Risk: the Chinese conundrum

Financial Services Authority (Photo credit: Wikipedia)

The Wikipedia definition of risk is helpfully succinct:

“Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome).”

The financial services industry is being torn apart by a regulator which is determined to eradicate risk. The Financial Services Authority (“FSA”) is spending millions of pounds (paid for by their member firms) imposing operating practices designed to ensure private investors are advised to the highest standards and protected from bad practices.

Most reasonable people would suggest that is a sensible strategy. Their methodology is, however, causing great concern. These are the comments of one respected practitioner:

“There is little evidence that the increasingly intrusive and burdensome micro-management of investment companies has been successful in staving off some egregious examples of fraud and mismanagement, the cost of which is spread across the shareholders in financial services companies.”

Sir David Howard
Chairman
Charles Stanley & Co. Ltd.
14 June 2012

The procedures adopted are, however, delaying vital processes as evidenced by the following extract from CityAM (8 June 2012):

“New Businesses face a longer wait to gain approval from the City regulator according to new research. Firms waited an average of 19.6 weeks in the first three months of the year…the 13.2% jump, the third consecutive quarterly rise…”

A situation has arisen which casts doubt on the FSA’s stance.

Anthony Bolton is one of the most respected names in the investment industry. Over 28 years his Fidelity UK Special Situations Fund showed a near-20% annual return.

Two years ago, in a blaze of publicity, he launched the China Special Situations Fund and attracted 75,000 private investors. It will have passed every test required by the FSA. The price of the shares has fallen by 26.3%. A £1,000 invested at launch is now worth £741.

The message is simple: you cannot and perhaps should not eradicate risk. Yet the FSA’s activities are damaging the industry which has the potential to play a part in funding growth which the Chancellor of the Exchequer and the Governor of the Bank of England crave.

A lighter touch regulatory regime could transform the sector overnight. It simply will not happen.

Anthony Bolton has, unwittingly, demonstrated the risk conundrum.

Tony Drury

Twitter: @tonydrury39