Politicians frequently act upon the politicians’ syllogism:
We must do something.
This is something,
Therefore we must do this.
This is analogous to the famous syllogism:
All dogs have four legs.
My cat has four legs,
Therefore my cat is a dog.
In the fraught arena of financial services regulation, politicians often seem out of their depth and desperate to cling to any possible solution that floats by them. The mis-selling of financial products is a classic example of this. Sure, there are cases where the financial adviser has recommended products based on the commission he or she was going to get rather than on the needs of the client. But to extrapolate this to assume that all financial advisers act this way and they have to be stopped is to make a false assumption that will render the resulting ‘cure’ unworkable and possibly it will end up rendering the situation worse than what it was originally.
Canadian politicians need to address the issue clearly if we are to avoid making the mistakes of other countries in dealing with this issue. Firstly, the majority of financial advisors act in the best interests of their clients. The fact that they potentially could act in their own interest doesn’t mean that they do and we should not tackle the issue based on a ‘guilty until proved innocent’ approach. After all, if we were to judge all politicians on the basis of the behaviour of the worst 5%, a purge of “Stalinistic” proportions would be the only answer.
Secondly, politicians already have sufficient laws on statute to prosecute anyone who grievously abuses their position and defrauds the client whom best interest’s they are bound to uphold under common law fiduciary duty. Professionals need to be held to the highest standards and working with their representative bodies, as is done in the fields of medicine and law, will establish a higher level of professionalism than use of the crude mechanism of the law.
Finally, the unintended consequences of regulation can already be seen in countries that tried to micro-regulate the financial services sector. The banning of commission in the UK has led to a huge advice gap; financial advice is now only accessible for the wealthy, those who generally already have a strong understanding of financial products and rules. Those in the medium and low income categories have been completely cut off from the financial planning arena and have been left to select and purchase products directly themselves, even though the fact that they have less money means they are in far more financial trouble when they get it wrong.
The UK is replacing a small mis-selling problem by creating an enormous “mis-buying” crisis, whose effects will only be fully felt in the coming years, a classic example of the cure being far worse than the disease. Canadian politicians need to learn from the mistakes of others and work on improving the quality and standing of financial advisors, whilst rigorously rooting out the bad apples.
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