The culture of investing must shift

Investing is viewed by far too many as a casino

Will the Financial Conduct Authority succeed in changing that ?

In recent decades, the Financial Conduct Authority (FCA) has been widely believed to have strayed from its original mission. Financial services are now regulated to stifle them with red tape, increase the cost and effort of conducting business, and deter investors from anything other than ultra-safe, low-return investments, rather than to protect investors from unfair or nefarious practices and maintain the reputation and trustworthiness of legitimate businesses.

This explains the London Stock Exchange's downward spiral, the widespread perception that all companies are trying to defraud their clients, the persistent net selling of shares and investment funds by regular investors, and the promotion of mis-selling campaigns. It is believed that the current administration is totally on the side of those who want to overregulate the city and the investment sector.

The FCA's director of markets, Simon Walls, sent a completely different message to investment company directors during a recent conference. "Our goals are purposefully vague so as to move with societal expectations, to make markets function well, to secure an appropriate degree of investor protection, and to advance market integrity," he says. "Our new five-year plan consists of four components instead of twenty-three. Though some regulations are evolving, it more accurately reflects a change in tone.".

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Start your experiment. The top is the source of this shift in investment culture. According to Walls, "the government's role is now very clear: instead of trying to stop anything from going wrong in the first place, we should trust in the structures we have in place for when things go wrong.".

How to alter the culture of investing.

The fact that financial services are not viewed as the enemy was also encouraging. According to Walls, "it is now evident that financial services are beneficial to individuals and investing is an essential component of assisting people in navigating their lives." "As a society, we are hampered by an interpretation of consumer protection that holds that nothing can ever go wrong. Asset management, banking, and insurance are all affected by this. We cannot afford to have people not saving as defined-benefit pensions give way to defined-contribution pensions. They need the power of compounded returns to accomplish their objectives.".

Wall is a strong opponent of overinterpreting regulations. According to him, "there is a sense that the industry thinks that the FCA wants more than it does." We receive requests for more prescriptive regulations because everyone has risk and compliance personnel whose work depends on this area. We're working to alter that culture. The industry is asking for too much nannying. A large portion of the submission to oppressive regulations is based more on myth than fact. For instance, the FCA does not mandate that advertisements state that your capital is at risk.

Regulation has received a lot of attention, but according to Walls, you also "need to get the message across about the importance of investment." He is especially worried about the findings of a 10,000-person survey conducted by the FCA. "In the UK, seven million people have more than £10,000 in cash but no investments. According to Barclays, this indicates that between 430 billion and 600 billion dollars are not being invested. Too many people simply do not receive investment. According to our interviews with these individuals, 29% say no one has assisted them in getting started, and 30% say they are afraid of scams. Just 9% receive comprehensive financial guidance.".

Next year, new guidelines pertaining to targeted support will loosen the requirement that advisors have complete knowledge of the client before providing advice. "It was a bit excessive to treat each investor as an individual. Complete financial advice will always have a place, but we must acknowledge that 91% of people cannot get it.".

Potential investors will have to acknowledge the possibility of losing money in addition to making it. Without the drawbacks, you cannot have the benefits. The 25% decline in equity markets this year does not imply that the investment message should be altered. "We have changed our tone for eighteen months, but until we have completed an entire investment cycle, attitudes will continue to be sensitive. Resilience to risk can only be tested in the face of adversity.".

Developing a love for leverage.

Naturally, a shift in investment culture cannot occur without sound financial services, and Walls is upbeat about the UK industry's future. "London is unquestionably the second-best financial services city in the world, and we rank first in many other areas. However, we must drastically alter people's attitudes toward risk if we hope to achieve anything like the US investment culture.".

For example, we should learn to love leverage. "I adore that investment firms are closed-ended (have fixed capital), which is great for many industries, like private equity, where issues with liquidity mismatch for other kinds of funds exist. If something is a good idea, I want a little more of it for my money because I like using gearing. Investment firms should prioritize achieving high risk-adjusted returns over compliance.".

Walls acknowledges that more than just improved regulation is needed for the UK financial sector to fully recover. "Taxes are a common topic in conversations, but there is nothing I can do about it. Investors will need to be patient for that.