The Financial Conduct Authority is under extreme pressure to reform itself following inquiries on its management of the LCF and Connaught failures. In response, respected consumerist Mick McAteer concluded a lengthy thread on Twitter… parliament should now be considering whether FCA has enough banning/ intervention powers and is using existing powers effectively. We have a golden opportunity post-Brexit to craft our own, more effective regulatory system.
The publication of the long-awaited Gloster report in particular, required the FCA to take onboard 9 major reforms and recommended a broader review from the Treasury of the FCA’s scope and activities.
For McAteer, the root cause of investment scams is consumer failure to recognise that in an era of low inflation , returns of 8% or more are unsustainable. So financial promotions that say they are, prey on the false expectations of a proportion of the public. But whereas many commentators find the answer in awareness programs, McAteer is not seduced – he labels liberal notions of financial education “ineffective and pointless”. The progressives who see investor behaviour improving with awareness do not seem to be winning the argument either with McAteer or others in the consumerist lobby.
McAteer agrees that parliament should now be considering whether FCA has enough banning/ intervention powers and is using existing powers effectively.
McAteer, has been for 13 years co-founder of the Financial Inclusion Centre, 7 of which he spent as an FCA non-executive director. This has left him with firm views on what can and cannot be achieved by financial regulators.
He argues that “Regulation can respond to financial ‘innovation’, and be robust, and cost effective. But he adds that three key changes are needed:
1. The FCA should move to ‘purpose based’ regulation,
2. The FCA should adopt the “precautionary principle” and ditch ‘permissive’ regulation
3. The FCA should ban products/ activities more often
By “purpose -based regulation”, McAteer means defining financial activities in law according to broad general purposes such as savings, credit, insurance and risk management, asset management, the provision of financial advice and guidance. He would like to see legislation give the FCA powers to determine or clarify which purpose any new product or activity falls under.
McAteer has no time for those financial technologists who rail against regulation stifling innovation and points out that relative to other countries, Britain has a permissive regulatory regime. McAteer sees developments in fintech and digitisation not as changing the primary purpose of financial activities – just the way they are delivered.
And here we come to the radical part of McAteer’s agenda. He tweets…
There are just too many products, too much choice. Finding a good financial product is like finding a needle in a haystack. Industry/ liberal pundits’ answer to that is to throw yet more hay onto the haystack. Their answer when competition fails is to have more competition
McAteer accuses the FCA of being at best naive and at worst disingenuous in its belief that competition will ultimately result in a fairer and more reliable financial system. Far from being pragmatic, he accuses regulators of an almost ideological fervour for the power of the market and competition. He explains the seeming contradiction between competition as the consumer’s friend (he’s a former policy adviser to Which?) and how competition plays with financial products. For McAteer more financial products lead to more complexity and less competition.
His purpose led system should (he says) result in a more “precautionary approach” to financial regulation imposing tougher conditions before products are launched. We can only imagine that if sufficient due diligence had been carried out on Connaught and LCF, the near half a billion lost by investors would still be in their pockets.
McAteer extends the scope of this purpose led system to include the regulation of products themselves, he is a fan of price caps which he sees as “achieving more in a short space of time than indirect interventions such as providing yet more info/ promoting competition”.
Which takes us back to the four questions Gloster poses to the Treasury. McAteer agrees that parliament should now be considering whether FCA has enough banning/ intervention powers and is using existing powers effectively.
McAteer is not alone and has unlikely allies in Gina and Alan Miller of the True and Fair Campaign whose pre-lockdown campaign found the FCA under its former CEO “asleep at the wheel”.
With further scandals, such as Dolphin Trust emerging, it is unlikely that the calls of the consumerists will abate. The regulatory philosophy outlined by Mick McAteer on twitter, may seem luddite to neo-liberals but it plays well to a pragmatic public shocked by tales of scams during the pandemic.
So what are the longer-term implications for regulated advisers? Gina and Alan Miller do themselves provide an authorised wealth-management service and their True and Fair campaign has become their call to action, to the investment industry and to their clients. At a time when the “G” in ESG is to the fore, good governance becomes a highly marketable commodity amongst advisers.
Conversely, association with toxic investments such as Dolphin Trust, Connaught or LCF will doubtless reduce the perceived value of a financial advisory service both to clients and future purchasers. The emphasis on precautionary due diligence proposed by McAteer is clearly in response to the absence of such both from the FCA and advisers recommending such investments. It would be good to think that after such scandals, the industry has learned, but history does not support such optimism. There are many other mini-bonds known to be in trouble and then there are the unknowns, many of which may not be revealed as toxic for years to come.
There being no clear evidence that the FCA has adopted new practices that ensure precautionary product due diligence, we look to the future with some foreboding. Perhaps the best thing to come out of mini-bonds is the prospect that the Treasury will take up Gloster’s recommendation and look at regulation through a more consumer focused lens. Our exit from the European Union may be the trip that makes this happen,