The U.K. is amid yet another regulatory cycle, one which has been further complicated by political rotation and a drive for U.K. growth. Having been recently quizzed what it all means by a colleague, it’s got JB Beckett thinking about the current world of that is UK financial services and advice, as he asks in the following analysis ‘is this new cycle good for customers?’
I was recently asked by a colleague what the ‘landscape’ was for U.K. investment. Not a small question, where do I start? Boom or bust, and I do not just mean NVidia’s share price! For those who can recall the 1980s, it was typified by boom and bust economic cycles. Some say it’s a phenomenon we are returning to. Echoing these large cycles has been the regulation of the advice process and financial services. We might conclude that regulation cycles occur owing to lesser or greater political paranoia towards bad economic outcomes (eg Global Financial Crisis), a desire to compete with other countries for capital, improve domestic savings ratio, large political regimes (like the EU) or arising from an economic need to direct investment to shore up the public purse.
For example, if we look at the time that has passed since the GFC then we can observe a gradual decay in systemic concerns and a commensurate rise in collective City amnesia as to how bad things actually got in 2008. Less caution leads to relaxed regulation that begets more risk-taking that leads to more blow ups, which leads to more regulation. So the cycle goes.
Much like indebtedness that late economist Hyman Minsky described in “moments” and “cycles”, cycles of de-regulation and re-regulation are inevitable. They may also ebb and flow owing to the persistency of blow-ups or financial scams albeit many see illegal activity as somehow outside the purview of orderly business as usual. Now in this new age of social media, crypto and self-investing, our regulation looks particularly outdated, constrained and ineffective, as a vast non-advised populous begin to trust Tik Tok or YouTube for financial advice and guidance more than our industry.
Time after time
The U.K. financial services industry has undergone a number of key regulatory cycles since Thatcher’s ‘Big Bang’, notably non-regulation, self-regulation (eg. Personal Investment Authority), ‘polarisation’ of the advice sector discerning tied agents and independents, the deregulation of the banking sector (Financial Services Authority), the alignment of increasing European regulation through the 1990s and 2000s, regulatory and capital austerity post GFC, Retail Distribution Review (RDR), Treating Customers Fairly (TCF), Brexit, Consumer Duty and on and on.
Now we have a growth/competition agenda with one eye on reducing regulatory burdens across the industry. There are certainly changes needed and many EU rules were deeply obtuse in application and overly acute in reporting. For example, cleaning up the cost transparency regime so that different investment vehicles can be compared in any sort of meaningful and fair way is long overdue. Investment Trusts are a good example and we will hopefully see some clarity from the new Statutory instrument and FCA’s Consumer Composite Investments (CCI) regime. They being funds or collectives to you and me. The CCI will likely set aside much of the old EU hangover; so long as Keir Starmer hasn’t agreed to anything rash with Chancellor Olaf Scholz at his recent visit to Germany.
Recall this latest cycle was first initiated by the Johnson administration as a post-Brexit strategy and penned in Sunak’s Future Regulatory Framework (‘FRF’) agenda, it is early days but much appears to have been adapted and continued by new Chancellor Rachel Reeves.
The only constant in all of this is that advisers continue to advise throughout these cycles. There is a cost to this. Regulatory fatigue should not be underestimated or overlooked by Treasury or FCA. All too often regulatory changes occur without advisers being engaged. Yet regulation changes can and do make the advice process either easier or harder, and improve or detriment customer outcomes. When we are facing into the lowest levels of savings rate and highest levels of non-advised populous then we are right to be skeptical.
Advisers have had a difficult relationship with regulators for decades, for a variety of reasons, but none more thorny than the cost of levies imposed by the FCA, Financial Ombudsman Service (FOS) and Financial Services Compensation Service (FSCS). The dissent often lies in that compliant firms essentially are subsiding the cost of wrongdoers and therefore inherently unfair. Recent noises about FOS efficiency, falling levies are perhaps some indication that the regulator is beginning to listen to these concerns. The whole Woodford debacle remains a poster child for all that is dysfunctional with our regulatory and compensation framework in the U.K.
What might lie ahead for us?
