Counting the cost of sanctions

Dennis Hall

The debate was triggered by a story in the weekend press about a father and son IFA firm. They had advised at least two sets of clients to invest a significant proportion of their investments into Arch Cru (and are now substantially out of pocket). For reasons not covered in the article, the IFA firm had subsequently gone into liquidation leaving clients dependent on the Financial Services Compensation Scheme. In the meantime the duo started a new firm. Along with my peers I do not like this and wish the regulations were sufficient to prevent this from happening.

However sanctions issued by professional bodies will not deal with the root causes of the problem, omissions in regulation and/or legislation. If existing regulation and legislation is failing to fix the problem then we should be demanding changes to regulation and legislation, not asking the professional bodies to close the barn door after the horse has bolted. Professional bodies should not be there to pick up the pieces or act as a backstop where regulation has failed. It would create more problems than it would solve.

Not least is the cost. Regulation already takes more of our hard-earned revenue than is affordable (or necessary) and I do not see any desire to pay more to the regulator or the professional bodies. But if we ask the professional bodies to take on another role we will have to pay for it. You might ask why.

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To ensure consistency of outcome the professional bodies will need rules that are consistent across all of them. You cannot have one professional body with a ‘lighter touch’ than another without creating distortion and bias. And if you have ever been involved in a professional body committee you will know how difficult it can be getting agreement and consensus from committee members, and they are generally like-minded.

But a worse problem would be trying to ban individuals who as yet have not been deemed unfit by regulators and legislators. The professional bodies would be stretched to the limit with appeals and challenges. It is not just the costs of defending any appeals, it is also the cost of compensating those who challenge and succeed. It would be difficult too to ensure absolute objectivity in reaching the outcome.

We have all experienced the unintended consequences of ‘gold-plating’ existing rules and regulations. It often leads to additional cost and bureaucracy, while inhibiting business and innovation. We must be careful what we wish for, in case we end up with it.

Dennis Hall is managing director of Yellowtail Financial Planning