Money is a human honey pot and to it are drawn the incompetent, the dishonest, the optimistic and the gullible." So began an article in last Saturday's Times by the chairman of the British Securities and Investment Board, Sir Andrew Large. Ironically, the headline over his opinion piece read: `Tailor rules to reward the good and punish the bad'.
In this case, the `Tailor' of the piece was not a person, but an opportunity which Sir Andrew sees emerging in Britain to amend the current regulations of their investment industry to better suit "not just the nature of the investor, whether professional or consumer, but the performance of particular firms." He argues that good companies - i.e. those that have consistently met the standards of training, competency, internal and external audits and compliance imposed by the regulatory agencies should not "be subject to the same level of supervision as less well-managed competitors. That is why regulators are now exploring ways of introducing differential approaches to supervision, such as monitoring."
Reading Sir Andrew's well considered analysis of the current regulatory climate in Britain, where `fine-tuning' has become a pressing issue, only highlights the shortcomings of the regulatory system here, where the statutory bodies with ultimate responsibility - the Department of Enterprise and Employment and the Central Bank have passed the responsibility for training and good financial practices and compliance to the trade associations which represent the intermediaries and companies that design and sell investment products.
The system is one that was inherited from Britain - and finally jettisoned by them a decade ago when one financial scandal after another (Barlow Clowes being the more infamous) threw the credibility of the investment industry into dissaray and shattered consumer confidence. The independent, statutory regulators that were set up in the place of the self-regulators went through a difficult weening period - "When the SIB started there were a plethora of regulators and not much experience of regulating," writes Sir Andrew. "It was perhaps inevitable that relationships between the regulators themselves and between the regulators and the industry were difficult to establish other than on the basis of prescriptive rules."
Today, "the number of front-line regulators has been reduced and their objectives and plans have been articulated in a more business-like manner. The SIB lays down broad principles and standards, such as the work we have recently done on custody, safekeeping and administration of assets. The front-line regulators then translate these into rules for their member firms. This two-stage process enables our standards and principles to be applied in a way that meets the realities of their sector."
Family Money has been arguing for a number of years, in this column and at public meetings for the need for a statutory regulator, like a Securities and Investment Board and/or a Personal Investment Agency (PIA) to oversee the regulation and compliance of life assurance and investment companies and private intermediaries. Regulation here should be introduced in association with the trade bodies already in place - the Irish Insurance Federation and the IICB (the Insurance Intermediary Compliance Bureau), the Irish Brokers' Association, the Insurance Ombudsman, the Ombudsman for the Financial Institutions and of course, the Pensions Board.
Statutory regulators like the Pensions Board already operate with great efficiency and are self-funded by fees from pension schemes. Set up just five years ago, it has gone a considerable way in setting high standards of design and compliance, especially in the funding and administration of occupational pension schemes. Over 120 companies were successfully investigated for alleged non-compliance under the Pension Act last year; not a single one had to be brought to Court for further action.
Coincidentally, the Pensions Board last week announced its latest weapon against malpractice and fraud in the form of a "whistle-blowing" provision in the Act which places a mandatory requirement on a range of specified persons involved in the operation of pension schemes to report suspected fraud or material misappropriation. These people include auditors, actuaries, trustees, insurance intermediaries, investment advisers and others who have been involved in assisting the trustees of a scheme.
When watchdog regulators are in place, with their statutory obligation to ensure that compliance measures are being taken seriously, the opportunities for fraud lessen; the intermediary that does not file obligatory company accounts on time or other records, for example, triggers a swift audit from the regulator. The SIB and PIA also have the authority to investigate the operation of a company against whom allegations of mismanagement or incompetence has been made. Companies and individuals can be heavily fined or in a company case, be wound up.
Sir Andrew Large: "Effective and efficient regulation is the godparent of the industry, not its enemy. A clean industry, offering high standards of professionalism, is the foundation for public confidence. Without such trust, financial markets would shrivel."
Consumer confidence has once again been shaken here by the revelations of the last weeks concerning Taylor Asset Managers. Investment brokers and companies that have operated within the codes of practice set by their trade associations and by the 1995 Intermediaries Act may very well suffer the loss of their own client's trust.
It is now in the industry's own interests to seek an authoritative regulator.
