27th February 2012
We've been discussing it at MM, in the light of the apparent impasse between the regulator and the industry.
Tracey McDermott FSA's acting enforcement head is apparently convinced that the loss of confidence evident in financial services is nothing to do with the failure of regulation and is entirely the fault of independent financial advisors.
As a result, the FSA (and its successor the Financial Conduct Authority (FCA)) would be:
"pre-emptive, bold and tough" in its quest to achieve better outcomes for consumers and markets.
When she added that:
Also by ensuring that the regulator is, and is seen to be, taking action to protect consumers or the markets – by doing whatever it takes to change behaviour in the industry – even where that means making unpopular and risky decisions."
I would have been really impressed, after all, she's talking about changing behaviour, my subject (psychology = the science of behaviour).
Except for a few niggles; listed below, followed by my solution to this situation – a manifesto for real change.
1. Are IFAs really the culprits?
I've mentioned before the penchant "own-product-only sales" have for mis-sales, with my own true story about a 74 year old for whom this IFA did the right thing when a regulator approved bank would have mis-sold. I've mentioned the regulator approved Barlow Clowes affair.
If Ms McDermott wants to trade specific horror stories I'm sure the IFAs of the country can match her fairly easily. I'm happy to give her half a dozen or so others to make her hair curl if she wants to ask.
Of course, for real, mass horror (as a parallel, think financial genocide as distinct from crime of passion financial murder), we can look at the IPP scandal, the pension transfer scandal, the low-cost endowment sales scandal, the pensions mis-selling scandal etc. These are all the results of regulated products, mainly from mass market and regulated companies (not IFAs) and usually (as with endowments and transfers) based on regulator approved or provided growth rates. That's little to do with IFAs, but everything to do with repeated failures of the regulator to see the consequence of their own actions.
2. Do they really appreciate how human behaviour works?
If Ms McDermott wants to influence behaviour, she could to talk to somebody who understands it. Repeatedly, regulators have set rules for the future, based on the past, and on a total ignorance of what governs human behaviour.
Probably if she does seek advice at all, she will go to unqualified people. As her colleagues and predecessors did in asking economists such as Layard and Thaler to devise policy on psychological concepts such as happiness and consumer behaviour respectively, instead of asking actual experts such as Seligman or the marketing psychologists who devise the "nudges" that make people buy from Tesco!
3. Do they understand the difference between risk & uncertainty?
If she's going to make tough decisions, she has to understand that they aren't risk. By definition (at least in insurance), risk is definable, you can put probabilities to it, as with a casino gamble or an actuarial table. What she is talking about is uncertainty, you can't put probabilities to the potential outcomes (you don't even know what they are) and you can't evaluate each outcome in terms of general utility. It would probably be handy if she took a course in mathematics, focussing on statistics, chaos theory, non-linear dynamics and fractals. Or she could ask the experts.
4. Can't we stop the scapegoating of IFAs and accept that its more complex than that?
The IFA view is, of course, rather different.
They haven't really helped themselves by immediately branding Ms McDermott as an unqualified player of the blame game and a defender of regulator incompetence who has gone on the attack because she has no valid defence.
They're probably right (I have no idea what qualifications she has, but she's certainly not accepted any regulator responsibility and gone on the attack on IFAs). But it isn't going to do them any good – Ms McDermott isn't going to listen.
If she listened, she'd have to admit to being at least partly at fault, and to her (as to the IFAs) that admission is not acceptable behaviour.
A Mindful IFA Manifesto
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