The mother of a friend of mine is about to lose her home because she took out a high-risk, speculative mortgage. Under the new terms, her house was remortgaged and the money invested in unit trusts.
Income from the unit trusts reduced her monthly payments. Meanwhile, the unit trusts’ capital value was supposed to increase quietly in the background, creating a pot of money that in due course would pay off the outstanding mortgage.
Along came the financial crisis and blew it all away.
At the time of remortgaging, she owed £30,000 and had a repayment mortgage. Some eight years later, she owes £65,000 (€77,346) . As a retired nurse on a small pension, she has no choice but to sell.
Clearly, it was silly of her to take out a mortgage that she didn’t fully understand. Equally clearly, it was negligent of her financial adviser to sell her that mortgage. And greedy. A newly brought-in financial adviser suggests the original adviser would have received £3,000 to £4,000 in commissions. Whether it was criminally negligent remains to be seen.
It couldn’t happen now – we hope – thanks to the UK’s retail distribution review (RDR). When my friend’s mother went to see her new financial adviser, she paid for the advice and was glad to do so, given her previous experience.
RDR is a piece of regulation that everyone agrees is – broadly – a good thing. It perhaps took a while to get to that point, but we’re there now – pretty much. I mention this because of another piece of regulation that has been in the news in the past months: the Alternative Investment Fund Managers Directive (AIFMD). Yes, it is finally upon us and yet the world continues to spin on its axis. Hurrah!
Whether we can say that everyone now agrees AIFMD is – broadly – a good thing is a moot point. I’m not sure we can say that. Pictures of Darth Vader-like monsters accompany articles on the topic, and there is much dark muttering about the “heavy impact” of the new directive from light-touch fans.
Of course, it is correct and proper that people within an industry should comment on regulation that affects it and point out potential problems and holes. It’s perhaps less proper simply to moan, particularly at a time when regaining investor trust is the objective du jour.
And it must be said that there has been quite a lot of undignified carping about the AIFMD. The main complaints seem to be that it is complicated and will cost a lot – which gives it much in common with the products it seeks to regulate.
In any case, the noble aim of protecting investors must surely supersede all that. The example of my friend’s mother shows what happens when we do not protect investors. Of course, alternative investment funds are different because they are bought by sophisticated investors, but we all know that some sophisticated investors are more sophisticated than others – and that the end clients of many institutional investors are people, just like my friend’s mother.
Best to suck it up then. Especially as there’s no choice, and even if we don’t like this paragraph or that paragraph, it’s easy to understand where the impetus for the new directive came from.
Furthermore, as much as there may be implied costs to the AIFMD, there are also implied benefits. During recent conversations with Swiss managers (see page 22), I was interested to hear them say that the directive will promote global regulatory convergence.
That can only be a good thing. Tax arbitrage is already on its way out. (As I write, an email from the Guernsey International Finance Centre saying the British prime minister, David Cameron, says Guernsey is not a tax haven is pinging into my inbox. That’s the end of that then, eh?) Every fair-minded asset manager will welcome an end to regulatory arbitrage as well.
Fiona Rintoul is editorial director at Funds Europe
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