Ethics matters

Panacea Comment for Financial Advisers and Paraplanners

4 Mar 2019

Ethics matters

”Real integrity is doing the right thing, knowing that nobody’s going to know whether you did it or not.” – Oprah Winfrey

Financial advisers are fiercely proud of what they do and since RDR, most are 100% fee-based businesses. All are professional and most aspire to be treated as a profession.

I have not been an IFA for over 14 years, as many of you will know, but I have always been fascinated with how firms present themselves and their proposition to their clients and prospective clients. And how that proposition can appear to competitors

In the digital world, the constraints of print medium are no longer there. Now, more than ever, it is vital to ensure that the consumer has a full appreciation of the value of advice and the service you offer, this in turn creates a trust in the industry.

In my day to ‘big up’ your business by criticising you competitors was known as ‘knocking copy’. It was considered a no-go, not just with the ASA, FCA and FSA but also your fellow advisers. No-one should undermine another’s business’s model based on poor research or plain false assumptions just to promote your own.

It still should be.

So, when a community member passed this ‘about us’ content from a firm promoting its services, in particular some introductory statements on the firm’s website that noted their “Difference”compared to other firms, I thought I would ask you….

Is this the professional way to go about things?

Firstly, they extoll:

Focus: Unfortunately, most ‘advisers’ just sell products; this is true whether they are IFA’s, Wealth Managers or Private Bankers. Our service focus is on planning, not products.  It is designed to help clients identify, achieve and maintain their desired lifestyle, whatever happens. We use traditional fund management and insurance companies as little as possible!

and then:

Continuity: “A typical private banker or wealth manager will have more than 100 ‘relationships’ to handle and the average adviser also moves jobs every 6 years.  We have just 65 retained clients and plan to cap the number at around 80. With two advisers this gives us the lowest adviser to client ratio in the business. You may also be assured that we won’t be leaving for other jobs and many clients have been with us over 20 years.

They go on to say “Almost uniquely, we are both Lifestyle Financial Planners and investment advisers. Most top financial planning firms outsource their investment management which results in extra costs”.

I cannot comment on the service by the firm or indeed name the firm. My area of concern is around the sweeping, uncorroborated statements above.

You can promote your business far better by being very positive about your own firm without resorting to ‘knocking’ your competitors in such a blatant way. It looks unprofessional and almost certainly counterproductive. In other professions such copy could be grounds for a disciplinary hearing.

Suggesting you are the only honest fish in a sea of sharks does not give consumers confidence to join you in the water. We already have the regulator, ambulance chasers and the media talking advice down – we do not need to do it to each other.

Comparative advertising is a great way to make your IFA firm stand out in the crowd But it can be an area that generates complaints, both from competitors and consumers and can fall foul of the Advertising Standards Authority too.

Here are some helpful tips around what you can say, should say, cannot say.

What are you claiming, is this just fantasy?

Think carefully about the claim you want to make and how it will be understood by consumers. When making an objective claim, like those above, you should hold documentary evidence to support it before making the statement. Your website and statements on it are, after all, an advert for your business and they should be true

“Most top financial planning firms outsource their investment management which results in extra costs”. 

On what basis is this deemed to be factually correct?

Who are you comparing with?

If your marketing statements refer to an identifiable competitor, in the case above think other IFAs nearby, then specific rules apply. This applies to marketing activity which in any way, either explicitly or by implication, identifies a competitor or a service offered by a competitor – so not just where you name a competitor.

“The average adviser also moves jobs every 6 years”.

Is this based on reliable research evidence? Here you would expect to find an asterisk and footnote stating where this fact derives from.

Apples v Pears. Are you comparing services meeting the same need or intended for the same purpose?

Comparisons with identifiable competitors must compare services meeting the same need or intended for the same purpose. You still need to ensure the basis for the claim is made clear and that the statement isn’t likely to mislead.

“With two advisers this gives us the lowest adviser to client ratio in the business”.Is this a fair, relevant or supported assertion? Additionally, how do they know?

