The investment industry must stop being over-reliant on regulators and solve their own problems in order to make investors less risk averse and boost economic growth, the financial watchdog has said.
Speaking in an interview with City AM, Simon Walls, interim executive director of markets at the Financial Conduct Authority (FCA), argued that despite the regulator actively trimming red tape, the UK industry is still stuck in a “codependent relationship” with the watchdog.
He said: “It’s a bit like a codependent relationship basically, where they have come to expect, but ask for and want the regulator to make the decisions.”
Walls noted the FCA’s attempt to the UK’s attempt to move away from European-mandated format for describing funds that “everyone hated”, by telling firms they need to describe fees, past performance and approach to risk buy can describe the product their own way.
But the regulator was met with calls saying it was “too much latitude” asking the regulator to “prescribe the page number”.
He said: “We’ve got to break this cycle, if you want a more buccaneering market, then stop asking us to prescribe things… We need to step away from this.”
Risk taking fears and speculative assets
Analysts and other industry figures have noted that over-regulation halts risk-taking and instead fosters a sense of aversion, through higher compliance costs and asset managers choosing low-risk products for consumers.
He said: “People aren’t investing enough in the UK… first and foremost that’s bad for the individuals but it can also be bad for the economy, because that’s a source of potential capital that’s not being invested in the UK.
The government and the industry are rolling out a campaign to encourage investing, with Walls noting society needs to not get too “twitchy” when markets are down and immediately run to the regulator.
He said: “Of course the downs are unfortunate, but they’re utterly an inherent part. If we can’t get the culture right…when these things happen, then we won’t be able to invest for the long term.
“This is the heart of it, a fear in some way that investing isn’t safe, and almost just in our culture, that if you lose money investing you are gambling rather than doing something prudent.
“That has to change, but you can also see at the margin, people going into much more speculative products.”
Younger investors are increasingly favouring bitcoin over entering the stock market, drawn to the idea that it will lead to short-term gains, which Walls called “a shame” in the face of the FTSE offering steady returns and investment trusts offering access to unlisted companies such as Space X.
While the FCA no longer has a mandate over financial education, it is “really keen to fix it”, as just nine per cent of the country receive financial advice, with Walls noting the incoming ‘Targeted Support’ scheme which allows firms to provide tailored advice to individuals.
Investment trust challenges
Walls is firmly focused on retail behaviour but he is also keeping his sights set on institutional responsibility, arguing that investment trusts must stop relying on the FCA to fix its problems and use tools that are available under company law.
His words come after Edinburgh Worldwide Investment Trust put forward a 100 per cent tender offer to its shareholders in a bid to end its stalemate with Saba Capital.
It caused a number of investment companies to call on the regulator to do more, arguing the current framework allows minority shareholders to “repeatedly attack investment trusts”.
Investment trust boards are able to go to court under the Companies act if a shareholder is being abusive or harassing companies with constant votes.
Walls said there was “a lot” of special pleading, referring to the practice of firms asking for rules to protect them from activist investors.
“The special pleading doesn’t necessarily put shareholders’ interests at heart,” he said.
Despite the watchdog’s pleading for industry figures to step out from under the shadow of regulation, just this week the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services called for a royal commission into UK financial conduct regulation, arguing that a fundamental review is needed to address persistent failures.
It also argued against relaxing regulation in pursuit of economic growth, fearing it would put consumer protection at risk.
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