The first time I approached an investment advisory firm was when I wanted assistance with shares recently inherited from my father.
I was informed — very politely — that they couldn’t help as the £80,000 portfolio was too small, even though it totalled around four times the average UK household financial wealth at the time.
That was 25 years ago, when the industry was often seen as patronising, secretive and lacking transparency, especially when it came to preparing the bills.
You might think that not much has changed, given that those criticisms are still widely levelled at financial services companies. And, on an even more serious note, there seems to be no end to the scandals that blacken the industry’s name, such as the 2019 collapse of Neil Woodford’s £3.1bn Woodford Equity Income Fund, when more than 300,000 investors lost money.
The Financial Conduct Authority this week launched its latest attempt to improve standards, with plans for a new principle of “consumer duty” that would, it said, “set higher expectations for the standard of care that firms provide to consumers”.
The regulator declared roundly: “For many firms, this would require a significant shift in culture and behaviour, where they consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.”
Note the “many firms”. Seldom is the FCA so sweeping in its criticisms. This is not about picking a few bad apples out of the barrel. It’s about sorting through the whole crop.
But, in truth, over the past 25 years since my unsuccessful attempt to engage an adviser, investment services have become widely available to more people than ever before, procedures have become more transparent and costs have generally dropped.
Financial services firms have knuckled down to overhaul themselves in the face of regulatory pressure, digitalisation and competition.
Change has coincided with a revolutionary shift in the retail savings market, as the corporate pensions system switched from defined benefit to defined contribution. People are obliged to take responsibility for their savings whether they want to or not — and offered new tools to manage their financial lives.
And savers have jumped at the chance, not least during the pandemic, when many people had more time to spend in front of their screens, following the thrills and spills of ultra-lively markets, not least meme stocks and crypto.
Clearly, fraudsters need to feel the full force of the law. And companies that indulge in behaviour which falls short of the criminal but still breaks FCA rules need to be punished. The mis-selling of payment protection insurance (PPI) for years by high street banks is a case in point. If you can’t trust the likes of Lloyds, Barclays and HSBC to treat customers fairly, who can you trust?
Controlling such behaviour is a subtle art. If we believe in the benefit of markets — in offering choice, stimulating competition, and permitting commercial success and failure — then finance needs to be flexible, and to have flexible supervision.
The retail sector is very wide in terms of risk tolerance, especially now with the expansion of day trading. With greater freedom of action comes an increased risk of financial accidents and even disasters. Nobody can be sure that newly liberated investors will act in their own best interests.
The key is whether the customers really understand the risks. There are plenty of disreputable financial companies taking advantage of deregulation, globalisation and growth. The FCA needs to be vigilant, as it has been, for example, in monitoring the explosive expansion of crypto.
It has rightly warned investors about the risks and it has gone out on a limb in banning the sale of crypto derivatives in the UK. With its international counterparts it may, in time, develop a less restrictive approach. But in this instance it can’t be accused of sitting on its hands.
Similarly, it has correctly come out in favour of regulating “buy now pay later” finance, where companies have got around credit rules by claiming they do not provide credit. They may be right in law, but this is often lending in all but name.
However, the responsibility to raise standards does not rest with the regulator alone. Financial services companies have a huge role to play, given their vast resources of staff, skills and capital.
As investors seek new products and new markets, companies face challenges. If they stick to traditional approaches they risk losing business as clients switch to new providers, as with crypto. But if they facilitate their customers’ rush towards the new horizons they run the danger of encouraging excessive risk-taking and perhaps infringing regulatory codes.
Companies are working hard to maintain the right balance. An example is AJ Bell, the Manchester-based retail investment platform, which has this month announced its plans for Dodl, a stripped-down zero-commission trading app, to be launched early next year.
It is aimed at bringing in a younger crowd, some from fast-growing free trading apps such as Freetrade and others from high street banks, where customers’ deposits languish at near-zero interest rates.
It won’t offer the chance to buy the full stock market. Instead, investors will initially be offered a streamlined selection of 50 UK shares and 30 funds, with some big US stocks brought on board later. Also, clients will be able to trade only once a day. As well as limiting AJ Bell’s costs, this approach could guide customers into trading a sensible range of mainstream stocks.
Dodl will tread a fine line between meeting the wishes of the new breed of active investor and protecting them from excessive risk. It may not work — the thrill-seekers may stick with the likes of Freetrade, while the cautious may stay where they are.
But it’s a worthwhile move both from the point of view of business and the need to shape responsible investing.
There are many such examples. And it’s not naive to think there will be more. The biggest threat to companies that break the rules is not regulatory sanction but damage to their reputation. This can wipe out a business overnight and rightly so.
Just look at Woodford, the star investment manager laid low by his fund’s failure. Others involved in the affair are now watching nervously as the FCA grinds slowly through the official inquiry into the affair.
It’s taking far too long. Having started in June 2019, the probe has already lasted two and a half years — and the FCA refuses to give any sign as to when it might finish the job.
Justice delayed is justice denied, especially for older Woodford investors who may literally never live to see the wrongdoers exposed and punished. The FCA codes are all about companies putting the right information in the right way before their clients. It should be doing the same itself right now.