Is the comparison verifiable?

Comparisons with IFA competitors must objectively compare one or more material, relevant, verifiable and representative features of yours versus theirs. If checking that information requires special knowledge most consumers are unlikely to have, your website readers should be able to get a knowledgeable and independent person or organisation to verify the comparison on your site.

In the areas mentioned above you should ensure the website statement clearly shows how the comparison can be verified. “Most ‘advisers’ just sell products”, how can you verify?

I spoke with Garry Heath who has recently released the Heath Report 3. He noted that many of the assertions above required information which few have. For instance:

  • The Heath Report shows that IFAs on average have 160 clients in 2018. But in the 250+ responses there were some with just 10 clients. So, the firm is not “the lowest in the business”
  • It also shows that advisers have shed over 11m clients in the last decade – Advisers now have more potential clients than they can handle. Knocking copy is simply not necessary.
  • If advisers moved around every six years it would demand that 5,000 advisers are in flow in any year. FCA figures show they aren’t!
  • In the current market advisers do not sell products and to truly avoid using established fund management would require an extraordinary amount of expensive research.

The FCA has some useful information around advertising, from my business experience there are many out there who will say and do anything at the expense of others.

Thanks to the ASA for some really useful research. Year on year, roughly 70% of the complaints the Advertising Standards Authority(ASA) receives relate to misleading advertising, proving that this is an issue that consumers take seriously and that all marketers should be mindful of.

Here are their top tips to help you avoid the most common mistakes.

Be careful out there!

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Can anyone imagine a large UK business being run like this?

Brexit comment for Advisers and Paraplanners

28 Jan 2019

Can anyone imagine a large UK business being run like this?

Some headlines from last week to make you feel proud about British democracy, values and standards.

  1. “May faces ‘high noon’ Cabinet meltdown on Brexit”
  2. “Philip Hammond refuses to rule out QUITTING if the UK leaves the EU without a deal”
  3. “Rudd threatens to walk out to back Remainer revolt”

 

Now for a scenario to imagine as you look around your office today.

Assume that for electorate read shareholders and customers, read for UK PLC that the CEO as Mrs May. Mr Hammond is the CFO and Ms Rudd has just come back to the business in a different role as Head of HR.

Both these board members are briefing against the business, the CEO and the shareholders are being ignored by these two directors. They have also had a Ratner moment, branding their customers and shareholders as ‘stupid.’

Two shareholder EGM vote results in 2016 and 2107 saw the board being given instructions to pursue a change of business direction also indicated by their customers, by survey.

The CEO is trying to progress the EGM direction change but half the board are not supporting her and want to ignore the shareholders. The resulting board conflicts are made very public causing damage to the corporate brand and the fallout is starting to damage business opportunities.

We had some interesting thoughts expressed on my LinkedIn post that I thought worth a share.

Chris Taylor, Global Head of Structured Products at Tempo Structured Products

I think our thoughts on this might differ. Because a company would be pragmatic, not dogmatic. A company would recognise that if nearly half of its shareholders (who are also customers) expressed polar opposite views to only very marginally more than half of its shareholders / customers, then they are dealing with a truly divided shareholder / customer base. Companies also do not deal with things in such a binary way as the referendum result has required – as democracy seemingly required. They would also recognise the need to move with the times, if they have good reason to believe that the views of their shareholders / customers have changed over time. Companies are kinetic. They know they must adapt … or die. They adapt to the interests of their shareholders and customers.

Campbell Macpherson, Business advisor, speaker, NED and author of 2018 Business Book of the Year, ‘The Change Catalyst’

Normally I would agree with you that the CFO and HRD’s lack of loyalty is shocking but, in this case, the CEO is such a terrible leader. She only listens to a vocal minority of her shareholders, ignores more than half of her customers, doesn’t engage at all with her fellow Exec Team members and has no vision for the company.

