JOB OF THE WEEK

It is with great interest that I ponder the development and changes in our regulator during my comparatively short tenure at AIFA.  Principles-based regulation, leading to outcome focused regulation twinned with intensive supervision to briefly summarise some of the themes.
 
But can a regulator just ‘change’ like that?  Aside from the cultural issues, and the statutory responsibilities within FSMA, what about the due process – and the necessary checks and balances?  Can, and have they, developed to meet the changing approach?
 
In old money you could describe our regulatory structure as being ‘post-regulation’ – regulation that focused on the end, be that through conduct of business regulation, but also with appropriate ‘post sale’ safeguards. For example, an adviser being struck off could appeal to the Regulatory Decisions Committee at FSA, a consumer unhappy with their advice or product could complain to FOS and then we have a statutory last resort of the FSCS for when all else fails.
 
But what happens if we move to a ‘pre-regulation’ (or product regulation) structure?  Where a regulator makes ‘judgments on judgments’ of senior management, where own-initiative variations of permission are used to stop a firm conducting certain activities before they start, where certain approved persons are refused entry to the industry, and where a regulator is involved in product design at an early stage?  Where does the check and balance of FOS or the RDC fit in the new world?

Take for example the issue of product innovation.  Without it we would still be travelling by horse, so it can’t be argued that all innovation is bad.  In the old world, a provider could innovatively develop products.  Sometimes these didn’t work – we do not operate in a zero failure regime – but we had in place the consumer focused check and balance of FOS.  If the innovation was ‘wrong’ then the consumer could complain and receive compensation.

But take this process from the other side: if the regulator is so heavily involved in judgments on judgments within product design, an extreme conclusion could be that they stifle innovation to the point of zero.  Consumers, and consumer representatives, should at this stage campaign for a more balanced approach, to let through some degree of competition.  But how?  All the safe guards are set up to intervene at the end of the process, not the beginning.  What opportunity is there for the consumer, or adviser, or wider industry to challenge this at a firm specific level?
 
Consider the pressure being exerted on individuals – be that CF31 for mortgage advisers or individual panel interviews for significant influence functions.  Yes, at the back end someone can appeal to the RDC against a decision.  But where is the front end check and balance – the measure that actually 99% of people who would have considered a non-executive role three years ago are not shunning financial services, based on the personal risk profile?  Where is the front end balancing measure to ensure good outcomes?

I’m not questioning – necessarily – some or all of the approaches we are witnessing in regulation.  I am however questioning the evolution of the process and the safe guards that we need to accompany these developments.  At present, I’m not sure that they have been fully thought through and I am wary of any process that can act as judge, jury and executioner.

George Osborne did the right thing this week. This isn't a party political statement but a comment on what UK plc needs from those who lead it and their attitude to dealing with European regulation.

The signal that the Chancellor sent in attending the European Council of Finance Ministers in the first few days of his tenure was unmistakable: Britain is here to do business.

Osborne went to Brussels with little hope of being able to win the hedge fund vote. The deal was sealed well before the General Election - but the final stages were postponed until after it for the, then, Government's convenience.

But just by showing up he did more than previous incumbents of No 11 who, in my opinion, stayed away too often and we lost influence as a result.

If UK financial services, and the advice profession, is to emerge strongly from the aftermath of the banking crisis the biggest threat we have to fend off is the tsunami of new regulatory, tax, and capital adequacy proposals now ricocheting around Brussels.

Too often we have been out flanked by French and German interests. Not because they are better lobbyists but because they have a clear plan and a cohesive vision for the future they are trying to create.

We have sought to rely on a veto and a tactic of little engagement. This simply leads to poor outcomes for the UK - as can be witnessed in the hedge fund directive.

We need a UK view. A proactive vision that protects the British financial services industry. There is nothing to be ashamed of in this statement - being a "good European" doesn't mean sacrificing national interest.

AIFA is acutely aware of the dangers of over-regulation. As has often been stated most regulatory proposals now emanate from Brussels and we must engage with them at that level - or be forced to argue over the mere details of implementation by the time it reaches FSA.

In a recent speech Hector Sants stated he saw a future where the rules came from Brussels and the FSA was a home state supervisor implementing them. If that is to be the case, we need more engagement by our politicians, regulators and trade bodies - working for a common purpose.

The UK model is different to that in continental Europe. It is for us to explain that this has not occurred to the detriment of clients but to better serve their needs. 

Silence may be golden in some circumstances but today we need to give voice to something far more engaging - a clarion cry for a prosperous, competitive UK financial services market.

Chris Cummings
Director General
AIFA

Like many of you, we have been watching today’s election result with close interest in the AIFA offices. As well as watching it for the obvious reasons of “who will win”, we’ve also very interested to see how successful the candidates from financial services backgrounds have been.  

While there was bad news for IFAs and Conservative candidates Deborah Dunleavy and Philip Milton, who failed to win in Bolton North-east and North Devon respectively, there was much better news for others with a background in finance.

Successful new MPs include Harriet Baldwin, formerly a JP Morgan Asset Management managing director, Steve Barclay, head of anti-money-laundering at Barclays retail banking arm, Mike Freer, a self-employed banking and financial services consultant, Karen Bradley, ex-KPMG, Amber Rudd, a former banker, Andrea Leadsom, head of corporate governance at Invesco, Tracey Crouch of Aviva, Richard Fuller, a equities specialist venture capitalist, and Accenture accountant David Mowat.

It can only be a positive thing to have a more commercially aware political audience that has worked in the financial services industry and will be sensitive to the plight of IFAs.

This insight of MPs with finance backgrounds will be particularly useful with regards to the reformation of the tripartite system of regulation, which is likely to be high on the post-election agenda.  

Equally, MPs drawn from business can feed practical insight and experience of the effects of regulatory change in the policy process.

This will hopefully be a reality check on the reform of regulation, especially with some potentially vast financial services bills going through Parliament, industry awareness will add a welcome dimension to Parliament’s scrutiny of legislation.

This afternoon Cameron outlined in general terms what he called a “big open and comprehensive offer” to the Liberal Democrats.

Cameron said while he will not budge on issues such as EU involvement, immigration or defence, there are some areas such as tax reform where the Conservatives are willing to give ground to the Lib Dems.

However the  position  of the tripartite system in a Tory / Lib Dem coalition is  unclear  - the  Lib  Dems  want  to  retain  FSA and  bolster  the  tri-partite  system,  which obviously  differs  widely  from  the  Tories plans. Discussions between the two parties will commence this evening, and we should have a clearer idea over the weekend of what, if any, deal is negotiated, and what this means for the future of FSA.