FIS Astec Analytics’ David Lewis examines the balancing act of allowing easy access to financial activities while not exposing amateur investors to undue risk
There are lots of things you need a licence for. Driving a car, flying a plane and even, in the UK at least, getting married. There are good reasons for needing a licence and the training required to obtain such qualifications: all these activities involve serious risk if you make mistakes, whether that risk is physical, financial or otherwise.
All major economies also provide regulatory frameworks and rules for engaging with the financial markets, requiring those that work in positions of responsibility to be trained, examined, regulated and licenced. Whether that person is your local mortgage advisor or an investment banker marshalling billions of dollars of other people’s money, they must pass examinations on a regular basis to ensure they are up-to-date, know what they are doing and what risks they are taking either individually or on behalf of their clients.
Regulators and governments must tread a very fine line with regards to permitting potentially millions of registered voters the right to take risks. This issue has been brought into very sharp relief by the drama surrounding GameStop, which has now led to hearings in the US congress scrutinising both short selling and securities lending. Short selling and, by association, securities lending are regularly brought into the public spotlight to be flogged as this largely opaque behaviour is pilloried for some market or trading losses, or even the bankruptcy of a much-loved company or brand. On occasion, there are positive stories, such as the exposure of the fraud undertaken at Wirecard AG, but they remain rare.
The current Congressional hearings in the US are trying to balance the alleged restrictions of rights of individuals to get involved in the capital markets while considering regulations to restrict the gamification of securities trading. The explosion of financial applications on our mobile devices has permitted individuals to take complete control over their finances if they wish to. It was not that long ago that your local bank branch was a hallowed place, where you had to make an appointment to see your bank manager who may see you as long as it was before the 3.30 pm closing time. How times have changed. Financial institutions have closed their physical branches and moved online; their services are available 24 hours a day and any amount of incentives are offered to help them compete for your custom.
Zero-fee trading is one such attraction, lowering one of the more obvious barriers to entry for many aspirational share investors. What is perhaps less obvious is that nothing is really for free and how financial institutions get paid is driving part of the conversations going on right now. It is not news that there are parts of the financial industry that are somewhat inefficient, and the proliferation of disrupting apps and services helping people to manage their pensions or save money on their bills underlines the interest that new entrants are paying to this market. In a recent article on Benzinga, it was proposed that “In the future, every company will be a financial services company”. As if to underline this, the link will take you to an article hosted on Yahoo! Finance.
As the article describes, Google, Facebook Inc. and Apple Inc. all either have or are launching financial services and products such as credit cards, insurance and banking. However, these are all borne out of partnerships with existing banks white-labelling their services or sharing the branding. Given the financial and technological muscle of these global organisations, why are they not simply developing and providing their own services? How hard can it be? Well, quite hard, particularly when it comes to regulations and the need for regulatory approval. This is not a new concept by any means. In the late 1990s there was a rush to provide banking services and even share dealing from many rapidly growing and diversifying companies, including many high street supermarkets, for example. These were all backed by existing banking organisations.
The landscape and tone have changed significantly since then, most notably in the last year, as the acceleration of service provisions online from shopping to finance has quickened. What has not changed is the position of the regulator as the gatekeeper and, in many ways, the safeguard against harm for unwary investors. On one side of the Congressional hearing there is advocacy for the small investor and their right to choose to invest in capital markets, and trade all manner of assets and products freely, but on the other side are those suggesting that it is not for everyone. The reasons that financial markets are not for everyone are where this debate becomes even more problematic.
The Securities and Exchange Commission has several barriers to entry in place with regards to accessing certain investments. The Accredited Investor restricts buying shares in private companies, for example, to those with an annual income of over $200,000 and at least $1 million in “wealth”. The underlying intent is to restrict riskier activities to those that can be viewed as being able to sustain losses should they arise. However, it is very easy to see that as a restriction keeping lower income individuals from accessing certain parts of the financial markets, only allowing the rich to get richer it would seem.
A new definition of Accredited Investor came into force on 8 December, permitting investment in private equity, private companies, hedge funds etc. by those who understand the risks sufficiently. In this definition, understanding the risks means the investor needs to hold an appropriate licence, such as a FINRA Series 7, 65 or 82. It could of course be argued that access to the required education and examinations is somewhat restricted to those that can afford it, but the regulator risks much greater criticism should it open all aspects of financial markets and complex products to all comers. Witness the extent of mis-selling actions in the UK and elsewhere on insurance, investments and other products from investors that have lost money. Memories of a large public protest I saw in a Middle Eastern country in the early 2000s loom large. The protestors were upset at falls in share values on their fledgling stock market and were demanding that the government put them back up.
Criticism of certain trading apps gamifying securities trading that somehow mask the risks that investors are taking by buying or selling shares may be unfounded, as the phrase does not fit easily within the realities of such services, but they may also be diverting the attention from the underlying issues and the increasing politicisation of financial markets.