To borrow from the wit and wisdom of the late satirist Peter Cook who might have reported a Brexit conversation with Mrs May on the subject as follows “I said to her, with all the dignity I could muster, is this any way to run a ******* ballroom?”

My LinkedIn question was “If you were the CEO, what would you do”?

Over to you!

Feel brave enough FCA?

Regulatory update for Financial Advisers & Paraplanners

24 Jan 2019

Feel brave enough FCA?

Being responsible is what the financial industry should be about.

Sadly we have now reached a stage that the responsibility now falls on all as the few who mess it up never have the resources to put things right, previously referred to as ‘the polluter pays’.

There is an urgent need to find a better way to fund the ever-increasing costs of regulation and redress as well as delivering confidence and developing consumer protection. At its core, is funding the seemingly endless liabilities for consumer entitlement to compensation whether or not from ‘inappropriate (bad) or unsuitable advice’ and/or failure of product.

If not found, the only way to even think about evaluating the worth, let alone seeking access to advice, will become so expensive only the very rich will be able to seek it out and the entry of new firms impossible.

That in turn creates big problems for almost all provider firms, almost all, who rely totally on intermediated distribution.

A leading provider CEO observed only this week that: The truth is that we currently have a mixed economy in terms of compensation for mis-selling, product flaws, etc. Individual firms have primary liability for their actions and the wider FS industry carries the costs of systemic regulation and systemic failures (FSCS). Whilst everyone grumbles about this it is pretty sensible. Firms have real incentive to ensure that their activities are meeting standards, but the overall system has a backstop to maintain public confidence”. 

He is quite right, but how regulation and consumer protection is funded is what I see as the problem and not the responsibility focus where the ‘who pays’ door has slammed shut.

Financial products are predominately ‘purchased’ as a result of adviser recommendation, this can now include sales attached to products such car purchase. This distribution of intangible products is often referred to as intermediated distribution. The latter outlets, although regulated, are rewarded by way of commissions.

Pretty much all life, pension, protection and investment product providers do not sell or distribute what they design and build and have not for decades. Instead they rely on third parties. That party is the adviser community, tied, restricted or whole of market. That distribution method became predominantly fee based on 31st December 2012, excluding protection products and mortgage related advice.

Many argued that this date spelt the end of mass market access to financial advice and the beginning of a more professional era where if you could not pay, or were not deemed financially worthy, customer segmentation by advisers ensured advice was not coming your way any time soon, or at all.

Segmentation does not mean that IFA firms are always financially well-resourced to compensate for when things go wrong. This simple fact is the cause of the big problem the FSCS, PI insurers and firms left who pick up the cost of the clear up face.

Poorly, yet still compliantly capital adequate firms often collapse after a big call of money from the FSCS or even a single successful complaint and unaffordable compensation payments.

The regulatory year 2018/19 with just over 3 months to go, has seen the FOS refer 273 cases from around 74 companies to the FSCS. For these firms, Sipp’s accounted for 39% of FOS casework, PPI 28% and portfolio management 9%. This in turn will see more complaints against those firms hit the FSCS as the FOS will wash their hands of them as they will be placed in default.

Smaller IFA firms often do not use limited liability protection options, instead using their personal assets to satisfy capital adequacy. For many established firms operationally functional PI to ride out a bad advice claim award is difficult to achieve because of a very restricted pool of insurers and a continuing slew of claims for unregulated products being distributed by regulated entities.

Limited liability protection actually increases the risk of firms failing. And phoenixing can follow.

As PI cover is arranged a year at a time, any claim or notification of a claim in the current policy year, with a diminishing pool of reinsurers and huge premiums, could be curtains at renewal in the next year, no PI = no business.

Although there are always exceptions in commercial life, very, very few businesses set out to disadvantage clients for their own gain. It seems in today’s world of financial services that the collapse of firms can often be brought about because of a failure to get compliant PI, a big (even small) FOS redress order, or a flood of unexpected FSCS calls for cash from the misdemeanours of others. This in turn sees reducing adviser numbers that in turn presents fewer firms to pay ever increasing liabilities of others as they fail.

