In the first of a three-part series, we look at how other countries, especially the UK, have moved to regulate their financial services industries post-GFC and how the Future of Financial Advice (FoFA) reforms compare to legislation already in effect. In part one we set the scene.
The global banking crisis of 2007–10 has spawned a welter of new regulation for the financial sector. Many will argue that politicians and supervisors have been very willing to blame bankers for causing a world recession as they wish to divert blame from themselves in propagating economies founded on light-touch regulation.
Media across the planet is full of comment about excessive bankers’ bonuses and yet supervisors have been earning big bonuses too. Globally, regulators have been attempting to close the stable door long after the horse has bolted.
At a wholesale level, the rule book has been usurped by the development of new higher risk – but vastly more rewarding – activities (for example, shorting, HFT). On the retail side, product complexity has exceeded consumer understanding. In the US, regulating the whole financial sector as foreseen by the Dodd-Frank Act will ultimately result in 13,000 pages of new rule-book text. To date, implementation has been slow and stormy.
Undoubtedly, politicians are seeking to cash in on anti-bank sentiments as vote winners despite a basic need for an effective financial sector in any prospering economy. Even the prudent German chancellor Angela Merkel has succumbed, with re-election due in September this year.
The new European Financial Transaction Tax is a financial penalty on banks but is seen fundamentally as a cheap vote winner rather than as a source of income. In dabbling with regulation, politicians are often guilty of delivering mixed messages (for example, more capital and increased lending).
All developed economies are facing major issues associated with increasing life expectancy. State retirement ages will inevitably rise but, in times of greater austerity, governments also need individuals to provide for their own pensions and long-term care.
Sadly, financial capability is still in its infancy. It is, therefore, imperative that the working population has access to financial advice and a range of products appropriate to their needs. Concern has been expressed universally at the track record of financial advisers and the impact of commission bias.
While all agree that consumer protection is the primary goal of a government and regulator, it is also crucial that any new financial legislation is proportionate and “fit for purpose”.
There have been different but complimentary approaches. In Australia, we have the FoFA program while the UK introduced its Retail Distribution Review reforms in January 2013. In our next article we will compare and contrast the two.
Roger Davies is a UK-based consultant with EA Consulting Group
