The accepted wisdom in the City in recent decades has been that the Financial Conduct Authority (FCA) has deviated from its original purpose. Rather than regulating financial services in order to preserve the reputation and trustworthiness of legitimate businesses and safeguard investors from unfair or nefarious practices, its purpose has become to strangle them with red tape, raise the cost and effort of doing business and discourage investors from anything but an ultra-safe, low return investment.
Hence the death spiral of the London Stock Exchange, the pervasiveness of the belief that all businesses are out to rip-off their customers, the relentless net selling by ordinary investors of shares and investment funds, and the encouragement of mis-selling campaigns. The present government is assumed to be entirely on the side of those wishing to regulate the City and the investment world to death.
The message from Simon Walls, director of markets at the FCA, to investment company directors at their recent conference, was entirely the opposite. “Our objectives, to make markets work well, to secure an appropriate degree of investor protection and to advance market integrity, are deliberately vague so as to move with societal expectations,” he says. “We have set out a new five-year strategy, which has four rather than 23 components. It represents a shift in tone more than in regulations, though some of those are changing.”
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That change in tone around investment culture emanates from the top. “The remit from the government”, says Walls, “is now very clear: we should trust in the structures we have in place for when things go wrong rather than try to prevent anything from going wrong in the first place.”
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How to change investment culture
It was good to hear, too, that financial services are not seen as the enemy. “We are now clear that financial services are good for people and investing is a fundamental part of helping people navigate their lives,” says Walls. “An interpretation of consumer protection that means nothing can ever go wrong holds us back as a society. This applies to banking, insurance and asset management. With the shift from defined-benefit to defined-contribution pensions, we can’t afford to have people not saving. To achieve their goals, they need the power of compounded returns.”
Wall is very critical of the over-interpretation of rules. “There is a sense that the industry thinks that the FCA wants more than it does,” he says. “Everyone has risk and compliance people whose job depends on this space so we get calls for more prescriptive rules. We are trying to change that culture. The industry is asking to be nannied too much.” A lot of the kowtowing to overbearing rules is based more on myth than reality. The FCA does not, for example, require a statement that your capital is at risk in advertisements.
A lot of energy has been focused on regulation, but you also “need to get the message across about the importance of investment”, says Walls. He is particularly concerned about the results of a survey of 10,000 people that the FCA undertakes. “There are seven million people in the UK with more than £10,000 in cash, but no investments. Barclays calculates that this means there is £430 billion to £600 billion of cash uninvested. Too many people just don’t get investment. When we interview these people, 30% say they are afraid of scams and 29% say nobody has helped them get started. Just 9% get full financial advice.”
New rules next year on targeted support will relax the requirement for advisers to know everything about the individual when they give guidance. “Treating every single investor as a unique person was a bit much. There will always be a place for full financial advice, but we have to accept that 91% of people are unable to access it.”
One of the things potential investors are going to have to accept is that they could lose money as well as make it. You can’t have the upsides without the downsides. If equity markets dropped 25% this year, that doesn’t mean the message on investment should change. “We are 18 months into our change of tone, but attitudes will remain delicate until we have got through a full investment cycle. You can only test resilience to risk when bad things happen.”
Learning to love leverage
No change in investment culture can happen without healthy financial services, of course, and Walls is optimistic about the outlook for the industry in the UK. “London is unambiguously the world’s number two in financial services and there are a lot of areas where we are number one… But to get anything like the investment culture of the US, we need to fundamentally change people’s attitude to risk.”
We should learn to love leverage, for example. “I love the fact that investment companies are closed-ended (have fixed capital), which is fantastic for lots of areas, such as private equity, where there are problems related to liquidity mismatch for other types of funds. I like the use of gearing – if something is a good idea, I want a bit more of it for my money. Seeking great risk-adjusted returns needs to be the primary concern for investment companies, not regulation.”
Walls accepts that a full revival of the UK’s financial sector will require more than better regulation. “Tax comes up a lot in discussions but there is nothing I can do about that.” For that, investors will need patience.
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