Many advisers have reported fraudulent claims in our regular FOS surveys. All this is really not helped by the culture of compensation that has encourgaged no win no fee lawyers (CMC.s) to boost consumer opportunity perception, as noted above. All financial products and advice presents an opportunity for a ‘refund’ many years later if what was suitable at the time of the advice is not seen that way, say, 15 years later due to changed client circumstances, changes in their aims and aspirations that applied at the time of advice.

Why? A lack of longstop does not assist, something that applies in just about every commercial walk of life. After six complete years from the date of the transaction there is no redress for bad service, goods or advice as commercial law does not permit it. In the world of financial services, it is forever, although I note that the FOS is now exercising the six years plus three rule a bit more.

In the summer of 2018, Panacea ran a FOS survey whereby 83% of respondents felt that FOS complaints process places them in an automatic position of guilty until proven innocent. The outcome should be determined by the evidence available and/ or the balance of probability. Often, that is not seen by firms as being the case. No file, because the case was more than say seven years in the past, does not help. Equally so if a file is retained, data protection could come back to bite as record keeping beyond seven years could be seen as a breach.

It is all well and good suggesting that the polluter pays from a compensation point of view, but the reality is they cannot because the pollution has proved so toxic, they just died along with everything else in that murky pond. In other words, the death of the polluter means they can never pay.

Some thoughts therefore follow for the FCA and HM Treasury to consider on how the industry should pay for regulation and at the same time protect the consumer from bad actors and product failures.

Every regulated firm, there are some 50,000, of whatever type (from car finance, to pet insurance, to funeral plans, pensions providers, life insurers etc) should pay a simple percentage of turnover to the FCA each year as a new type of ‘all inclusive’ regulatory fee to cover ALL the cost of delivering regulation, FCA, FOS but not the FSCS as this idea would see their need removed, building, quickly, a financial services fund to pay for when things go wrong (similar to the Pension Protection Fund?).

The complete opposite of the polluter pays.

This clearly defined cash ocean is locked, and if need be in the beginning underwritten by the Treasury, rather like the FSCS is today.

It should not see HM Treasury doing a cash grab on surplus funds as it has done with fines. Build up surplus, rather like the three-year Lloyds of London accounting period, and use that surplus to reduce the cost of regulation along with fee and fine offsets.

This pool of cash would be to specifically deal with the cost of FCA regulation and FOS arbitration when investigating consumer detriment for regulated products and advice only. Claims should be arbitrated at minimal, even no cost to either side by the FOS with the outcome being determined by the FOS with a low-cost form of independent appeal for each party.

The FOS should operate by assessing claims on the six years plus three rule, the basis of evidence available and/or the balance of probability and not by way of retrospection or beyond that time limit.

In the case of ‘guilt’ there should be an element of affordable, turnover redress payable by the firm and the rest paid for by the accumulated fund. This should mean that firms do not go out of business because of a claim or a claim against others.

There should be a very strict bad behaviour outcome with very bad being an immediate red card then say a ‘two strikes and you are out’ standard, or, where redress amounts are above a certain level and you are out ruled out of further activities, possibly even first time.

Regulated advisers should only engage in regulated products. Unregulated products should be exactly that and excluded from the support.

There would be no need for individual PI as the FCA should/ could, rather like huge corporates, self-insure by way of the fund created and the FCA could have in place a reinsurance pool made up of many insurers, PI or otherwise to remove any doubts of being selected against.

Tear up the current protocols, the status quo needs something a bit different.

