Sunday, February 19, 2012

Over regulation kills business

As long-term readers might know, your humble Devil gambles a bit.

Every month, a standing order conveys a few tens of pounds to an escrow account with my stockbroker; every few months, when I have built up enough cash to make it worthwhile to buy, I fire up my Instant Messenger client, ask my stockbroker to get me prices on a couple of stocks and then instruct him what to buy.

In the weeks before I do this, I will have done some research—I find City Unslicker to be useful, as well as The Motley Fool—and tracked a few stocks that I'm interested in.

Quite often these stocks will simply be companies that I have read about or stumbled across and which happen to fit my general interests. In building my portfolio, I tend to stick to areas that I know quite a lot about—technology and energy.

And, because I don't have that much spare cash, I tend to look at "penny shares" that might provide a good capital return: after all, if I buy a stock at 4p and it gains a penny, I have made 25%. As such, most of my stocks are on the AIM, rather than the LSE's main market.

As I said, I gamble.

And I do it largely for fun. Although with the added bonus that this particular brand of fun has delivered roughly 40% growth over 18 months.

Well, it's better than sticking it in the bank, eh?

But what I am not really prepared to do is to give my stockbroker the most intimate details of my life, earnings and medical history (this last might be problematic in any case, since I haven't seen a doctor since 1999, am not registered anywhere, and have no idea where my medical history might reside—somewhere in Edinburgh, I'd imagine).

"Surely one doesn't need to!" you cry. Well, I haven't had to yet, but as my stockbroker writes today, it's coming down the line.
The FSA, which does not understand Private Client stockbroking, and therefore does not like this is at serious risk of harming clients by hammering the brokers with often inappropriate demands for record-keeping, and fact-finding. The ultimate effect is to deny decent advice to people without serious amounts of money to invest. If it ain't worth my while spending 3 hours or more finding out your inside-leg measurement and medical history (the former is flippant, the latter is not), I will not be able to advise you about the best way to save for your retirement. You're on your own, or at the mercy of cowboys. Maybe you've inherited a pot of money and you'd like to stick it somewhere for a few years, before buying a house. Maybe you've downsized and would like to supplement your pension with a bit of income from the capital. Few brokers will touch you if it's less than £100k.

As Jackart points out, all of this regulation is killing businesses and, most importantly, reducing choice and service for the customers.
Inappropriate over-regulation is killing the old school advisory business, just as it killed old-school relationship banking where long-term relationships have long provided decent advice to people for a reasonable cost. The only people to benefit are the big banks who have access to more captive customers for their fee-larded "products" sold according to a process, and the regulation sausage factory of the FSA.

I am going to get little sympathy. Though I am just a guy earning a crust by helping clients decide which stocks to invest in to achieve their aims, in the popular imagination I may as well be a "banker". But this nonsense is going on in every industry, not just finance. I am not saying all new regulation is wrong. Much of the new regime is merely formalising what a decent broker should be doing anyway. But to imagine this is without cost is naive. And the cost is borne by customers, who lose choice and privacy as well as paying higher fees. Regulation ultimately benefits government, which gains power over people, and big business, which can absorb the cost, pass it on, and put the insurgent or innovative smaller player out of business.

Ultimately the cost is borne by the nation who have to employ a caste of nose-poker-inners in every industry to check "compliance" with regulations. The only businesses who can influence the regulations are the big, powerful, politically connected ones, and you can bet they're gaming the process to their benefit, and against the interests of the entrepreneur, sole-trader and independent small firm. This crony-capitalist cartel is the real beneficiary of over-regulation. The compliance department, or indeed the PAYE administrator, or the H&S officer may be nominally employed in the private sector, but they're every bit as parasitic as the mandarins of Whitehall, as they are not serving the person who's forced to be paying them.

Worse, innovation may well be beneficial to customers, but the compliance risk means much innovation is not allowed or otherwise stifled because regulators who by their nature are conservative and risk-averse don't like that which they don't understand. Ultimately as we're at the technological frontier, without innovation, we've no growth. And what does the UK desperately need now?

Quite.

And in the meantime, I will continue gambling: I might lose it all—it's a risk that I take. But, ultimately, if I do then I won't blame my stockbroker, or the bankers, or anyone else. I shall blame myself.

But the reason that I do it is because I get to choose what stocks I invest in, I get to see if my hunch was correct. I don't want some big fund choosing where my money goes (even if I had enough to interest them)—where would be the fun in that?

Ultimately, the fun and the pleasure that I gain from my little bit of gambling is because I get to choose my own path. If I lose the lot, well, I'll get back up and carry on. But every little thing that I do here, every little gamble that I have, is my gamble. It is fun because I get to choose.

And this is true, not only in stocks and shares, but in the whole of life: you might get it wrong, but at least it was your choice. And if it didn't work, well, you can choose something else.

A life in which your decisions are made for you is no life at all—and it probably won't work because you cannot be invested in decisions that you haven't made.

So, make your own choices. Or at least have a little gamble—go on, you might enjoy it!

12 comments:

Anonymous said...

25%, not 20%!

Devil's Kitchen said...

Whoops! Corrected...

DK

Techno Mystic said...

I work for a stockbroker that specialises in small investors so any new regulation is worrying if it affects small investors.

I consider penny shares to be too much trouble and too risky. I stick to funds, specifically iShares Exchange Traded Funds. They spread the risk and can be bought and sold with an online account.

I'm in it to try and beat inflation for the long term rather than short term gains though.

Anonymous said...

The FSA's "know your customer" obligation screwed me up, also.

I had an account wherein I never used leverage (so I couldn't lose more than I had deposited), and I was up 60% in the 12 months I'd had the account open.

Then I lost my job and was stupid enough to mention the fact to my broker. I was told I was now considered a high risk (by the FSA) and my account had to be closed.

So, thanks to the FSA, I had my only means of income shut off.

Very helpful.

Jackart said...

Of course, the need to know your client's inside leg measurement doesn't apply to "execution-only" business, so don't worry. I won't be taking out my tape-measure!

necronaut said...

If you're still holding GKP then that definitely is gambling ;)

Anonymous said...

Anoymous - the broker telling you the FSA KYC rules meant your account had to be closed because you were high risk was talking balls. Either stupid, or lying.

Any time anyone tells you anything like that, ask them to confirm in writing which section of the FSA guidance/rules applies. 7/10 times the issue will magically disappear.

Anonymous said...

Why engage with the ponzi gulag casino bullshit at all?Just buy physical gold and silver and relax by watching Max Keiser, it takes all the stress out of it.

Devil's Kitchen said...

Anon,

Because gold and silver are, fundamentally, not wealth creators—businesses are. If you like, add it to my odd collection of personal philosophies...

DK

Anonymous said...

However, when they are grossly undervalued, as currently, the upside potential is far greater than companies that can be taxed, regulated and hounded to their deaths.

The normal rules no longer apply.

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Lola said...

I'm an IFA - fee charging and fully accountable and have been so for over 20 years. In a reasonable length comment on here there is not the space to set down the Fabianistic self serving weasel worded lunacy of the Failed FSA. All you have to know is that it was set up by that utter cunt Brown specifically to proto-nationalise all financial services and to enable him, Brown, to go on a borrow and spending binge and encourage the Banks to help. And now the same Failed FSA is about to totally screw up the UK's successful financial advice sector. If ever there was a case for piano wire and lamposts it is the Failed FSA.