The Financial Services Consumer Panel (“FSCP”) recently published a number of suggested options for reform of the governance, disclosure and pricing of investment products. These options were based on the findings of two studies, one by Rajiv Jaitly and the other by a team led by David Pitt-Watson, commissioned by the FSCP into the issues of cost opacity and (lack of) cost control in the investment industry. The FSCP concluded that the “scope of the challenge for reform cannot be underestimated” but “the prize awaiting consumers should reform prove successful would be a marketplace characterised by effective competition in terms of both the quality and price of asset management services. By the same token, the industry could look forward to a newly burnished reputation for effective stewardship of the nation’s savings, and to a reformed regulatory regime that was both less costly and intrusive”.
There are certainly structural challenges to identifying, let alone disclosing, some of the costs of asset management services. I have previously addressed the issue of costs embedded in spread-based transactions in a separate article, so will spare you the detail save to say there are practical steps that can be taken to isolate these costs.
Many financial markets have developed piecemeal over time, embedding inefficiencies in market practise. The bond market is the most high profile and significant of these fragmented markets. There are a large number of relatively small and illiquid bespoke bonds, impacting the cost of transacting in these securities. At the other extreme, the equity market has a much smaller number of standardised securities that are liquid and consequently bear low transaction costs. It is not uncommon for a company to have a single outstanding common equity security but hundreds, and sometimes thousands, of bonds. It is possible to consolidate previously fragmented and bespoke markets into markets of standardised instruments, as most recently demonstrated by the CDS market. Markets of standardised instruments have operated for equities as well as futures and options, both based on a wide range of underlying instruments, for many years.
The calls for changes to the structure, operation and/or conventions in various markets are becoming more frequent and broadly-based. Issues related to intermediation have been raised by the Securities & Exchange Commission. The bond market has been specifically addressed by the International Organization of Securities Commissions and BlackRock in recent months. Many of the topics raised and proposed reforms impact multiple parties and will require significant investments of time and resources to implement. How about setting out to eat these elephants one bite at time?
A long-term investment and commitment is required to improve financial markets, for the long-term benefit of the majority of providers of capital. Savers are often urged to take a multi-year approach – why should those responsible for the operation of the markets in which the savers’ capital is deployed have a different time horizon? There is an opportunity to apply advances in technology to increase transparency and efficiency as part of the wider process of seeking to upgrade financial markets, supporting the more effective stewardship of savings. Why not make a meaningful start to this long-term investment programme, sooner rather than later?