Capitalism means good businesses thrive and poor ones fail. Though this can be chaotic, there is a natural ebb and flow.
Regulation should be there to promote competition, and as a backbone to keep good companies upright, but not to support unsustainable businesses. Take what is happening in the energy market at the moment.
On one hand you could look at the demise of smaller energy companies as a wholesale failure of attempts to spark competition.
On the other, many of these businesses were tinpot organisations with poor business models that could not cope with market turmoil. Regulation allowed the energy supply industry to develop, but it was capitalism that killed these businesses too.
Consumers were protected, the market will resettle and we will carry on.
In a way the same thing happened in retail banking in 2007: good banks survived and bad ones failed or were taken over (although in one instance in particular a bad bank survived only thanks to the taxpayer). Regulation allowed the mortgage industry to thrive, but it was competition itself which effectively created the environment that killed off many lenders.
The first that took too many risks were the ones that went to the wall.
But again, consumer deposits were protected and so the market moves on.
Which brings us to the financial advice market. We don’t have a clear picture of what has happened to the number of businesses since the pandemic, but the last available picture showed the number of companies registered is falling.
In particular the number of businesses classing themselves as independent was dropping steadily.
And what we have seen is that a number of businesses are dropping out of giving advice altogether, or of giving some kinds of advice, particularly pension transfers.
Is this a market functioning in a capitalist way – were there too many businesses and within that many bad businesses operating – or is there something more afoot?
It is probably both. The market does seem to be weeding out unprofitable firms, and tighter regulation on pension transfers has certainly stopped those that either solely relied on contingent charging or who were less than scrupulous in their advice.
But in the hope of stopping consumers from losing money when businesses fail it has also meant that excessive regulation is stifling the market, putting some companies out of business, which in turn is destroying consumer choice.
Regulation is not allowing competition, but in fact killing it – and that is not an effective way for any capitalist marketplace to work.
I think that the Financial Services Compensation Scheme works as a very effective safety net for consumers, and certainly the scourge of phoenix companies has allowed some utterly unscrupulous business owners to simply start again.
But the way it is funded is certainly questionable. While the scandal of defined benefit pension transfers was largely the responsibility of rogue advisers, many large life insurers were also beneficiaries of huge amounts of funds.
These insurers may at least have given a safe place to the money, but they have profited and participated in the misery that has been heaped on the consumers.
So what is the regulator doing about that? Is it asking proper questions about the due diligence that was done when insurers accepted transfers through advisers that were clearly unscrupulous?
And why aren’t insurers on the hook for the liabilities for consumers who were the victim of failed firms?
Poor regulation is killing good independent advice, meaning that good businesses are dying out with bad ones. That’s not capitalism, it is market failure.
Equity release popularity rising
I think 2021 will be the year that equity release hits the mainstream as a core part of financial planning.
The pandemic, the focus on social care reform, and sharply rising house prices have focused the minds of wealthier households who, able to live longer, now want to do something productive with their home.
Equity release has moved on from being a product for the cash poor or those facing sudden large bills, to families who want to tax plan and pass on inheritance.
But that means an increased focus on the morality of this, and it will get even greater attention from regulators and the Treasury.
Social media boasting
The fuel crisis will not have stopped financial advisers from going about their business – at least based on the evidence on Twitter.
Sometimes it seems like almost every financial planner on there is boasting about his new Tesla and/or the expensive road bike they have just acquired.
There may be a shortage of petrol, but there is plenty of smugness to go around.
James Coney is money editor of the Times and Sunday Times
