Saturday, 18 February 2012

Over-regulation.

The Economist this week deals with the regulatory labyrinth of the Dodd-Frank act. It put me in mind of the regulation of my dusty corner of the financial services industry. We stockbrokers, managing money and advising clients on stocks, shares, unit-trusts, investment trusts, bonds, managing money in ISAs, Pensions, for Charities, trusts, companies, relying on long-term advisory relationships with clients. This is not an industry with a track-record of mis-selling products. Nor was it one, unlike the superficially similar IFA sphere, replete with cowboys. There were not many complaints from customers, even during the crash, because it would be a short lived career if I made promises I couldn't keep. Hoary old brokers had seen it all before, and advised the young-guns to hold the line, stick 'em in Gilts and wait. An advisory relationship is one where the broker gives his opinion, and the client is free to take it or leave it, but I am not selling a trade, I am building a business. I want my clients to be happy with my advice in 30 years time.

Nevertheless, "deregulation" was blamed for the financial crisis. We were unregulated and so that couldn't be tolerated. Something must be done, regulating blameless stokbrokers is "something" so the FSA will do it. There were brokers without qualifications, many of whom had been running money with great success since before "big bang". Stockbrokers were advising people, without keeping detailed records of every phone-call, which offended the horrid little bri-nylon Gauleiters of the FSA. The idea that a client might just want you to give advice on a pot of money, for a particular purpose - inheritance, or school-fees for example, without knowing the clients income, expenditure, mortgage, inside-leg measurement and so on just did not compute with the FSA.

So the new round of regulation, the RDR sees every broker have to take more exams, much of the content of which is entirely irrelevant or obsolete in one tax year. As most "wealth managers", as the FSA seems intent on rather grubbily calling Stockbrokers are self-employed, we will have to find the money for these exams out of income. This extra focus from the FSA doesn't come cheap. My FSA and FOS fees, which I pay every month, have tripled in the last couple of years.

I don't see how my clients benefit from the vast amount of extra information on them we are obliged to store about them on our computer systems. Indeed, much of it, if I am doing my job correctly, I already know. But this won't wash, I have to be able to prove that I've asked my client about his health. The client cannot opt out, or keep his mortgage balance private from his stockbroker. For my clients, this will simply be a question of a detailed fact-find to satisfy the regulator, and hopefully their service will continue.

But for much of the industry, the clients will end up being the ones paying for this regulatory focus. Those FSA and FOS fees will be passed on to clients. Clients who've dealt occasionally will be subjected to an intrusive fact find or lose any opportunity to ask for any advice at all, ever. Long-term clients whose fees are currently low will find their existing arrangement "tidied up" as they're "re-papered". Their fees are extremely unlikely to go down.

It gets worse. The first firm I worked for was the now long-defunct Gerrards, now subsumed into Barclays wealth management. Gerrards, itself a merger of Capel Cure Meyers and Albert E Sharp's was a large, but otherwise old-school private client stockbrokers. The senior management, for whom I (then a wet-back, just out of the Army) was a bag-carrier, decided that the brokers out in the branches, doing their thing was a risk which it couldn't afford in the new N2 world. Instead, an "investment process" would be created. An Asset Allocation committee would set the appropriate split between cash, Gilts, bonds and equity for clients, who would be put into 3 "risk" categories. An investment committee would then decide which individual equities or bonds would form the "core holdings" within these asset classes.

Brokers who had up till this point been owners of their own businesses, and who gave as much or as little advice as their clients felt they needed to navigate the financial markets, were reduced to salesmen, actively ringing up clients who neither desired nor needed the advice to switch long-term holdings on the say so of a team of analysts (Which by this stage, I had joined). Analysts were encouraged to advise switches and congratulated on the basis of the commission generated. Brokers were thus encouraged to churn their client's accounts. Portfolios were monitored for compliance (not straying from the "recommended" list). People who had enjoyed playing the markets with a trusted broker, were now forced into what amounted to an expensive index-tracker. Don't like Vodafone? Tough, it's 20% of the index (in 2000) so it's a "risk" (regulatory "risk", to the broker, not financial risk to the client) to be out of that stock.

The old school brokers out in the branches revolted, and so I watched a perfectly strong business, which had long served its clients perfectly well for decades, utterly destroyed in a matter of a few years. I jumped ship to Lazard and whole branches left to join partnerships and firms which would leave them alone to get on with servicing their clients.

The FSA, which does not understand Private Client stockbroking, and therefore does not like this is at serious risk of harming clients by hammering the brokers with often inappropriate demands for record-keeping, and fact-finding. The ultimate effect is to deny decent advice to people without serious amounts of money to invest. If it ain't worth my while spending 3 hours or more finding out your inside-leg measurement and medical history (the former is flippant, the latter is not), I will not be able to advise you about the best way to save for your retirement. You're on your own, or at the mercy of cowboys. Maybe you've inherited a pot of money and you'd like to stick it somewhere for a few years, before buying a house. Maybe you've downsized and would like to supplement your pension with a bit of income from the capital. Few brokers will touch you if it's less than £100k.

