It’s time to regulate the non-regulated
With the aim of ensuring consistency of standards and consumer protections, PFS chief executive Keith Richards has said that “all activity should come under the same umbrella”. We agree.
Calling for the review, Richards is quoted as saying:
“Consumers logically assume that all financial and investment activity is covered by the appropriate supervision and regulation, but this is not the case.
“It is perhaps also time to undertake a broader review of regulation to ensure that it does not actually drive firms to develop non-regulated solutions to avoid regulatory cost and risk.”
The retail financial services sector is a heavily regulated place.
Our regulator, the Financial Conduct Authority (FCA) insists on a number of tough standards from financial advisers.
We must undertake our activity in line with their conduct of business rules, manage our businesses in line with prudential standards and ensure we treat our customers fairly.
In addition to this FCA regulation, individual advisers are effectively regulated to certain standards by their chosen professional bodies; the annual renewal of a Statement of Professional Standing means advisers must adhere to ethical standards, hold appropriate qualifications for their role and undertake appropriate CPD during the year.
Customers of regulated firms have recourse to the Financial Ombudsman Service (FOS) to settle complaints and can access compensation from the Financial Services Compensation Scheme (FSCS) in the event a regulated business owes them money and has gone into liquidation.
And of course all of this regulation has a cost.
We pay annual levies to fund the running of the FCA, FOS and FSCS. Sometimes the FSCS comes back to us again during the year to demand an ‘interim’ levy.
We pay annually for a professional indemnity insurance policy we never have any intention of using.
We set aside valuable working capital to satisfy capital adequacy requirements.
We devote countless hours in the business each week to complying with regulations, maintaining the required records and keeping our continuing professional development up to date.
Of course all of these costs are really costs to our clients, and to the consumers of all regulated financial services firms.
The cost of regulation is reflected in the fees we charge; without regulation, we could afford to charge significantly lower fees, although of course this would come without all of the protections consumers receive when dealing with a properly regulated firm.
So when the Personal Finance Society calls for a review of regulated and non-regulated financial services activity, we back this call and hope to see a level-playing ground emerge in the coming years.
It’s essential, in my opinion, that consumers of financial services are not driven to inferior non-regulated services simply because the bar for those firms is set so much lower.
Protecting consumers from the dangers of unregulated investment schemes, which rarely perform as expected, would have the benefit of reducing the compensation cost to the rest of us, those properly regulated firms which inevitably end up bailing out the investors who went for them due to greed or naivety (or both).
It would also do wonders for the collective reputation of the financial services community if the requirement to be regulated to operate in this space was enforced.
No more non-regulated marketing firms cold-calling innocent consumers and passing them to the rip-off merchants. No more websites packed full of information and guidance which looks suspiciously like advice, complete with ‘buy now’ buttons below each article.
And no more sob stories from regulated financial advisers using regulatory exemptions to promote high risk, esoteric unregulated investment schemes which then cost us (and our clients) a small fortune in FSCS levies to fund compensation payments.
It’s time for it all to be regulated. Then we can focus on making the burden of regulation, in terms of both time and cost, much lower.
When that eventually happens, everyone wins.