Regulation is Failing - Here’s Why - FP Advance

Regulation is Failing – Here’s Why

BY brett

Better regulation and the Hayne Inquiry | FP Advance

Fees from beyond the grave

I’ve been keeping a casual eye on developments in my former homeland, Australia, regarding the Hayne Inquiry. It was formally known as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The name says it all and it’s not pretty.

Here are a few snippets from Jamie Smyth’s article ‘Australian inquiry into banking faults greed and lax regulation’ (article needs subscription to read) in the Financial Times on September 28th 2018:

“Too often, the answer seems to be greed — the pursuit of short-term profit at the expense of basic standards of honesty,” the 1,000-page report’s executive summary said. “How else is charging continuing advice fees to the dead to be explained?”

Wow. Charging advice fees to dead people. Not a good look.

The report specifically pinpoints the lack of action by the major regulators in Australia too.

I’ve included links to two articles at the end of this newsletter if you’d like to read more of the gory details.

How not to do business

Far too many of the larger players in the Australian industry are like a John Cleese training film on how not to run your business and manage your brand.

However, I’d like to make a couple of observations that apply to the UK industry too. Here are some lessons that the Hayne Inquiry can teach us over here.

Lesson one: We need more effective oversight

The Hayne Inquiry noted that much of the behaviour outlined in the report “was already contrary to law”. That is, it was already illegal, but not enforced.

Yet when it was uncovered by regulators the most common response was to get an apology and what’s known as an enforceable undertaking; which basically means someone from the regulator will come and check that you’ve made any changes that were agreed.

Hardly intimidating stuff if you’re a large public company.

It feels to me that a similar environment exists in the UK. Small firms feel completely intimidated by regulation, while large organisations appear to feel totally immune to its reach.

Whenever there is a wrongdoing exposed in a large organisation, the worst that happens is a slap on the wrist and a fine. The fine may be large and headline grabbing, but it’s a drop in the ocean for the businesses concerned. When you make £1BN every quarter, a £50M fine is a joke. No executives or directors ever seem to be suitably punished personally for poor behaviour.

My understanding is there are stronger remedies available, but they don’t seem to be used.

As Martin Bamford highlighted in a recent article for Financial Planning Today, ‘Bamford: FSCS is a giant regulatory train wreck’, even in the smaller-firm space, the burden of regulation falls squarely on the shoulders of the surviving ‘good’ businesses.

“The FSCS budget for 2018/19 presents a £519 million levy for the year ahead. More than half a billion pounds is being spent compensating the customers of failed regulated firms. This is broadly equivalent to the budget for the Financial Conduct Authority. On what planet does anyone believe it is acceptable to spend the same on compensation costs as we spend on regulation?

Compensation costs of this magnitude are indicative of failed retail financial services regulation. They are a black mark on the performance of the FCA each year and send a very clear message that consumers are not safe when it comes to dealing with regulated financial services providers and advisers.”  

Lesson two: Doing things right, pays off

I’m not naive. Many of the individuals involved in the poor practices, that we all know of and constantly highlight, get rich off the back of it. One in a thousand gets caught and suitably punished. With those odds, why wouldn’t you just join the club and stop moaning?

I can think of plenty of reasons, and I know readers of this article are in the ‘try-to-do-it-right’ camp.

When you choose to run a business that does the right thing by its customers life is a lot simpler:

  • You don’t have sleepless nights.
  • There’s no risk of going to prison – although it seems the less virtuous hardly have to fear that either.
  • You actually help people, which feels great.
  • You can still make loads of money as personal income, and on the sale of your business; it just takes longer.
  • When you do decide to sell your business, it will sell quickly and easily for a premium. When the buyer does their due diligence they’ll find nothing; not a thing, to chip away at your price.
  • After you leave the profession, you can spend the next 30 years of your retired life in your community as a revered local businessperson. You won’t have to hide from your former clients.
  • You might be invited onto boards of other great businesses that want to do good by focusing on their customers first.

Keep up the good work

I just wanted to get my thoughts out there on this subject, if only as a nice reminder to the great and the good that you’re on the right path. I don’t mean in some moralising sense, I just mean in terms of building something great that you can be proud of.

Don’t let the naysayers and the shortcut-takers distract you from your goal. Stay focused, and know that there are loads of other good advisers out there doing it right. They’re building a positive impression of our profession.

Stick to your task.

Let me know how you go.

Further reading

Note: Both these articles need a subscription to the Financial Times to read.

Australia’s bank inquiry criticised as a ‘damp squib’

Australian inquiry into banking faults greed and lax regulation

Small firms feel completely intimidated by regulation, while large organisations appear to feel totally immune to its reach.

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ABOUT BRETT DAVIDSON When you work with FP Advance you work with me, Brett Davidson, directly. My motto is ‘advise better, live better’ and I practice what I preach. I’m straight talking and get to the heart of an issue quickly. There’s no beating about the bush, just a focus on helping things improve. Ask my clients – what I teach works.