Advisers may thus rightly question the direction of U.K. financial regulation following the general election, with a new Labour administration declaring growth ambitions and already amid a number of key regulatory changes post Brexit. It is therefore useful to try to quiz what Rachel Reeves and the new Treasury have in store for our industry, investment freedoms, constraints and ultimately FCA Handbook. Most recently the largest development on our industry has been the new Consumer Duty. Reeves’ plan includes proposals to streamline the Handbook and align conduct rules with Consumer Duty. On 8 July, Reeves said in her first post-election address that; ‘Our manifesto was clear: Sustained economic growth is the only route to the improved prosperity that country needs and the living standards of working people.. plans to.. catalyse private sector investment – in new and growing industries.’
On 7 August the Treasury published comments from Reeves’ meeting with Canadian pension funds and said; ‘I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment.’
There is a clear drive for U.K. pensions and pension providers to now invest in U.K. infrastructure and private assets. Whether this is through pensions, BritISA, Long Term Asset Funds, mutual funds or Investment Trusts seems less clear. We can expect there will be an inevitable rush by the industry to capture such assets and dare say divert the trend towards offshoring assets in the US stock market. Platforms, DFMs, ISA providers, ETFs, Investment Trusts, pensions, all will declare they are the best way forward. We may even see a relaxation of the FCA’s permitted links rules or even direct political intervention as to setting thresholds for U.K. investment for pensions.
The industry expectation is that the FCA will streamline some of the duplicative and excessive procedures in the FCA Handbook and ease-off unnecessary regulatory burden for firms. In this sense Reeves looks set to continue the work of Sunak, albeit with different strap-lines and perhaps for different purposes but the effect will be broadly the same. We are entering a cycle of deregulation, promising less bureaucracy but ultimately posing less investor protections. Whether advisers and clients benefit from this cycle then is less than clear.
With 2022 barely out of our memories; we have had more recent volatility in stock markets and a rollercoaster of AI bubbles, versus lagging U.K. equity returns. The City is concerned by post Brexit effects including losing clearing markets, teetering property sector, flat capital flows and sluggish new listings on the London Stock Exchange. The stifling of capital for new U.K. enterprise and further offshoring of U.K. capital. It is quite understandable then that there is an allure to channel retail U.K. clients into private assets, especially ones that invest into a growing U.K. economy or address social or ecological challenges. Better to build things that serve the populous than another dozen shiny towers to be owned by overseas investors, goes the narrative. Advisers and clients feature little in this shift. Pensions and U.K. investment have become politicised where once they were ostensibly left as an individual consideration between client and adviser (or plan sponsor).
Economically an aim to invest in the U.K. helps us all. Especially so for long-duration, institutional investors, the prospect makes a lot of sense given the volatility in public markets. The question might rightly be why UK pension funds haven’t done more so far? However, advisers are right to be prudent for their individual clients. Caution is needed for retail exposure and we do not need to think back too hard to occasions when private assets have not served retail customers well. We all want to see sensible regulation, less bureaucracy and better enforcement of wrongdoers to restore trust. Many of us want to “reform” the FCA but what belies that varies greatly. City lobbies and consumer groups will unlikely agree.
The Transparency Task Force for example currently has an open letter to the Chancellor to remind the Treasury of the importance of a fit for purpose regulator for protecting customers, which you can read here: PLEASE BECOME A CO-SIGNATORY TO OUR LETTER TO THE CHANCELLOR OF THE EXCHEQUER
Given the difficult history, as advisers and wealth managers you have good reasons to welcome a new regulatory cycle. You are right to feel the FOS needs to improve, that levies need revised, Handbook needs to simplify and enforcement needs to be more present. As British citizens we can laud the drive to more U.K. investment. Treasury policy will be preoccupied with such big picture notions of economy, greater good and public purse. As an adviser you will be preoccupied with consumer duty for your clients and their well-being. With this in mind there will be opportunities, yes, progress, yes but also unintended consequences arising and new risks ahead.
Caveat emptor? One more time around we go.
About JB Beckett
Across 30 years, JB Beckett has delved through the contentious and taboo of our industry, speaking around the world. In 2015 JB wrote “New Fund Order” and “NFO 2.0” in 2016 and co-wrote a number of books on digitalisation of asset management. Since 2020 JB has hosted the New Fund Order podcast – NewFundOrder.Buzzsprout.com. A multi-asset allocator for over 20 years, until 2018 JB was a fund gatekeeper at Lloyds and Scottish Widows. Today, JB is a member of Royal London’s Investment Advisory Committee and remains Emeritus of the Association of Professional Fund Investors and external specialist for the CISI.
