It’s time for ministers to regulate the regulators

Artificial Intelligence is talked about as the most profound threat facing those employed in the financial services industry. Robo-advisers, possibly using machine learning, mining vast banks of so called ‘big data’, will replace brokers, dealers, sales teams and advisers. But given that the FCA has no idea how it would regulate financial services provided in this way, this new paradigm may yet be a long way off. This may be good news for the industry since threats abound from behind every other corner as it is, not least from the sector regulator, the Financial Conduct Authority (FCA).

Indeed, the FCA seem to have AI on the brain. While they may not have a plan to regulate it (or extract fees and fines from robo-advisers) it has at least inspired their latest £41m advertising campaign, which sees Arnold Schwarzenegger’s Terminator encouraging people to come forward with their PPI claims even though the deadline is Aug 2019. This is, in a nutshell, what is wrong with financial regulation. I would not suggest that those with a legitimate complaint involving mis-selling should not be duly compensated. Only that the FCA has moved past neutrality into the realm of the litigious, using its favourite ambulance chasers, the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme, to encourage claimants and ultimately do what public sector agencies normally do, pursue expansionist policies in the name of budget maximisation.

The PPI example is a telling one. Because of the mis-selling of mainly the large banks, we now face a situation where the market for advising on legitimate insurance products is drying up. This is for several reasons. First, the cost of being regulated so as to pay for the FCA, its high-priced enforcement agencies and its even higher priced advertising agencies – Saatchi and Saatchi no less. Research conducted by the London School of Economics calculates that the cost of being regulated – in other words FCA fees due – have increased by 70pc. It has gone up from 4pc of the income of small insurance brokers to 7pc. And it is worth remembering this money is not ring-fenced to small brokers.

Second there are significant fears of legal reprisals. Leaving aside the fact that there is no long-stop on claims so advisers can be pursued for claims pertaining to advice they made 30 years ago, of greater concern is the lack of adherence to Common Law by the FOS. Their approach encourages early settlement by advisers because contesting claims is likely to be more expensive in the long-run, even if the claims are found to have no merit. It has only recently become the case that their enforcement powers are being subject to some modicum of transparency, in that it is now revealed to you by the FOS, why you are being investigated – the right to face your accuser indeed.

All this is done in the name of consumer protection but where are the interests of the consumer if we create a fragmented market, with patchy advice provided only by those with massive compliance teams and lawyers to match those of the FCA? Our industry and the consumers it serves will suffer. Even now the FCA is scrabbling for an insurance mechanism that the advisory community could use but they are being forced to propose a monopoly provider because who would take on such a job in a rigged market? This will simply heap more cost on an already stretched sector.

Our competitors in the EU are bronze-plating European regulations but we are reaching for the gold. The FCA of course has a competitiveness objective but it is narrowly interpreted as maintaining the functioning of the marketplace. One can argue they have missed that by an order of magnitude but the fact that the FCA freely admits the international competitiveness of the market is of no interest to them should cause concern. I have asked in Parliament for a specific review into the opaque policies and practices of the FCA, but the response was not encouraging. Ministers have traditionally eschewed interventions with the FCA so as to avoid the impression of interference. But this surely concerns operational matters. When it comes to democratic accountability and adherence to the rule of law, that is exactly the domain of said ministers and they should intervene accordingly, while we still have an industry to regulate.