Let’s do a little simple maths:

  • In 2017 £22.1 billion of revenue was earned by retail intermediary firms in 2017 from insurance, investment and mortgage mediation activities, compared to £20 billion in 2016. Source FCA
  • Over £300 million was paid by firms in Professional Indemnity Insurance (PII) premiums in 2017, Source FCA
  • The FSCS paid in claims to the year ended March 2017 £375,262,000 (£130,362,000 was recovered) source FSCS Financial review page 47
  • The biggest single cost to the FSCS in that year was £306,246 in interest source FSCS Financial review page 47
  • There are some 50,000 firms across many business areas that are registered with and regulated by the FCA

So, if every firm regulated by the FCA paid just 0.20% of their turnover each year, based on the above numbers some £442m would initially be raised. There would be no need for PI cost and a sum could be set aside to reinsure easily covered within that 0.2% cost.

That could be a starting point for a brave new world.

This thinking is not about presenting firms with a low-cost way to be reckless in their advice, it is not about bringing advice to the masses in its purest sense. But it is a starting point.

As the leading provider CEO further noted: Your suggested approach will only affect advisory firm behaviour materially if it leads to greater socialisation of all of the risks across the sector, and so reduces risk of ruin for advice firms.

The description of my thoughts as “socialisation” is very astute.

He did add a caveat that “this in turn runs the risk of too many firms taking higher risks because they don’t have to bear the brunt of their actions to the extent that they do today”.

But I beg to differ. Money is being made in the ‘industry of compensation’ that would be better used by ploughing it back to the pot, confidence would be restored, bad business put out of action very quickly and all that money saved on a firm level basis put to providing lower cost, easier access to advice, better regulated products and services created with foresight to ultimately benefit the consumer rather than hindsight to compensate them.

I hope that this very brief summary could be the basis of a new way to deal with compensation.

Just a thought.

A fourth way to fund regulation?

Regulatory update for Financial Advisers & Paraplanners

22 Jan 2019

A fourth way to fund regulation?

First of all Panacea followers, this is our 1,000th Bento. Given this landmark status, I felt that it should contain something special, and with that in mind, I would like to make a heartfelt suggestion or two about how the regulation and protections in the financial services industry could be re-engineered, for in regulatory parlance, better regulated firm and consumer outcomes.

This is quite long, but it needs to be to articulate conceptual thinking that can be taken forward and developed.

In a scene from ‘Wall Street: Money Never Sleeps’, the great Gordon Gekko defines financial services moral hazard as “when they take your money and then are not responsible for what they do with it”.

But being responsible is what the financial industry should be about, we have reached a stage that the responsibility should fall on all as the few who mess it up never have the resource to put things right.

There is an urgent need to find a better way to fund the cost of delivering confidence and developing consumer protection. At its core, the funding the seemingly endless liabilities for consumer compensation regarding ‘inappropriate (bad) or unsuitable advice’ and/or failure of product.

If not found, the only way to even think about evaluating the worth, let alone seeking access to advice, will become so expensive only the very rich will be able to seek it out and the entry of new firms impossible.

That in turn creates further problems to those provider firms who rely almost totally on intermediated distribution.

A leading provider CEO observed only this week that: The truth is that we currently have a mixed economy in terms of compensation for mis-selling, product flaws, etc. Individual firms have primary liability for their actions and the wider FS industry carries the costs of systemic regulation and systemic failures (FSCS). Whilst everyone grumbles about this it is pretty sensible. Firms have real incentive to ensure that their activities are meeting standards, but the overall system has a backstop to maintain public confidence”. 

He is quite right, but how regulation and consumer protection are funded is what I see as the problem and not the responsibility focus where the ‘who pays’ door has slammed shut.

The problem:

Currently regulation and the compensation culture based on consumer expectations, fraud, advice failure and entitlements has presented the financial services industry as a harvesting opportunity for limitless cash calls from lawyers and consumers, who some may argue, should take some responsibility for their own actions and not always expect the financial services industry to compensate for circumstances that were quite possibly of their own making or not the intent of the advice channel at the time of giving the advice.

Financial products are predominately ‘purchased’ as a result of adviser recommendation, this can now include sales attached to products such car purchase. This distribution of intangible products is often referred to as intermediated distribution. The latter outlets, although regulated, are rewarded by way of commissions.

