George Osborne, anarchist

George Osborne has a new way of thinking

Like army generals, the senior financial regulators are always fighting the last war. Here’s how the game works:

The regulator recruits some low-ranking bod from the City to tell them what they need to know about the dastardly banks’ various nefarious schemes. The big City institutions recruit high-ranking bods from the regulator, then the new recruits tell the banks exactly what they can and can’t get away with. And exactly how they should push the envelope.

It’s a revolving door of staff succession between the regulator and the finance industry. It means the regulator is indeed, always preparing for the last battle. The bigger chequebook offered by the City boys ensures they are always one-step ahead of the shoeshine.

I was catching up with an old mate the other week, and together we lamented the regulatory environment (yes, these are the sorts of conversations old bores like us have for fun!).

“Well, Bengt, surely the regulator needs to be beefed up. They need to spend the City salaries and get hold of the top talent to keep this industry in check!”

“No, no, no…” says I. “What we need is anarchy.”

Regulation just doesn’t work

In the run-up to the 2007/08 crisis, regulation failed. It’s practically bound to. When it comes to banking, we’re dealing with big-money power brokers.

There’s also the nature of global capital markets. If you don’t like the regulation in one country, then shift operations to another. That’s a powerful tool oft used by the banks.

London, in particular, has benefited from open financial markets. Successive governments have kept EU regulation at bay, shielding our banks from legislation emerging from Brussels.

The point is it’s extremely difficult to regulate effectively. Either the banks won’t have it, or they’ll continually adapt to new legislation. But the worst of it all is the uncanny ability of the regulators to score own goals.

Take the highly topical annuities furore. Regulation has long-since been established to ensure pensioners (or the pension managers) don’t whittle away individuals’ savings as they go into retirement. The regulators decreed that most retirees on a private pension will have to buy an annuity (an income for life policy).

An independent financial advisor mate was telling me how just about everyone she’s put into annuities over the last year has opted for a non-inflation linked policy. Nobody wants to buy an inflation-linked policy paying a pitiful £3,000 a year, for every £100,000 invested. Instead, they buy fixed annuities paying something like £6,000 on £100,000 invested.

These retirees could be alive for 30 years or more. Given the central bank’s monetary experimentations, these annuities could become all but worthless.

This is the law of unintended consequences, and it has an uncanny way of popping its head round the regulators door. So I was encouraged to see George Osborne breaking out of this way of thinking in his Budget last week.

The government’s radical move

In the light of Osborne’s Budget announcement to vastly scale back annuities, the insurance industry is up in arms. But with the government’s swift action here, it seems the industry didn’t have time to dispatch its lieutenants.

The industry is crying “foul!”. They say retirement funds will be whittled away. “Regulation is there for a reason, you know!”

But their argument hides the truth. And that is, regulation is used by the big boys to protect their own interests and their carefully groomed markets. It adds reams of complexity to finance, maintains the status quo and thwarts competition.

The current system of regulation strips individuals of responsibility and hives it off to an industry highly undeserving of our trust. It all too often allows the industry free rein to siphon off vast sums of our money. A) because somebody has to pay for all the compliance staff in the first place. And B) because the regulation hinders competition in the savings market.


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Explanation, not regulation

I like the idea of simplifying finance. Simplifying pensions. Making it easy for people to understand and to look after their own finances by demystifying the industry. And yes, that means less complicated regulation. Explanation, not regulation.

The NHS has a very useful online flow-chart that helps individuals identify and help treat symptoms. The government could set a similar flow-chart for the health of an individual’s finances.

Let the investing public work it out for themselves. In so doing, I suspect many will be much more realistic about their retirement savings policy too.

But, I hear you cry, “Who’s going to look after individuals and make sure they don’t just get ripped off?”

Now, while that’s a concern, I don’t think it’ll be as considerable as you may think. Given today’s vast information network, it wouldn’t be too difficult to weed out the industry’s nasties. If eBay can set up a decent enough system to identify shamsters, then why can’t a government website do the same?

And anyway, it’s not as if there aren’t enough investment scams going on even in today’s regulated markets. I dare say many individuals are conned into land banking schemes, diamond investment fraud and dodgy wine investments, because they think that the regulators are policing the whole system.

Individuals put too much faith in the system. Better to be honest about it. Osborne need to go futher. He needs to further demystify the financial system and let individuals get on with their own investments. That would open up the financial markets to more simple investment products that investors understand.

While unregulated, the system would be an awful lot safer than what goes on behind the closed doors of today’s highly regulated investment banks!

Your money. Your look out! Sounds anarchic? Let us know your thoughts.

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16 Responses

  1. 26/03/2014, chazza wrote

    Done with annuities now – what a rip off.

