their spinners the Chancellor bowled a Doosra of his own by announcing Mark Carney as the new Governor of the Bank of England and therefore head regulator (with apologies to non-cricket fans). Lies, damned lies and statistics It could have been the Earl of Beaconsfield (Disraeli), or it could have been Lord Courtney, or it could have been Sir Charles Dilke who first coined the famous phrase about the unreliability of statistics.  The truth is nobody knows which is fitting because conflicting statistics about the RDR continue to fly around.  Nobody knows which figures are an accurate predictor of what will happen from 1.1.13. The RDR ceases to be the RDR at 00.00 0n 1 January 2013 and will just become the FSA’s rules.  Various pundits expended various sums and deployed varying degrees of rigour to forecast the impact of these rule changes.  In November it was Deloitte’s turn to throw in its three ha’p’orth.  By their method they estimate 5.5 million people will cease to have access to face to face advice as a result of the RDR.  If true, this would be a very worrying statistic since if we parse UK society by disposable or investable wealth we would soon discover that virtually no one with any money had any access to advice.  This appears implausible.  But it is no more implausible than would be the result off adding together all the business plans of all the wealth managers and private banks.  This would show that the UK had very many more HNWs and VHNWs than is conceivable.  The reality appears to be that a small number of wealthy people will remain very well served by advice if they choose but the mass market and mass affluent will find it harder.  The post-RDR experience is likely to be that adviser business models will flex as they come into contact with strong competition for highly desirable customers and the actual position of the regulator under conditions where supervision is being pared back. In practice, some of Deloitte’s 5.5 million may find they are wanted after all. Indeed, the FSA has carried out its own research, broadcast by the Sunday Times rather than the FSA’s own website. This purports to show that 63% of advisers will continue to advise people with between £20K and £75K to invest and 38% will continue to advise people with less than £20K to invest.  We do not know what the extent of this advice will be, whether it will be investment advice and just how low some altruistic advisers will go.  What this research means is hard to tell and what it means in conjunction with the Deloitte findings is even harder. The trouble with all this is that it is largely irrelevant to what public policy ought to be addressing.  The regulator is tasked with protecting consumers by making markets work efficiently and promoting the benefits of competition.  It is not any regulator’s fault that they are given the statutory objectives they have got.  For that we must look to the legislature and the government of the day.  They have given us all an incoherent mish-mash of policies that result in too low pension saving and too low protection the consequences of which will fall on the taxpayer.  5.5 million people going without advice, whether a good estimate or not, is an indirect expression of the problem.  We assume that more advice (persuasion) will lead to better outcomes, so do the FSA apparently.  If regulatory policy is ever to be any good it needs to be located within a clearer framework of public policy requiring that households must save enough (taking one year with another) and protect enough.  Then regulatory policy could be seen to be consistent or otherwise.  Moreover, we might put the cart before the horse and not work out the ramifications of regulatory policy only after it is set in stone.  This seems to be what is happening in Parliament at present.  Instead of getting the framework right our legislators have lighted on the jolly good wheeze of giving the FCA the additional statutory objective of ensuring consumer access to financial services.  The consumer lobby apparently supports this sage move.  What it means we cannot tell.  How the FCA will recognise their conflicting objectives we cannot tell.  There is nothing inherently wrong with the balanced score card approach to statutory objective setting it is just that it is a last minute idea tacked on to an already too complex regulatory environment. Instead of a debate and an outcome that might do some long-term good we are more likely to see an unedifying test of the regulator’s new rules as stressed business models drive advisory businesses to arbitrage the gaps in the rules.  And there are some very awkward loose ends the FSA cannot tidy up because the RDR is too ambitious in scope.  Issues around what is an administration charge and what is an adviser charge look set to be a nightmare.  The indirect benefit rules have always been a creaking wreck of ifs, maybes and buts.  Testing and probing opportunities is how markets are supposed to work.  Unleashing competitive forces may make a good sound bite in Parliament but it is no substitute to getting the policy framework right in the first place. When the FCA comes to undertake its post-implementation review we hope they find out what consumers think about paying transparently for advice.  This is a subtle question because we often know what is good for us (like going to the dentist) but we put it off because it is unpleasant and expensive.  The FCA in its “Journey” document says it will take into account the implications of behavioural economics.  We hope it does, we hope it really does, but if central government does not do the same with public policy we may continue with the slide into pensioner poverty. On the backs of flees This author has never bought (or been sold) payment protection insurance.  Odd then how these text messages keep coming saying that I have and that I may claim compensation.  The Government should regulate this deceit out of sight but apparently some very clever computer geeks on the Indian sub-continent equipped with a mere super-computer can spray these texts around the UK and sell any responses to eager CMCs in the UK.  These CMCs are said to be regulated but there is little evidence for it. Part of the problem is that the FSA can’t be bothered with the consequences of its actions.  Many invalid pensions mis-selling claims were paid by the industry because of the way the regulator set up the redress rules.  Equally, the pressure on banks to settle PPI claims is disproportionate.  In the long run, this is poor consumer protection because it creates moral hazard.  None of this is to defend the egregious behaviour of the banks but we must look at the bigger picture.  In that sense, John Cridland’s remarks are not an apologia for the banks.  Rather it is a call for the regulator and the Government to up their games.  A very fair call. Who he? For some time Mark Carney had been an outsider in the race for Governor.  Mark Tucker and Adair Turner had appeared favourites with Tucker apparently overcoming his Bob Diamond connections to become the clear favourite.  Carney must be an impressive man.  He beat two formidable candidates and impressed an interview panel including all three permanent secretaries at the Treasury.  And that seems the significant point.  The Treasury clearly set up the selection process to ensure they secured the outcome they desired.  They did not want a Bank insider and presumably could not face five years of erudition from Adair Turner.  They have chosen instead a real banker, not an out and out economist.  And an investment banker at that who has practised regulation in a smaller jurisdiction.  Perhaps the Treasury believes “it takes a thief to catch a thief”.  This is a high risk appointment because it is out of left field.  Let’s hope it works.  And let’s hope the Home Office will give him a work permit.  There are plenty of people (well two at least) in the UK who could have done the job!      Yours sincerely The Regulatory Consulting Team