The FSA will reluctantly have to be more robust in forcing through change, says Anthony Hilton
Richard Saunders, the chief executive of the Investment Management Association, told
a conference in London recently that the willingness of the FSA to allow the market
to reform itself, rather than to reach for its regulatory big stick, would be a key factor in the continued ability of the City of London to remain dominant as an international financial centre. No other regulator in the world was prepared to show such flexibility, he added.
He was speaking of the drive to compel fund managers to tell clients how much of what they charge in dealing commissions actually are the genuine costs of buying or selling shares, and how much of those costs might equally be considered attributable to the fund manager directly as part of their business costs.
Forcing transparency into this area will, in fact, also force the investment management industry to move towards a new business model. So there are obvious parallels with similar debates about whose costs are what and where should they fall which are now taking place in the insurance industry - again with similar implications for the business model.
It also helps to answer a question which has exercised those in the insurance world who would like the process of reform to move faster and who would agree with comments made by Robert Hiscox that the regulator could be more robust in driving change.
FSA chief executive John Tiner has been told publicly and privately that the reforms he wants to see in the insurance industry in areas such as contract certainty will not happen unless he uses his regulatory powers - by for example imposing excess capital requirements on the foot draggers.
But in private he has shown considerable reluctance to go down this route, though he is more robust in his public pronouncements - presumably for the reasons outlined above. The FSA wants the London markets to flourish so that is likely to be its stance until it becomes irrefutable that the industry will not act itself.
The other parallel between pension fund management and insurance is that the clients have not demanded change. Economic theory tells us that pressure from customers will force suppliers to become efficient and business will flow to those who are. However, this has not happened in the investment world because the pension fund trustees have neither the knowledge nor the incentive to demand change. The customer does not apply his power. This has also been the case in insurance.
Recent weeks have seen some notable speeches from Lloyd's chairman Lord Levene and his chief executive, Nick Prettejohn. They could barely be more blunt on the need for the industry to reform itself, to embrace technology and to deliver a step change in the levels of customer service and costs.
At the Xchanging Insure conference last autumn the audience mainly consisted of those in the thick of the drive to modernise the London market. Asked whether they thought the initiative would actually succeed, they voted by a substantial majority that they believed it would not.
So in spite of Tiner's reservations about regulation, and the desire of the FSA to maintain its light touch, ultimately it is left with no choice but to use the big stick.
This would be a great pity because it would inevitably disrupt the markets, and as a blunt instrument regulation could destroy those elements of the London culture that actually give the market its edge.
But that is the risk practitioners take if they fail to realise that this time it is serious. Fund managers and brokers have not wanted to reform, but have done so to recognise the realities of the modern world. Insurance must do the same. IT
'Anthony Hilton is city columnist for the London Evening Standard