    The next to go must be ISAS. There’s no need for all this self serving red tape. Its jobs for the boys and girls at the Inland Revenue and loadsamoney for the ISA industry.

  2. 26/03/2014, Wotan wrote

    I think you live in cloud-cuckoo-land. How can you expect “investors” to make their own pension decisions? They simply lack the know-how; that’s is a fact, not an accusation.

    Consequently, they will take their pension pot to one of the usual “financial advisers” where, again as usual, they will be shafted. These “experts” are only interested in filling their own pockets (or those of their employers) with fees and commissions; they are not concerned with the interests of the investors, whom they regard as a source of income and nothing else.

    • 26/03/2014, Bengt Saelensminde wrote

      Wotan

      The only reason a pension is so complicated is because all the regulation and legislation that surrounds it. I would think a decent website run by a government body could provide the platform and information that people require.

      There would be no need for ‘experts.’ Of course, an individual could still go the IFA route if they preferred. But if you simplify the whole process, there should be no need for one.

      The savings in fees could be fantastic. And by taking personal responsibility for their investments, investors would know exactly where they stand.

      Bengt

  3. 26/03/2014, lesprojects wrote

    as well as de -regulation they need to remove other obstacles, i.e you can’t have a mortgage after 70 years age, So for those of us who would like to use buy to let with part of our retirement pot, we won’t be able to

  4. 26/03/2014, amazed wrote

    I am amazed we are still having these conversations about regulators and regulations.Regulation and regulators simply dont work.In the Madoff case 25 years of regulators failed to spot his Ponzi scheme. PFG, a futures broker mandated to have segregated accounts and non segregated accounts, stole for 25 years $215M from the segregated accounts while leaving the non segregated accounts alone.Why ? Because the segregated accounts were regulated and the others werent.Yes , you read that correctly.Go figure why a thief would do that.Its pretty clear. MF Global, saw $ billions disappear from JPM segregated accounts. Look at the UK.It was no secret that during the years 2002-2009 self certified mortgages were a fraudulent activity, along with forex manipulation, gold manipulation,metals cartels etc all clearly known and condoned by regulators and central bank governors. The end result is that ordinary people have paid the price while politically connected and protected individuals have escaped and even profited.Yes we have two forms of justice, one for you and me and another for the ” Too important to touch”. Regulation.A total sham. We just need to take responsibility for ourselves and stop this modern day whinging .. and ofcourse jail those who have ripped us all off.

  5. 26/03/2014, Feeleep wrote

    We don’t have effective regulation in Cyprus for most financial services with the possible exception of CYSec for Securities…what a mess we are in as a result. The primary role of ‘Regulation’ for me is to even up the relationship between ‘Professional’ and ‘Client’ when things go wrong and the ‘professional’ starts to run for it or bluster. Your view may have some credence in ‘mature’ markets with ‘Gentlemen’ Players, but in an immature market filled with , frankly, the dregs of ‘Players’, effective regulation is vital. We don’t have that and the ‘Self’ Policing Bodies are useless and self serving too. So No! I don’t agree with you except possibly in ‘Good Old England’ – if it still is!

  6. 26/03/2014, John Brown wrote

    I do agree about the consumer-based policing like Ebay uses. I just had what looked like a late delivery from South Korea (got up to 5 weeks), and they just gave me a refund.
    I also now look through all the customer reviews on Amazon before buying anything concrete.
    It is actually a shame that Ebay does not have these sorts of reviews.
    For book reviews, GoodReads is probably the best, with erudite readers covering their specialisms.
    In the health field, Dr. Mercola’s website is very useful, especially for its readers’ blog postings, which again are often very erudite.

    I have just started subscribing to Fat Prophets, and have been very impressed (rather surprisingly) by their very ergonomic web-site, and very deep coverage of Buy and Sell recommendations, including charts which I would have to fiddle about with for several minutes to find, for example to get the recent Gold chart from Kitko.

    Everything looks completely transparent, and there is an archive of all the earlier Buy and Sell recommendations.

    Incidentally, MoneyWeek, thank you for the recent Tullow speculative Buy recommendation, which is panning out well so far.

  7. 26/03/2014, Plodder wrote

    I agree with Bengt. George Osborne has set those pension savers, who do not have employment schemes, free from wretched annuities, but effectively stopped them drawing too much or all at once, by taxing them for doing so, at the highest rate, (after tax-free portion). He should however, not have allowed them to do so, until they reach sixty five. the country needs the skills and experience in the work-place of those between fifty five and sixty five. In my view, if people wish to cease work early they may do so but not be able to draw any of their pension savings whatsoever until sixty five. After all they have had generous tax incentive saving to help build up these sums for use later in life.

