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Regulation to safeguard savers is self-defeating

Regulation to safeguard savers is self-defeating

We need to grow up and accept risk. There is no way that we can invest money and hope for significant growth outstripping inflation without undergoing some risk that investments may go wrong and the final amount we get will be less than our original contributions.

Because of the nature of auto-enrolment and its approach of enticing people into saving, the FCA seem to be very afraid that they will be accused of poor regulation if savers end up with less than they would have had if they had simply stuffed their money into their mattress. They are attempting to respond to this by bringing in guidelines that are aimed at ensuring that only low-risk funds are recommended to those with lower amounts to save.

There is a flaw in this. Surely those with less to save are the most in need of high-returns in order to accumulate a worthwhile pension pot? And yet, they are the very ones being steered towards ‘safe’ low-returning investments that are not capable of giving anything like the return that those savers require. It is as if they are being kept in a poverty trap – ensuring they have no chance to break out of it. Far from improving the likely benefits of auto-enrolment, this approach appears to copper-fasten a poor result for those first time savers whom the government are most anxious to drag into the savings net.

A survey of 500 advisers by the business consultancy BDO has found that more than half believe that the arrival of the FCA will have a negative effect on their business with 55% believing that they would have to recommend cash-based rather than equities-based investment in order to prove they were not taking excessive risk with their clients’ money. And yet 89% of all advisers believe that equities-based investments are the most appropriate for long-term savers.

This shows the danger of regulatory zeal in what is essentially a risk-based business. The fear of being found in breach of the guidelines is going to force highly qualified advisers to recommend the wrong products to their clients.

So the advisers are saved from being publicly criticised for risking their clients’ money and the regulators can relax because there won’t be headlines in the Daily Mail claiming that some pension savers have been robbed.

Shame about the poor-returns for the clients, leaving low-paid workers trying to survive on a pittance in their old age!

Tom Murray

Twitter: @TomMurrayDublin

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