It is with some trepidation that I start this week’s blog with mention of politics and the forthcoming UK general election. Readers may feel they have more than sufficient exposure to these at the moment. I do however consider that it is an opportune time to reflect on what the global financial markets have experienced during the current parliament, and to remind ourselves of a few facts.
Firstly, conspicuous by its absence over the last three weeks has been talk of abolishing the UK Financial Services Authority. A muse which one political party was reportedly contemplating in 2009, but has been eerily silent on during its political campaigning during April. I had occasion this week to respond to an intermediary who bemoaned the work of the regulator. I cited several tangible improvements which the UK Financial Services sector has seen over the last 13 years, but had to concede that the improvements/cost ratio appears very inefficient. I also asserted that no amount of UK regulatory intervention could have prevented the near collapse of the UK banking sector, and the consequent damage to global investment confidence.
With the attention the Retail Distribution Review has been getting in the UK investment mediation market since 2009. Particularly the focus on raised professionalism, and the requirements to meet and continue to evidence higher levels of professional competence, I began to reflect on whether we’re being too parochial here in the UK.
On the positive side, the new suite of Diploma Examinations emerging this summer, in response to the Retail Distribution Review, do much more to educate the investment adviser about the causes of investment instability. They focus on global factors which influence the performance of UK consumers’ investment portfolios, and in turn, these equip the adviser to do whatever is possible to explain the risks to private investors. We even have a new compulsory paper to examine the theory and practice of Ethics in UK Financial Services. All of this is good for UK investors and savers, who can be confident that when transacting, their investment adviser will educate them about the effect or potential effect on their life savings of macro influences. The 21st century has brought to the average UK investor new financial complexities, practices and risks which he / she probably never previously contemplated, and almost certainly didn’t feature in his / her decision to place his savings in, for example, Northern Rock.
So it struck me that the Retail Distribution Review is about transparency to the UK consumer about what the investment adviser knows about. It is a series of measures which help the consumer to think about the effects of global influences on the security of his savings, about the ethics which the intermediary adopts. This is good, but is it enough? What thought is being directed at mitigation of the causes of global financial instability? What is feasible in terms of intercontinental regulation that would stimulate consumer investment confidence on a global scale, and what are the potential implications in terms of education and training?
The US Financial Regulation Bill is progressing through the US Congress, and in the EU, ministers are optimistic that this transatlantic financial overhaul will converge with calls for more regulation. This time though with more focus on measures to fix the failures that led to the 2008 banking and credit crisis which continue to stifle the UK economy today.
The US Bill proposes to ban banks from risky trading on their own behalf, forcing European banks to change the way they operate in the US. Furthermore, the Bill proposes to govern previously unregulated derivatives blamed for spreading the troubles. I would wager that many UK investment advisers wouldn’t routinely have made investors aware that they weren’t regulated in the US, and news of this would come as a surprise to most consumers, and to many advisers.
So, in Europe, Ministers are keeping a close eye on US moves. What the US decides could affect moves in Europe, where efforts to regulate derivatives trading is already underway. Although the US is ahead of the EU currently, the EU Financial Services Commissioner, Michel Barnier, announced last month that he wanted Europe to catch up by summer, with the EU commission presenting plans as early as June.
In my next blog I'll explore more on this topic and how we may need to look at training and qualifications that address the macro causes as well as the micro ones.
Mark Ehlinger - 29th April 2010