22nd August 2012

More Red Tape

I probably won’t get many people on this site disagreeing when I ask what purpose the Regulator fulfils?  This is not meant to be a facetious question, but let us start with what I think is fairly self-evident. 

No Regulator will ever achieve 100% success and our own Regulator has fallen well short.  Perhaps the first objective of the Regulator should be “Do no harm”.  The second would be to engender mutual respect between those who are being regulated and the Regulator. Neither of which our Regulator has shown to be conspicuously successful. 

It is all very well contemplating our own navels, but we now get to the situation where Financial Services Regulation in general is having a deleterious effect within the wider world.  Within two days on the 16^thand 17^th August there were two pieces of news that may have escaped people’s notice.  The first was a very sad indication of pig headed bureaucracy. Dawson International has fallen into administration after the Group failed to fill a hole in its Pension Fund.  This is a 140 year old company who originally had the Pringle brand and is one of the leading Cashmere producers in Europe, based in Scotland.  They wanted to do a deal with the Pension Protection Fund but all offers were rejected out of hand which forced the firm into liquidation and 180 people onto the dole. The PPF now has the whole thing on its hands anyway.  What a great result for regulation!

Those who know anything about me will know that  for many years have maintained that  a company should not  be a benefit agency, a company’s main task is to provide a return for its shareholders whilst at the same time providing employment, a reasonable working environment and a market competitive salary rate.  We have all seen what happens when firms confuse their role and we have had benefit agencies masquerading as car produces, airlines, industrial equipment providers and so on.  This latest merely illustrates the point in a sad addition to this roll. 

The following day we hear of entrepreneurs having the rug pulled from under them.  In the developing countries micro finance is a big business and helps start-up firms to achieve their startling growth rates, entrepreneurial spirit and produces burgeoning new companies.  In this country we have the FSA trying to do their best to stop it.  Micro finance here  often comes under the heading of ‘Crowd Financing’ where websites are formed  to allow small business to raise finance from the public. This invariably consists of small investors putting up small amounts (typically £50 or a couple of hundred).  The hero’s at the FSA are now stepping in saying that they don’t like this at all because there are all sorts of risks.  Of course there are risks!  That is what investing and entrepreneurship is all about. You can’t have a vibrant economy without risk. That’s why we are in such a parlous state – our regulators are trying to wring out every last vestige of risk.  Our Regulator is so obsessed with people not taking risks and this  is undoubtedly something that is holding back UK recovery.  We cannot have a burgeoning economy without taking risks and if investors have to play their part, that’s all to the good.  Yes there are certain aspects to Crowd Funding that might not be everyone’s cup of tea, but does it need the FSA stepping in to stop people putting in a few hundred quid to help some small firm get on its feet - even if some of these are going to fail?  A jolly sight better than having to fund the cost of all these bureaucrats that actually add nothing to the productivity of the UK I would have thought.

Harry Katz

Norwest Consultants

Regulation, Adviser Letter of the Week