    • 27/03/2014, I read this as meaning I could apply for 'fixed protection' now, if I ceased making further contributions. Not as simple as that. As well as there being varieties of 'protection', none of them seem to apply unless you already have, now or on 5/4/2014 wrote

      Er, why not until 65? The state pension already has this restriction, or actually at 66, 67 etc. If you have saved enough, and had enough, why should you not retire at 55? It used to be 50 until A Day, which I missed out on by one year. I know a guy who missed out by 6 weeks and has to work another 5 years, even though he is on a final salary scheme and has already put in maximum years. If someone is that indispensable (the graveyards are full of them) then they will be enticed to stay. Otherwise they make room early for the huge numbers of young unemployed. You may have a Protestant work ethic, but no one should force their ethics (or religion) on others.

  8. 27/03/2014, JDEvolutionist wrote

    I agree with Bengt and Plodder.

    We live in an era in which the wealth of a sizeable elite minority is generated, not by the creation of new wealth, but by the unjustifiable and excessive transfer of earned wealth from the owners of that wealth into the hands of the elite minority on the pretext of performing what appear to be a services, whose true value is greatly overhyped. The system is unethical and corrupt but is so powerful, because it generates so much money, that it appears to be indestructible. It’s actually not we just have to say ‘NO’ and stop supporting it.

    Fundamentally, we are encouraged through cleaver advertising and spin to pay far in excess of fair value for products and services that we in reality have little need of and, where we to decline them, would not only leave us richer but would also increase the probability of creating real wealth and improving the substance of our civilisation.

    Part of the problem is the extent to which the media, MoneyWeek excepted of course, is in the pay of the elite minority and does their bidding.

  9. 27/03/2014, Aussie61 wrote

    Bengt,

    This must be one of the best articles you have written, more please and less of the regurgitated stuff about fracking and Money week.

    Well done.

    • 27/03/2014, I read this as meaning I could apply for 'fixed protection' now, if I ceased making further contributions. Not as simple as that. As well as there being varieties of 'protection', none of them seem to apply unless you already have, now or on 5/4/2014 wrote

      Can I propose a further small change to George? Gordon Brown instituted the frankly heinous stealth tax on pension funds, making dividend tax un-reclaimable. Obviously we would all like George to scrap this, but the problem is he probably cannot afford to right now. So how about a compromise, to at least right the wrong of double-taxation where no annuity is purchased. Since that is his main topic right now. Because if you are in drawdown mode, your fund dividends are taxed at source, but when you withdraw them as income they are taxed again. So to work in tandem with his other changes, make dividend tax credits available again once a fund is in drawdown.

  10. 27/03/2014, mikeT wrote

    “And by taking personal responsibility for their investments, investors would know exactly where they stand.” Correct, but be warned. Just as MW recommend “multi-asset funds”, this is what Morning Star tell me:”We are not able to calculate duration data for funds of funds. This is why you will see zero values in the duration and maturity columns when reviewing this particular fund within the X-Ray tool.” So…if you take personal responsibility and invest (£150?) in a Portfolio Manager such as Morning Star’s X-Ray, your portfolio duration will be wrong (and so will Fidelity’s etc who use x-Ray). Moreover, MS took about 3 weeks to warn other investors after I’d questioned their analysis. Incredible.

  11. 27/03/2014, Critic Al Rick wrote

    I can’t help but consider that in some way and others, at least one of them wickedly devious, the biggest winners in the longer than short term of changes to pensions, etc c/o the recent Budget will be that segment of society comprised of the effectively self-serving so-called elite.

    And that GO is not the “anarchist” but one of the self-servers’ apprentices/puppets.

  12. 28/03/2014, Orb wrote

    Come on all you Gates/Zuckerberg/et al wannabes………… PensionAdvisor.com! Just like TripAdvisor, only that it’d be for pensions!

  13. 01/04/2014, Texas Pete wrote

    Absolutely spot on, Bengt. Financial regulation has been a complete car wreck. Not many people know but the flawed Basel II regulations were a big contributor to the financial crisis – ironically these had the effect of causing banks to hold less capital! The FCA and their predecessors, the FSA, have proved utterly useless at spotting genuine crises, and frankly have spent the last 12 years stifling innovation and competition in the name of consumer protection, forgetting it is the poor consumer who ultimately ends up picking up the tab for all this unwanted protection. I also resent some faceless apparatik in Canary Wharf telling me what I can and can’t do with my money in the name of consumer protection – why do I have to be a sophisticated or professional investor in order to invest my own hard earned money in a crowdfunding site? Its my money, if I want to invest in a crowdfunding scheme, bet the lot on greyhounds, give the lot to the local cats’ home or blow it all on fast cars and loose women that is entirely my perogative – its my money! GO seems to have belatedly grasped that, let’s hope he carries on with the theme and chucks the FCA into the same bin he recently threw annuities into.

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