Pretty much all life, pension, protection and investment product providers do not sell or distribute what they design and build and have not for decades. Instead they rely on third parties. That party is the adviser community, tied, restricted or whole of market. That distribution method became predominantly fee based on 31st December 2012, excluding protection products and mortgage related advice.

Many argued that this date spelt the end of mass market access to financial advice and the beginning of a more professional era where if you could not pay, or were not deemed financially worthy, customer segmentation by advisers ensured advice was not coming your way any time soon, or at all.

However, it seems that when the adviser advice, rather than what was previously known as a sales process, all goes wrong, a derivation of Billy Bennet’s thirties music hall ditty seems to apply. Something along the lines of “it’s the rich what has the pleasure and the poor that gets the blame”.

In this case read IFA for ‘the poor’ as the blame always falls at the advice door.

And in some cases that blame may be correctly placed but irrespective of that, IFA firms are not always financially well-resourced to compensate. This simple fact is the cause of the big problem the FSCS, PI insurers and firms left who pick up the cost of the clear up face.

Poorly, yet still compliantly capital adequate firms often collapse after a big call of money from the FSCS or even a single successful complaint and unaffordable compensation payments.

The regulatory year 2018/19 with just over 3 months to go, has seen the FOS refer 273 cases from around 74 companies to the FSCS. For these firms, Sipps accounted for 39% of FOS casework, PPI 28% and portfolio management 9%. This in turn will see more complaints against those firms hit the FSCS as the FOS will wash their hands of them as they will be placed in default.

Smaller IFA firms often do not use limited liability protection options, instead using their personal assets to satisfy capital adequacy. For many established firms adequate capital adequacy and affordable, operationally functional PI to ride out a bad advice claim award is difficult to get because of a very restricted pool of insurers and a continuing slew of claims for unregulated products being distributed by regulated entities.

Limited liability protection actually increases the risk of firms failing.

As PI cover is arranged a year at a time, any claim or notification of a claim in the current policy year, with a diminishing pool of reinsurers and huge premiums, could be curtains at renewal in the next year, no PI = no business.

Although there are always exceptions in commercial life, very, very few businesses set out to disadvantage clients for their own gain. It seems in today’s world of financial services that the collapse of firms can often be brought about because of a failure to get compliant PI, a big (even small) FOS redress order, or a flood of unexpected FSCS calls for cash from the misdemeanours of others. This in turn sees reducing adviser numbers that in turn presents fewer firms to pay ever increasing liabilities of others as they fail.

All this is really not helped by a consumer perception, as noted above, that all financial products and advice present an opportunity for a ‘refund’ many years later if what was suitable at the time of the advice is not seen that way, say, 15 years later due to changed client circumstances, changes in their aims and aspirations that applied at the time of advice.

Why? Very simply because there is no longstop, something that applies in just about every commercial walk of life. After six complete years from the date of the transaction there is no redress for bad service, goods or advice as commercial law does not permit it. In the world of financial services, it is forever, although I note that the FOS is now exercising the six years plus three rule a bit more.

In the summer of 2018, Panacea ran a FOS survey whereby 83% of respondents felt that FOS complaints process places them in an automatic position of guilty until proven innocent. The outcome should be determined by the evidence available and/ or the balance of probability. Often, that is not seen by firms as being the case. No file, because the case was more than say seven years in the past, does not help. Equally so if a file is retained, data protection could come back to bite as record keeping beyond seven years could be seen as a breach.

It is all well and good suggesting that the polluter pays from a compensation point of view, but the reality is they cannot because the pollution has proved so toxic, they just died along with everything else in that murky pond. In other words, the death of the polluter means they can never pay.

Now to go off piste, bear with me…

In 1970, I started working in the Lloyds marine re-insurance market. My ‘learning’s’ area of expertise was around reinsurance and claims, very specifically the ‘Torrey Canyon disaster’ of March 1967, the claims were still being worked on three years later.

