50 years of regulation

50 years on from when Money Management started publication, it is difficult to appreciate how different the financial services market was in the 1960s compared to what it is today. The various sectors of the industry ploughed their own furrows and regulation tended to reflect that fact.

Look for a single piece of financial services legislation pre-1986 and you will be disappointed. Banks did not need to be licensed until the Banking Act of 1979, insurance companies did not need prior authorisation until the Companies Act 1967 - prompted by the collapse of Fire Auto & Marine. IFAs, as we know them today, did not exist.

The trigger for regulatory change was often the latest scandal and so it remains today.

It was the problem of share pushing and hawking that led to the first piece of investment business regulation, the Prevention of Fraud (Investments) Act 1939 (PFI). This introduced a system of licensing although with numerous exemptions.

With some tinkering in 1958 the PFI effectively remained the main investment business legislation until the 80s. True, there were also some voluntary industry codes in existence, but coverage seems to have been patchy and enforcement little in evidence.

Financial services cease to be parochial

The late 1970s and the 1980s were a period of rapid and radical change in financial services.

In 1971 competition was introduced to banking and credit controls were loosened, exchange control restrictions were lifted in 1979, building societies were deregulated, the Big Bang happened for the London Stock Exchange, IT started to revolutionise processes and finance started to go global.

It was not just in the world of finance that the Government was making changes. Restrictions on property development were lifted and in the pensions area the ability to opt out of, or transfer from, occupational pension schemes was introduced.

In all these changes can be seen the seeds of many of the later problems to have dogged the financial services sector – the reviews of pension transfers and opt outs and mortgage endowments.

Regulation arrives

Regulation lagged behind the changes in the financial services sector. The landmark of the 80s in changing regulation was the work of Professor Jim Gower, whose discussion paper was published by the Government in 1982 and then followed by his report, ‘Review of investor protection,’ in 1984.

A White Paper in 1985 set out the Government’s proposals to implement some but not all of Gower’s recommendations. It was anticipated that the City would be subject to two regulators, the Securities and Investments Board (SIB) and the Marketing of Investments Board (MIB).

In fact, a strong industry voice emerged in favour of a single regulator to avoid many firms having to be subject to two regulators and the Government bowed to this view; the single regulator was to be the SIB.

Action followed with the Financial Services Act 1986 (1986 Act) and the scene was set for the regulation of financial services as it is familiar to us today.

In advance of the 1986 act, however, the Government had made a small start in shedding itself of front line responsibility for regulating financial services. Membership of the National Association of Securities Dealers and Investment Managers (NASDIM) was recognised by the Government from the end of 1983 as an alternative to the need for a firm to be licensed under the PFI.