The ostrich myth stems from the writings of Pliny the Elder, the Roman author and natural philosopher who lived between 23 AD and 79 AD. Evidence of retail intermediaries’ lack of engagement with regulatory change comes from a survey carried out by law firm DLA Piper and accountancy group BDO between June and July this year.
The so-called twin peaks regulatory system will be implemented in early 2013, while a number of other important changes are lined up over the coming months and years. But intermediaries’ “lethargic response” to the moves seems worrying and suggests the industry needs to make preparing for regulatory change a higher priority.
Intermediaries less engaged
The New Twin Peaks Model study found intermediaries are less concerned about the impact of the new Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) on their activities than retail banks, investment banks, insurers and asset managers.
BDO head of asset management Michelle Carroll pointed out that the concerns highlighted by intermediaries – such as the FCA’s ability to make enforcement actions public at an earlier stage, increased competition powers and greater product intervention powers – are appropriate for firms primarily dealing with retail clients.
However, she is concerned by the low number of intermediaries expressing these concerns – each of the three factors above were cited by 84% of respondents as medium or high worries. Within other financial services sectors, leading concerns were mentioned by more than 90% of participating firms.
“This gives rise to the concern that firms are in this sector are less engaged or possibly unaware of the significance of the challenges that await them,” DLA Piper and BDO’s report concluded.
Advisers unconcerned by most changes?
The wide-reaching changes that twin peaks regulation will bring will affect every business in the financial services industry. Preparing for these changes should be one of the pressing concerns of intermediaries, but the survey’s findings suggest most of the industry is worryingly unconcerned.
Taking a closer look at the results backs up Carroll’s argument of a “lethargic response” by advisers. For example, 38% said the FCA’s early publication of enforcement actions is a high concern for them, with 46% labelling it a medium concern and 12% giving it a low rating.
We would expect the number labelling this a high concern to be greater. More banks, insurers and fund managers were significantly concerned by the impact this would have on their business and, unlike intermediaries, they don’t even believe it will be the largest factor to affect them. In reality, all firms could be subject to damage from early publicity of enforcement proceedings that later turn out to be unfounded and more advisers should recognise this as a risk.
Although DLA Piper and BDO’s survey concentrated on preparation, or lack thereof, for twin peaks regulation, it also looked at efforts being made ahead of other important regulation changes. Again, this threw up some unsettling findings with regards to intermediaries.
Only 12% of intermediaries expect RDR to have a very significant impact on their workloads. That seems like a gross underestimation of the shake-up. Furthermore, and more surprisingly, 11% think RDR will have no impact whatsoever on their workload.
Foreign regulations also appear to be overlooked. Some 23% of advisers said Fatca will not lead to any increase in their workloads, while just 1% expect a very significant rise and 16% a significant rise. However, the regulation could mean they have to check every client to see if they fall under its remit.
Waking up from regulatory fatigue
The most likely reason for the lack of engagement, according to Carroll, is "regulatory fatigue". The sheer amount of new regulations, persistent changes to their specific rules, delays to their implementation and a lack of clarity over what needs to be done now in anticipation is pushing advisers into inertia.
That intermediaries, along with the rest of the financial services industry, face an overwhelming amount of regulation is beyond doubt. If they fail to prepare for these in a timely fashion, the consequences for firms could be massive.
I hope that DLA Piper and BDO’s survey has failed to capture the subtleties of what is happening on the ground. Given the amount of regulatory change hanging over them, it could be that advisers are simply dealing with the most pressing first before moving onto the others.
Maybe the reason RDR is not seen as having a great impact on workloads, for example, is that the bulk of the work has already been done. Fatca might be a bit too far off to be firmly on advisers’ radar with the noise being thrown up from all the other regulatory demands.
But taking this hope as given would be akin to sticking my head in the sand. The findings of the survey do suggest a lack of engagement and concern across the board, rather than some areas being prioritised more than others.
Getting ready for the new regulatory landscape will not be easy but acting like the proverbial ostrich is no solution. It’s time to pull heads out of the sand and start moving, despite the fatigue.