As any insurer will tell you, you need to spread the risk base you hold, advisers take note. To do that you need to reinsure to protect yourself as a ‘name’ and your business. This is common place with life assurance products.

For those who do may not know, back in the ‘60s and 70’s Lloyds syndicates (the collective of insurers) operated in what was at the time the biggest open space room in the world opposite the current Lime Street current location.

Their individual ‘office space’ was referred to as a ‘booth’ paying homage to the coffee shop heritage that started Edward Lloyds concept in 1686. Each booth contained specialist syndicate underwriters who took a view on a risk, like Torrey Canyon, and signed up to insure it. No computers, just a piece of paper and in many cases a quill. The back office was another world of paper, comptometers, typists, and clerks but it all worked.

The super tanker SS Torrey Canyon hit rocks off the coast of Cornwall.

What was different about Torrey Canyon was the scale. The ship, one of the new generation of tankers, had been lengthened with the insertion of a new, larger mid-section. She was carrying, on a single voyage charter, nearly 120,000 tons of crude oil from Kuwait to Milford Haven in South Wales. Being deeply laden, she had to catch the late evening tide for berthing. To save half an hour and avoid a wait of five days, the Italian master took a route to the east instead of the west of the Scillies.

Those Italian captains eh, where has that happened since?

When the tanker struck the Pollard Rock, thousands of gallons of crude oil, a filthy chocolate-coloured mess, started spilling from her ruptured tanks. Detergent was sprayed continuously to disperse the slick, but it was like trying to hold back a tide that Canute would never even think possible.

Eventually the RAF and Royal Navy bombed it, using it as target practice. The idea was to burn the wreck and oil, still on the surface, as a final solution.

But beaches were left knee-deep in sludge and thousands of sea birds were killed in what remains the UK’s worst environmental accident and the minimal quantifiable cost, in other word insurance claim, was £14.24m, in today’s terms that would be some £249m. The losses were incurred on the hull, the cargo and the consequential losses a disaster can cause.

This massive claim threatened to put some Lloyds syndicates out of business as Lloyds always paid claims. If an individual Lloyds syndicate member, (a ‘name’),’ could not pay, their personal worth along with all those others who invested in the risk carrying syndicates were expected to pay. If you could not, your business was at severe, terminally and very legally seizable risk as were your personal assets and wealth, and all in cash.

Unlike IFAs their risk continued, a bit like PI today, for a specified policy period and a specified amount.

Matters were made worse because of a quirk in the risk assumption management and its spread.

Most syndicates would reinsure (spread) the risk on big bits of kit, like a tanker. A spread of risk with others who were not directly involved in insuring the vessel. But the complexity and size of the risk and the claim meant that reinsuring saw the risk spread back to the original insurer syndicates with the reinsurers reinsuring their risk.

Reminds me a bit of the 07/08 financial crisis, securitisation of mortgage debt bundles but not knowing what was in the bundle you brought. Reinsurance could be many layers deep.

As a disaster comparison in 2010 following the explosion and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico, insurers, Lloyd’s paid out over $600m.

So how does this connect with the problem?

Some thoughts for the FCA and HM Treasury.

Every regulated firm, there are some 50,000, of whatever type (from car finance, to pet insurance, to funeral plans, pensions providers, life insurers etc) should pay a simple percentage of turnover to the FCA each year as a new type of ‘all inclusive’ regulatory fee to cover ALL the cost of delivering regulation, FCA, FOS but not the FSCS as this idea would see their need removed, building, quickly, a financial services fund to pay for when things go wrong (similar to the Pension Protection Fund?).

The complete opposite of the polluter pays and in complete harmony with the Lloyds ethos of spreading the risk.

This clearly defined cash ocean is locked, and if need be in the beginning underwritten by the Treasury, rather like the FSCS is today.

