5th February 2009

Faults and Responsibilities

They’ve wrecked the economy. They’ve tightened lending so that small businesses can’t borrow and perfectly healthy companies go to the wall. They won’t give you a mortgage. They’ve destroyed the value of your pension and doomed you to an impoverished retirement. They’ve triggered a collapse in sterling and made your annual holiday unaffordable.

And are they sorry? Apparently not. The bankers whose lack of judgement, greed, failure to control risk and gleeful pursuit of unsustainable and unjustifiable business plans brought us all into this mess don’t seem very contrite at all. In fact, just to prove that they think they were blameless, they’ve still been paying themselves huge bonuses, even as the global economy lies mortally wounded.

One of the problems with the banking crisis is that the mistakes were so widespread, and the errors of judgement so ubiquitous, that it is difficult to say exactly who was really responsible for the whole fiasco. The FSA? The mortgage banks? The investment banks? Or consumers for borrowing far more than they could afford?

Unfortunately it is independent financial advisers who had to break the news to clients that all this irresponsibility in the market has led to 30 per cent or more falls in pension funds, Isas, and retirement savings. Few clients currently have the appetite to invest in equities and so new business levels are down. Clients are frustrated, confused and bewildered – and no one has answers to the oft-asked question – when will the market recover? Yet at a time when IFAs are having to deliver a difficult message to customers, a new threat to their own business is emerging – in the form of retrospective legislation.

As if there wasn’t enough paperwork dealing with compliance and regulation issues, there is now the frightening potential for principles based regulation, in addition to the current rules based regulation to be applied retrospectively. In effect it is not the manufacturer of the product who is being held responsible for mistakes or misrepresentation – it is the seller, or in this case the adviser. No other industry operates this way.

The current move towards principle-based regulation rather than rules is a potential minefield for IFAs. If there are a set of rules in place, it is easier to defend yourself against a complaint, and equally, if those rules have been broken then the person making a complaint has a clear case to argue. But principles are in the eye of the beholder, and it is even more difficult to apply such an approach if applied retrospectively. Rules come in for criticism because “experts” argue that they are holding business back. But rules give advisers a clear roadmap with which to work, and that is good for IFAs as well as clients.

It is a critical time for the industry – the whole banking system has changed irrevocably and we will probably never see such easy credit again in our lifetime. The housing market may take years – or even decades – to recover, depending on what gloomy survey you feel inclined to believe. But people will always need to save for their future, and it is in no one’s interest for the IFA sector to collapse under the weight of unfathomable regulation and compliance administration. The FSA needs to bear this in mind when it is drawing up its new guidelines for our brave new financial world, ideally before they too are replaced by another “fit for purpose” regulator intent on reinventing the wheel.