Published by Clive Waller on 14 January 2020 in Opinion

Regulation Worries

I am increasingly concerned with the FCA’s prescriptive and detailed approach to regulating retail investment and financial planning, adding layers of cost and bureaucracy without real customer benefit. For many years, the amount and transparency of cost and charges has been a crucial issue for consumers, yet after frequent papers and consultation, it is as hard as ever to identify the total costs of a wealth management proposition, especially when it is discretionary. At the same time, regulation such as PROD increases costs and only benefits compliance consultants. There is only so much suitability that any one customer can take!

I have just written a column for Money Marketing despairing at the regulator’s view on CfL. Micromanagement is bad enough, but doing so with issues where there is little or no comprehension is reckless. If you really believe that the FCA understands the art or science of ATR measurement either by psychometric or behavioral science AND matching that to an investment portfolio, you need to take more water with it! Whether they like it or not, CfL is related to risk and is as good as impossible to measure when it comes to decumulation.

The only possible strategy is to fully annuitise, i.e. almost eliminating risk. Short of that, there are far too many variables out of one’s control.

All this brings me to ESG – an absolutely intriguing subject. Everyone, I guess, gets the environmental bit, albeit, there are the Trumps of this world who defy reality. Social is harder, and includes ethical issues that can be utterly subjective e.g. the inclusion or otherwise of pharma. Governance is arguably harder still. I doubt whether anyone envisaged a CEO of a global business being fired for having a consensual affair with an adult employee. On that basis, many might be shivering in their shoes! More normally, governance will be about corporate good behaviour. Major asset managers and investors such as pensioner trustees will not wish to be seen to support bad behaviour.

Climate change and, to a lesser degree, the me-too/equal pay issues around gender, have been drivers– and quite rightly so. Now, social media content is becoming a big issue. In another excellent FT piece, Gillian Tett points out that Aviva, HSBC, L&G, Nomura and Northern Trust have agreed to lobby the biggest social media companies about content. This follows the NZ sovereign wealth fund starting the campaign after the massacre in 2 mosques in Christchurch. The shooting was livestreamed on Facebook.

One hundred asset managers controlling $13 trillion have so far signed up. 

In her latest blog, Holly Mackay reminds us that NEST is no longer investing in tobacco. The Norwegian sovereign wealth fund is to dump investments in firms that explore for oil and gas, but will still hold stakes in firms such as BP and Shell that have renewable energy divisions.

These are example of top down changes whereby major investors are demanding good or better behaviour by companies in which they invest.

When it comes to retail investment, my number one fear is around trying to find a relatively simple and workable solution to a very complex problem. The track record of the FCA doesn’t give one much hope.

It is likely that under the already complex suitability heading, advisers will have to conduct some form of probing on the ESG views of clients. The problem, of course, is that most clients will know relatively little about ESG. That presumably will mean a requirement for some education about the subject – and that assumes that the ‘teacher’ is right. My views will be different to yours. I would not choose to invest in tobacco (although, whereas I would happily invest in booze. I regard investment in pharma as crucial, albeit, there are extraordinarily greedy firms that I wouldn’t touch. We still need some investment in oil and coal, but I would prefer companies that do so as sympathetically as possible to the environment and who are investing the maximum in alternatives.

However, none of this matters, as I largely invest in indices! As such, I invest in the good, the bad and the ugly and see little alternative. Passive managers are aware of this. Vanguard and Blackrock are cognizant of the importance of stewardship as large and long-term holders of all quoted companies.

Moreover, we will see more and more indices with some form of ESG label.

My number two fear is that many greedy firms will see ESG as an opportunity for profit and that we will see more and more greenwashing – ESG badged offers that are not what they claim to be. More nightmares for the adviser!

I see ESG as the business of government and regulators to ensure transparency and good behaviour at institutional level.  I do not see it as further need for micromanagement, something that has typified the Andrew Bailey years.

As an investor, I most certainly do not wish to be subjected to interrogation by my adviser on ESG issues. It must be a simple part of the fact find, indeed, it should be there already.

Have you noticed that compliance consultants badged the ludicrous PROD regulation as the biggest change yet from the regulator, only to say the same when SM&CR turned up. We can be sure of an encore for ESG when the FCA decides to act. Mind you, if the ‘consultation’ process takes as long as the asset management review, most of us will be retired before it come into effect!

One simple message to the new head of the FCA, whoever they might be: Don’t make life harder for over-regulated advisers and more costly for investors by adding pointless additional process to investing.

The King is Dead! Long Live the King!

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