TAX NEWS - June 2010

UK Tax: AIFA warns of regulatory crack-down

Financial services regulation is set to get harsher despite the break-up of the FSA, the Association of IFAs (AIFA) warns.

Director of AIFA Robert Sinclair says the move to break-up the tripartite financial system will see the rules tightened still further and risks "regulating out" good ideas.

The Government will phase out the FSA over the next two years, with control over adviser firms passed to the independent Consumer Protection and Markets Authority.

Sinclair said at an Aviva Round Table debate after the first coalition Budget: "I see regulation being more draconian and harsher, especially for product manufacturers."

In yesterday's Budget documents, the Government intimated it intended to take a firm stance on the financial services sector with the proposed resurrection of the tax General Anti-Avoidance Rule (GAAR).

This would help close tax avoidance loopholes by giving HM Revenue & Customs (HMRC) more extensive and widely-drafted powers to judge tax liabilities.

The rule, which was dismissed by Labour as "unworkable", would put legal avoidance methods for CGT (raised to 28% for higher earners in the Budget) inheritance tax, corporation tax and income tax under closer scrutiny.

Sinclair warns a crack-down could result in good financial services ideas being "regulated out" of the system, in a repeat of what happened to final salary pension schemes.

"In final salary we had the Rolls Royce of pension schemes. By creating a set of rules to deal with a few misdemeanours we regulated that Rolls Royce out of existence.

"Now we are regulating a set of rules around investment management to stop people taking gains.

"We had an industry with a lot of golden eggs and we need to get back to that."

However, Sinclair was upbeat a new regulatory structure could pave the way for better relations between the watchdog and the industry.

"We need a more symbiotic relationship between the regulator and the regulated.

"It is a step forward to set up a different authority which will hopefully see the benefits of working with the industry. We all know what was said previously by Hector Sants about wanting the industry to be afraid of the regulator."

Also at the debate, Jonathan Cornell, consultant at Cornell Consulting, agreed the end of the FSA would not mean a relaxation in regulation.

"The current political situation is unlikely to beget less regulation.

"We are still dealing with TCF, which we have spent thousands of hours and thousands, millions of pounds investing in, but are still not sure how much it benefits firms or the customer.

"And if it is not benefiting the customer, what is the point?"