St James’s Place (LON: STJ) shares are down 14% this morning. The specific announcement for STJ shares seems bland enough to be honest. But the actual problem is significant - in fact, it’s staring down the shotgun barrels of a well known economic problem. Markets work just great. Except markets work just great for certain things and not so well for others. The importance of this distinction is that where markets don’t work so well then there’s a righteous argument for regulation of them. OK - but that regulation then is always subject to its own political incentives and problems. There is no way out of this conundrum, just one of those things where we have to try and find the correct - even just the least bad - tradeoff and that’s the best we can do.
The announcement itself: “St. James's Place notes recent media speculation regarding its fees and charges structures for clients. As disclosed in our Half-Year Report & Accounts published on 27 July 2023, we continue to build on the work completed for Consumer Duty. This programme includes an assessment of our fees and charging models to ensure we operate with a simple and scalable charging platform for the long term. Whilst the evaluation has not yet been completed and therefore no decision has been made, we are confident that all the options under consideration will ensure value for clients and a strong, secure, and sustainable business for all stakeholders. We naturally continue to engage with all of our primary regulators during this process.” As we say, seems bland enough.
St James’s Place share price from Google Finance
But as others are explaining: “St James’s Place is under pressure from regulators to overhaul its fee structure to ensure it complies with the UK’s new consumer duty, according to people familiar with the discussions. The UK’s largest wealth manager has faced scrutiny over what critics say are opaque and expensive charges for financial advice and stiff penalties for early withdrawals.” As we can probably guess “overhaul” here means “lower”.
No, really: “St James's Place, the UK's largest wealth manager, said it is continuing to work with regulators over potential fee cuts in the wake of new rules to ensure fair value for investors. The £150bn financial advice behemoth said earlier this year that the Financial Conduct Authority's consumer duty, which came into force on 31 July, had pushed it to cap fees for some long-term clients at 0.85%, down from 1% — an £859m cost to the firm that sent shares tumbling.”
The economic point here is that markets work just great when it’s something we do often. When it’s something we do rarely then they work not so well. So, in financial markets, brokerage fees do not need to be regulated. We can can just leave that to the market for brokerage. Anyone trading regularly will be aware of trading fees and will naturally seek out the lowest. But if it’s a product we tend to buy once in a lifetime - a pension plan is the usual example given - then markets work less well. Just because we buy them less often and our antennae are less active. Wealth management is somewhere long that spectrum.
So the idea of regulation of fees is fair enough. It’s just that the regulator is most unlikely to have a look and then say that’s fine - that’s not the way bureaucracies work. So, yes, there’s likely to be substantial pressure on revenues going on here.
