Expecting a regulator to admit that it has completed its job is rather like a prescient turkey - if such a creature exists - wishing for Christmas.
It should come as no surprise, therefore, to find that the Financial Conduct Authority (FCA), the UK’s financial regulator, can only manage to provide a very qualified opinion of the extent to which its activities, along with the regulatory regime in general, have successfully remoulded the retail investment industry to provide a better balance of interests between itself and its customers in its inaugural “sector view”.
“Regulatory interventions have improved firms’ policies and procedures,” it says in one of the more explicit conclusions contained in its review of the sector’s performance which accompanied its latest business plan published on 18 April. “In the advice market, regulatory and industry efforts to improve professionalism and standards of qualification are driving improvements.”
Nonetheless, the subtext is that more must be done in a number of areas, not least because technological change, ongoing socio-economic developments, government policy - especially in relation to pensions and taxation and the sector’s reaction to previous regulatory initiatives - continue to move the sector’s underlying tectonic plates and mitigate against the achievement of a benign equilibrium.
The reality is that the retail investment sector, which to all intents and purposes means the UK wealth management sector, is suboptimal in a variety of respects.
To some extent this reflects consumers’ shortcomings. “Some consumers may find it difficult to assess their current needs, or may have a biased perception of what their future needs are likely to be,” says the FCA.
Moreover, even if consumers can articulate their needs they may be unaware that they could benefit from advice, or it may not be available to them.
Furthermore, as the FCA admits, it can be difficult to obtain information about the quality of advice. “Such information is not available from published sources and can be difficult to verify even after purchase.”
But it also reflects the state of competition and market structure.
Despite low levels of concentration and the absence of dominant firms the FCA says “providers of advice and products may have some room to maintain high prices or poor quality without losing business to their competitors. Firms offering face-to-face advice may have a degree of market power in geographical locations where the number of providers is extremely limited.”
Poor competitive pressures, which often reflect consumer shortcomings, mean that prices still seem clustered around “certain” (i.e. uncompetitive) levels.
And the market often seems able to counteract the best intentions of the regulator.
“Implementation of the Retail Distribution Review (RDR) removed a significant cause of conflicts of interests by changing the way advisers and platforms are paid,” says the FCA. “However, increasing vertical integration between product manufacturers and distributors has the potential to reintroduce some of these risks.”
The FCA notes that remuneration policies at these risks could also incentivise customer-facing employees to sell in-house products and services.
Government policy can also complicate the issue and, in some instances, be counterproductive.
RDR has facilitated price competition although whether or not this has had a significant impact remains an open question. But the government’s pension policies could open a new can of worms, not least because they produce additional complexities into the decision making equation and may increase the likelihood of some consumers making poor decisions.
Similarly although the taxation treatment of property investments may increase consumers’ appetite for retail investments the FCA points out that the Prospectus Directive has had the unintended consequence of limiting retail access to debt and equity markets.
So what does the FCA intend to do about the situation?
Not much it seems, at least in the immediate future, beyond more monitoring especially as far as the suitability and awareness of advice is concerned.
The FCA does raise value for money as an area for focus noting that advisers “may not pay enough attention to value for money when they make personal recommendations for consumers”. However, it doesn’t elucidate how it will address what appears at first sight to be a somewhat nebulous issue.
Its concern about the plight of self-directed consumers appears to offer more of the same, i.e. more monitoring. The FCA does point out, however, that UK consumers pay higher charges for execution than peers in other jurisdictions with “clients of wealth managers and stockbrokers likely to face similar issues”.
Some albeit unspecified action may be more forthcoming as far as “product governance” is concerned.
“We have identified instances of poor product governance in structured products, crowdfunding and peer-to-peer markets,” says the FCA. “This can lead to firms marketing poorly designed products or not taking sufficient steps to make sure products reach the right consumers.”
It also points out that some firms continue to charge “legacy customers” more than new or prospective customers.