Was that it? Campaigners for positive change in the investment industry have been waiting for months for details of the new Fiduciary Rule in the United States. But when the announcement finally came this week it was, well, a little underwhelming to say the least.
OK, the proposed reforms are, on the whole, good news for investors. Crucially, in future, brokers and advisers will be subject to a fiduciary standard, meaning they must act in the client’s best interests. Until now, they’ve only been required to recommend investments suitable for the client’s situation.
But look at the proposals in any detail and it’s clear that Wall Street has escaped very lightly. To quote Josh Brown, “the industry has been expecting a punch in the face that would force a dramatic overhaul of how they dealt with their customers. Instead, it’s received a love tap”.
I don’t want to go into the different ways in which the proposals have been watered down, but Wednesday’s announcement is yet another reminder of the huge power and influence exerted by Big Finance. Wall Street has spent the past year belly-aching about reform, and its objections have ranged from the farcical to the downright dishonest. And yet, by and large, it appears to have got its way.
Unfortunately, this is the nature of financial regulation the world over. We’ve seen the same sort of pressure exerted on the European Commission over MiFID II, the new directive intended to give much greater protection to consumers. As in the US, the fund industry trade bodies have not only managed to extract major concessions but also to ensure severe delays in implementation.
It’s a similar story here in the UK. The industry and the regulators have been talking about the need for greater transparency for years, but meaningful action has been sadly lacking. When, last year, the Investment Association asked its members to sign a Statement of Principles, including a pledge to put clients’ interests ahead of their own, only a tiny fraction agreed to do so. By threatening to quit the Association in protest, a group of the largest fund houses managed to oust the CEO, who had championed a more consumer-focused approach.
With its enormous PR and advertising budgets, the fund industry is able to exert far too much influence over the media than is good for consumers. As a sector, it remains the biggest contributor by far of donations to political parties. Many politicians serve as directors of fund management companies; others aspire to lucrative jobs in the City or on Wall Street should they get voted out.
If ever an industry needed reforming, it’s the investment industry today. The Fiduciary Rule, in its current form, doesn’t go nearly far enough. Change is happening far too slowly and, in the meantime, financial intermediaries continue to help themselves to far too big a chunk of ordinary’s people’s investment returns. Every day, across the world, thousands of people are retiring with insufficient funds to last them for the rest of their lives. Until this problem is fixed, and faith restored in the pensions system, the crisis will continue.
It’s time to stop this on-going pattern of two steps forward, one step back. Most of all, it’s time to stand up to the finance lobby.