There is no bigger threat to financial adviser firms than regulatory change. The recent cage rattling by the Financial Conduct Authority (FCA) in the defined benefit transfer market might prove significant or it might not, but it is just the latest in a whole stream of regulatory changes across the industry.
Sure, regulation of financial services has always been more hands-on than in other sectors, but the sheer pace of change has accelerated in recent years. Why? I can think of three reasons.
The first is fiscal. The sheer cost to the public purse of pensions is big and growing. Across the developed world, pensions is often the single biggest ticket item of public expenditure.
In the UK, the combination of state pension, unfunded public sector occupational pensions and tax relief on workplace and personal pensions costs £1 in every £10 created by economic activity (GDP). Pensions cost more than anything else – even the NHS.
Furthermore, the cost of pensions is only going to grow with an ageing population. The ratio of those in retirement to those in work is expected to rise steadily over the next half century. There will be fewer taxpayers to support more retirees.
No wonder the government is persistently seeking to reduce entitlements (move to flat rate state pension), limit eligibility (raise state pension age), increase taxes (cuts to pensions reliefs) and up contributions (reducing the discount rate applied to unfunded public sector pension liabilities).
You can expect these moves to continue given the demographic context and the need to redirect spending to the NHS and social care.
Impressing the boss
The second explanation is incentives-related.
Charlie Munger, Warren Buffett’s right-hand man, is fond of saying one can explain (nearly) everything by incentives.
Politics is a profession – if a peculiar one – and many politicians want to rise as far and as fast as possible. This means making a name for yourself. Making a name for yourself demands impressing the boss.
But there is nothing so bureaucratic as the annual line manager review in politics. Politicians are in many ways self-employed single traders, with no line management between themselves and the chief executive. Getting the boss’s attention means making a noise. That demands TV exposure.
But getting airtime depends on saying something controversial or novel. In short, the incentive structure encourages “something must be done, and here is something” behaviour. This is before you even consider the incentives created by a four/five year electoral cycle.
Blaming the regulator for regulatory change is rife – shoot the messenger – but is in fact a trap.
Regulatory change in the end is a product of decisions made by Government and by Parliament. Blaming the regulator for regulatory change is rife – shoot the messenger – but is in fact a trap; or at least, a diversion.
On the big issues at least, the FCA and associated institutions act with limited autonomy.
Just remember what happened to the previous FCA chief executive Martin Wheatley: his boss, the Chancellor of the day George Osborne, summarily removed him because Wheatley would not do his bidding (Osborne considered Wheatley not sympathetic enough to UK financial services institutions).
In this case, the political pressure was direct.
But political pressure on regulators is also indirect. The FCA’s new interest in possibly banning contingent charging reflects a rising political temperature around defined benefit to defined contribution transfers.
Contingent charging is not a practice which has just been discovered. It has been much talked about.
Comparisons with the kind of commission-based charging banned by the Retail Distribution Review are not hard to make. But contingent charging has until now been hidden in the broad daylight of Parliament’s ongoing support for pensions freedoms.
Strong backing from the Government (authors of the policy), and ambivalence from the Opposition (instinctively sceptical but leery of yet another overhaul) rendered Parliament inert on the issue. As Parliament stirs in response to the Tata steelworkers case in particular, so does the regulator.
Weight of numbers
A third explanation is the sheer growth in the number of people working in financial services regulation.
The UK regulatory head count currently sits at around 3,500. As Bank of England chief economist Andy Haldane notes, this is a huge 40 times more than 40 years ago. In 1980, there was one UK regulator for roughly every 11,000 people employed in the UK financial sector.
Now the figure is roughly one regulator for every 300 people employed in finance. Thus the recipe for regulatory churn: take a big dollop of fiscal pressure, mix with politicians’ incentives and add an army of financial regulators.
A version of this article appeared in Money Marketing on Tuesday 10th April 2018.