Written by Kevin Okell on Tuesday 16 February 2016
In 2005 when we founded Altus, New Labour had just won its third term in power and Gordon Brown was widely credited with making it happen. His steady handling of the economy, combining capitalism with social responsibility had attracted widespread admiration and the FSA (Brown’s own creation) was viewed as a model regulator in Europe and beyond.
The FSA had been created by New Labour in the aftermath of the Baring’s collapse and very much reflected both the era and the paternalistic nature of its creator. Tasked with protecting the humble consumer by ensuring the stability of the financial institutions which manage their finances, the FSA focused its attention on providers and adopted a principles-based approach to the regulation of the market. The belief was that by concentrating on overall solvency while making providers responsible for product suitability, the regulator could avoid another financial meltdown whilst ensuring consumers were looked after.
10 years on things look very different. After the longest recession in history and a series of financial mis-selling scandals, support for Labour has collapsed and the FSA’s reputation was so tarnished that it had to be dismantled and relaunched with a new brand. The Conservative party has won a second successive term, right-wing philosophy dominates the political agenda and several commentators are predicting we won’t see Labour back in power for a generation.
The impact on financial services and its regulation has been profound. Personal freedom has replaced collectivism on the political agenda and this shift has been mirrored in the gradual decline of Life Insurers and the inexorable rise of Platforms. With the increased emphasis on managing individual portfolios over pooled insurance funds, there has been an inevitable swing in regulatory focus from Prudential Standards to Client Assets as the FCA tacitly abandons the “too big to fail” doctrine in favour of ensuring that clients get their money back in the event of a failure.
But the biggest change is yet to come. Pension Freedoms may not have been the most carefully considered reform of our financial system but it was one of the biggest and absolutely in line with Tory philosophy. Liberating pension savers from the tyranny of state meddling and handing them control over their own money is just part of a broader move to personal liberty – and therefore responsibility.
Unfortunately for the FCA, regulation of the market has not caught up with this sea-change in politics yet. The cracks started to appear in the wake of RDR as adviser numbers fell and mass market consumers declined to pay for advice. But if RDR created an advice gap, Pension Freedoms has blown it wide open. As we stand at the dawn of the next great industrial revolution, the technology solution to the advice conundrum seems obvious apart from one little problem; regulation.
The Chancellor would, I think, be very happy to see software take the strain and help Mrs. Miggins understand the impact on her capacity for loss of buying that Lamborghini. Crucially, I think he would also be happy if she decided to take a gamble and buy it anyway in the hope that it might actually increase in value. The FCA would, I suspect, be less comfortable with risk taking on this scale and that conservatism (with a small “c”) is built into its fabric. Despite repeated protestations from the FCA, a rulebook conceived in an era of social paternalism remains a key obstacle to harnessing technology for mass market advice as providers shy away from potentially unlimited liability.
It seems to me like the government has finally had enough. The wide ranging FAMR initiative is being jointly led by HM Treasury and the FCA with the former taking an unusually active interest. It may well be that the handbook can be rescued with some careful editing but the future of the FCA will, I suspect, come under renewed scrutiny.
After 10 years of fretting about the least worst outcome, how will the regulator fare in a political climate where risk taking is seen as virtue?