The Potemkin village solution
The satirical tone of this post is not intended to minimise the importance of ethical behaviour in the fund management industry. It simply illustrates the difficulty of applying vague moral standards to a generally honest and proper industry. The effect of this is to impose additional costs on the majority of regulated firms while not catching and punishing the fraudsters and rip-off artists. I sympathise with those at the FCA charge with trying to implement it
Playing the game
The FCA’s new game – Consumer Duty – looks as if it might be hard to play. But it’s not. Like any game, once you understand how the rules are enforced it’s easy to get around them. Think of professional fouls which the ref doesn’t see or rolling around clutching your ankle trying to persuade the ref to give you a penalty. It’s all in the eye of the beholder. So, the model you need to build is a Potemkin village. This was a series of false village fronts that the Empress Catherine of Russia would see on her journey down the Dnieper that showed the excellent conditions in which the peasants lived; but which actually concealed the miserable condition of the serfs. Got it? Remember the FCA knows very little about the real nature of your business. It will always be impressed by what it sees. It’s not what it is it’s how you show it.
Lesson one. Mobilise those expensive and useless non-executive directors. Get them involved in fashionable but pointless issues by asking them to study things like the impact of diversity, gender dysphoria, social duty, climate change , ESG and any other irrelevant but fashionable issue on the way you can better serve your customers. Provide them with reading lists of obscure research papers. For example, the study by Grimethorpe University which showed a strong correlation between fund managers with red hair and poor investment returns. Illustrate your commitment to excellence by writing a new company policy never to recruit red haired fund managers. Make sure that the discussion of the conclusions of the research conducted by your NEDs is a lead item at every board meeting. Feed their egos. Remember these inconsequential items will occupy a disproportionate amount of time. Debate about the colour of the annual report lasts on average five times longer than the decision to spend £100 million on new offices. Make sure that the stack of board papers is at last six inches thick. No one except the unfortunates who are paid to put them together will ever read them; but, Boy! Aren’t they impressive. .Write extensive minutes for the FCA to see.
Lesson two. Take consumer complaints very seriously. Keep a register of complaints that is tabled at every board or management meeting and discussed in minute detail. .It’s always a good idea to make up some complaints that will have been easily resolved; no one will ever bother to find out if the complaint was real or a fake. For example, show the way in which a ninety-five-year-old widow living on benefits, who had mistakenly bought (or been sold) a very long-term venture fund , was given her money back with an invitation attend an online coaching seminar on investment in later years. Make sure that the complaints are analysed and categorised according to a specially developed algorithmic (remember that algorithms are how everything works today) methodology that is so complex that it will take several hours of explanation from an enthusiastic techie with pages of algebraic formulae. This will bore the FCA inspector into giving you top marks. Make sure that this is another lead item at your board meetings and the board papers contain the full 100-page methodological summary. The NEDs will not understand it anymore than the FCA, but will be impressed.
Lesson three. Embed the culture of consumer duty. Ensure that all you staff learn the four principles of consumer duty by heart and repeat them as often as possible and particularly whenever questioned by anyone from outside the firm. Tell you staff, if asked what they do at work by a friend or relative, to answer “I do my consumer duty. Remember there’s a war on” Consider designating staff members as ‘consumer duty champions’ and having a monthly league table that is displayed prominently in a public area of the office and on the website, with a badge for top performers. You know the kind of thing ‘“Employee of the month: Gladys from accounts”. When they are answering queries by telephone or online, make sure that staff members introduce themselves; for example, “Hi there, I’m Jim or Jemima, your consumer champion”. Probably stop short of having everyone sing the ‘consumer duty anthem’ every morning. This is after all Britain and not Japan.
Lesson four. Visibly punish some distributors or IFAs. Reach down into the distribution chain. This is a great opportunity for a Potemkin village. You probably (or should) know what your most important distribution channels are ranked by percentage of sales product by product. Select one or two of the insignificant individual distributors, who have bought unimportant funds that are not selling well anyway, and ban them from doing any further business. Choose one or two obscure IFAs who had once mistakenly advised clients to invest in your long/short frontier markets bond fund and send them a warning letter about customer outcomes. They will certainly have forgotten what they had done, probably don’t do any more business with you anyway and are now mainly selling motor insurance. But your action is on file to demonstrate your commitment to consumer duty regardless of its economic consequences. Very impressive.
None of this is very expensive or difficult. It’s just a question of getting it going and making it fun for everyone. Your staff will certainly come up with some great suggestions for spoofing. But once it is set up and running, you can rely upon your Potemkin village to protect you from the unwelcome gaze of the regulator. Then you can get on with the real job of flogging the products to the plucky punters.
All about investment funds 