I think it might be time for us all to take a few steps backwards — to the work of the classical utilitarians Jeremy Bentham and John Stuart Mill.
For them, the best approach to decision-making in an impartial world — one where every individual’s happiness or wellbeing has the same value — is to look for the choice that will produce the greatest good for the greatest number of people.
You can argue about what that choice is given the uncertainty of the future. But the idea that the collective good of the majority should be the driver behind policy and regulation still offers an excellent — and currently rather underused — way to structure one’s thoughts.
When he came up with his Greatest Happiness Principle, I doubt Mill could have imagined the existence of the Financial Conduct Authority or its call for input (CFI) this week into how we might improve the consumer investment market. But it works as well here as anywhere else.
The FCA’s questions on the subject all sound valid and important. How can it “help the market” offer a range of products for straightforward investment needs and to be more competitive? How can it allow those who are up to the risk to take on high-risk investments without letting those who don’t understand those investments in on the game? How can it regulate promotions, compensate those who lose money and protect people from scams?
You’ll have ideas on these things. Everyone in the industry does. We should crack down on silly jargon and acronyms (why does the FCA’s online survey have to be a “CFI”?). We should increase levels of financial education in schools, particularly given that, as Myron Jobson of Interactive Investor points out, 32 per cent of those who told the Great British Retirement Survey 2020 that they had been scammed had suffered investment fraud. We should increase transparency and comparability. We should charge financial firms bigger levies to cover the losses made by unlucky investors. And so on.
But here is the thing. Before we regulate to do any of these things, we should ask ourselves if the market as it stands is working for most people — and the extent to which further regulatory intervention would make that experience better or worse.
I tend to think that we should hold the financial industry to a higher standard than others. That’s partly because of its charging model (only fund managers and the government get to extract their charges from us at source, direct from our salary or investment pot); partly because of its role as stewards of our corporate sector; and partly because in managing our money it is also defining our futures. The more the sector messes it up, the worse our retirements.
Buying a fund inside your pension wrapper is not a bit like buying a car. But those things said, it rather looks to me that the “greatest good” choice now might be for the FCA to do nothing. Why? In the main the industry is doing what it is supposed to do for most people. It is offering them reasonable, if mildly overpriced, advice. It is safeguarding their money by holding it in safe structures that are mostly tax efficient. It is providing an adequate return on that money; most funds one way or another knock around index returns.
There are plenty of very simple products around that will do any diversification job you want; competition is pretty brutal, and major blow-ups are unusual. The Woodford scandal got as much attention as it did because this kind of thing seldom happens.
You might want your pension fund to shoot the lights out. But for most people low stress adequacy combined with tiny odds of both disaster and miracle is fine. It is also fine that despite its ongoing adequacy, retail investors don’t much trust the industry — finance is the least trusted sector there is. Scepticism is the retail investor’s superpower when it comes to fraud evasion.
You will say that the industry can be better and should be better. I agree, but I’d also say that better as driven by the FCA is not necessarily the kind of better we need. The key point here is that it isn’t being transparent, not using jargon or even being a super-skilled stock picker that really makes the difference to long-term returns for investors: it is costs.
Total expense ratios, according to work from Morningstar a few years ago, are more than anything else “proven predictors of future fund performance”. The cheapest funds are “at least two to three times more likely to succeed than the priciest funds . . . across virtually every asset class and time period”. Buy cheap and the odds are you will make more money than if you buy expensive. Fund management is one of the few service areas where you can be almost certain that the more you pay the less you will get.
With that in mind the only real task the FCA has — outside having a go at preventing actual fraud — is to provide an environment that does not drive costs up and returns down, particularly given the recent downward trend.
I can think of a few minor, low-cost things we could do to improve matters. Three thousand funds in the UK is too many. We could mandate that any that underperform over a 10-year period must admit failure, shut down and return cash to investors.
A little financial education might take the edges off the worst experiences investors have. However, finding a way to make the entire population well-educated, blessed with very high boredom thresholds, keen on admin and never desperate for cash — the basic requirements for everyone if you want to make sure they don’t make mistakes — is probably outside the FCA’s remit.
Better, then, to go low key and have that education take the form of just-in-time videos. Others will argue for the expensive option of financial education at school or university. I will not. I did an A level and half a degree in economics and I’m pretty sure I didn’t know exactly what a share was until I got my first job in the City — although as I was at university in the good old days of legal party drinking, much of my time there remains a pleasant blur.
Better that every adult watches a two-minute fraud, cost and risk warning video before they can transfer money to any finance firm. These things aren’t going to save everyone. You might think that not doing more is unfair on the minority who will get ripped off. But is doing too much more fair on the greatest number hoping for the greatest good?