Most ordinary people are therefore left at the mercy of IFAs and Banks who won't advise you about investments. They will sell you a product. Big finance is almost entirely parasitic in this regard. I typically charge less than 1% for advice. Most funds charge 1.5% or more. You will get no more contact, except when a salesman rings you up to "advise" you to switch into a different fund, using a script. The salesman gets commission, but unlike an old-school broker, he's not responsible for performance, a faceless and distant fund-manager is. There will be no ongoing relationship, because the salesman who will have given you his card when you went into the bank's branch will have been promoted or fired by the time your circumstances change.

Inappropriate over-regulation is killing the old school advisory business, just as it killed old-school relationship banking where long-term relationships have long provided decent advice to people for a reasonable cost. The only people to benefit are the big banks who have access to more captive customers for their fee-larded "products" sold according to a process, and the regulation sausage factory of the FSA.

I am going to get little sympathy. Though I am just a guy earning a crust by helping clients decide which stocks to invest in to achieve their aims, in the popular imagination I may as well be a "banker". But this nonsense is going on in every industry, not just finance. I am not saying all new regulation is wrong. Much of the new regime is merely formalising what a decent broker should be doing anyway. But to imagine this is without cost is naive. And the cost is borne by customers, who lose choice and privacy as well as paying higher fees. Regulation ultimately benefits government, which gains power over people, and big business, which can absorb the cost, pass it on, and put the insurgent or innovative smaller player out of business.

Ultimately the cost is borne by the nation who have to employ a caste of nose-poker-inners in every industry to check "compliance" with regulations. The only businesses who can influence the regulations are the big, powerful, politically connected ones, and you can bet they're gaming the process to their benefit, and against the interests of the entrepreneur, sole-trader and independent small firm. This crony-capitalist cartel is the real beneficiary of over-regulation. The compliance department, or indeed the PAYE administrator, or the H&S officer may be nominally employed in the private sector, but they're every bit as parasitic as the mandarins of Whitehall, as they are not serving the person who's forced to be paying them.

Worse, innovation may well be beneficial to customers, but the compliance risk means much innovation is not allowed or otherwise stifled because regulators who by their nature are conservative and risk-averse don't like that which they don't understand. Ultimately As we're at the technological frontier, without innovation, we've no growth. And what does the UK desperately need now?



3 comments:

Anonymous said...

Although I don't know much about the world of finance, I see exactly the same processes in place within my own profession; engineering. Unfortunately, in my experience 'process uniformity' is not only being driven by government but seems to be the stated objective of every second-rate and dim-witted manager whom Worstall might have observed were those best able to stay awake during meetings.

Regards,

Mr. Pants.

Anonymous said...

Really, Dude, You have no idea. The boss who put you through hell and then applauded your efforts was in thrall to your father. 'Hey, I gave him such a shitty job and he buckled down and did it.' (Imagined dialogue of minion grovelling to boss). Sure you did, but you knew you were proving a point, not doing a job that was going to go on for the rest of your working life.

Try to be a little honest with yourself before you give yourself a gold star. You are a public school boy. By an accident of birth you were born rich. You are a stock broker and you earn a rather large 'crust'.

You have no idea what it is like to be the man who has to clean out the boiler for the rest of his days. (I do know that this relates to a previous post)

You do rather give the game away when you write about 'ordinary people'. The fact is, that the days of doffing your cap and respecting authority are gone, and the advice that you wish to charge for is common sense. Your days raking in the money are almost over. You can advise all you like but you cannot see the future.


Maybe you should do a real job? That boiler's looking pretty black.

Jackart said...

Mr Pants. "Dim-Witted Managers" are the reason I am self-employed.

Anon. In my previous post, I acknowlege my privelege. The point I was making is that I have not existed in an Ivory tower. In everything I write, I desire the policies which actually help the working person, I then explain why I hold these opinions.

The assumption that I am rich because of what I do is false. I've built a business from scratch which means for the first year or more, it cost me money to go to work. I fear that under the current regulatory regime, I would find it a great deal harder to build the business I have.

My days of "raking in the money" are almost over. Why? You think the market's going to crash? I survived in this industry since I left the Army in 2000. I know nothing but crashes. History suggests that after 10 years of negative returns, the next 10 years are very good. (Japan is the cautionary tale).

Anyway, I use the industry I know to ilustrate about the dangers of regulation which slowly strangles growth. Multiply this accross the economy, and you have a recipie for the stagnation we're seeing now.

Finally, read the "comment policy" post. I don't normally deal with chippy, ignorant anonymous comments. Get a name or pseudenom, or fuck off.

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