It should not see HM Treasury doing a cash grab on surplus funds as it has done with fines. Build up surplus, rather like the three-year Lloyds accounting period before profits are realised and use that surplus to reduce the cost of regulation with fee and fine offsets.

This pool of cash would be to specifically deal with investigating consumer detriment for regulated products and advice only. Claims could only be arbitrated at minimal cost to either side by the FOS with the outcome being determined by the FOS with a low-cost form of independent appeal for each party.

The FOS should operate by assessing claims on the six years plus three rule, the basis of evidence available and/or the balance of probability and not by way of retrospection.

In the case of ‘guilt’ there should be an element of affordable excess and redress payable by the firm, again set as a percentage of turnover. This should mean that firms do not go out of business because of a claim or a claim against others.

There should be a very strict bad behaviour ‘two strikes and you are out’ standard or where redress amounts are above a certain level and you are out ruled out of further activities, possibly even first time.

Regulated advisers should only engage in regulated products.

There would be no need for individual PI as the FCA should/ could, rather like huge corporates, self-insure by way of the fund created and in the event of a ‘Torrey Canyon’ the FCA could have in place a reinsurance pool made up of many insurers, PI or otherwise to remove any doubts of being selected against.

Tear up the current protocols, the status quo needs something a bit different.

Let’s do a little maths:

  • In 2017 £22.1 billion of revenue was earned by retail intermediary firms in 2017 from insurance, investment and mortgage mediation activities, compared to £20 billion in 2016. Source FCA
  • Over £300 million was paid by firms in Professional Indemnity Insurance (PII) premiums in 2017, Source FCA
  • The FSCS paid in claims to the year ended March 2017 £375,262,000 (£130,362,000 was recovered) source FSCS Financial review page 47
  • The biggest single cost to the FSCS in that year was £306,246 in interest source FSCS Financial review page 47
  • There are some 50,000 firms across many business areas that are registered with and regulated by the FCA

So, if every firm regulated by the FCA paid 0.20% of their turnover each year, based on the above numbers some £442m would initially be raised. There would be no need for PI cost and a sum could be set aside to reinsure easily covered within that 0.2% cost.

This thinking is not about presenting firms with a low-cost way to be reckless in their advice, it is not about bringing advice to the masses in its purest sense. But it is a starting point?

As the leading provider CEO further noted: Your suggested approach will only affect advisory firm behaviour materially if it leads to greater socialisation of all of the risks across the sector, and so reduces risk of ruin for advice firms.

The description of my thoughts as “socialisation” is very astute.

He did add a caveat that “this in turn runs the risk of too many firms taking higher risks because they don’t have to bear the brunt of their actions to the extent that they do today”.

But I beg to differ. Money is being made in the ‘industry of compensation’ that would be better used by ploughing it back to the pot, confidence would be restored, bad business put out of action very quickly and all that money saved on a firm level basis put to providing lower cost, easier access to advice, better regulated products and services created with foresight to ultimately benefit the consumer rather than hindsight to compensate them.

I hope that this very brief summary could be the basis of a new way to deal with compensation.

Just a thought.

Go to immediately jail, do not pass go

Panacea comment for Financial Advisers & Paraplanners

7 Jan 2019

Go to immediately jail, do not pass go

On day two of 2019 yet another IFA has been jailed for fraud. Neil Bartlett, 53, of Delamere Road, Ainsdale, used £4.5m of his victims’ money to fund some of the usual, favoured by all fraudsters, indulgencies of foreign travel, top hotels, prostitutes, exotic cars, boats and gambling.

In this case, again, like so many others, it involved investing other people’s money, pensions and often life savings into what they thought was a safe investment account with interest.

By safe, that means it is being paid to the advisory firm to disperse according to the advice plan. But in a not uncommon twist, Bartlett had created a sole trader account with the same name as the company he worked for and paid himself the money.

It is clear that in just about every case of fraud it involves client money being paid to a client account for onward distribution. Ninety-nine times out of one hundred all goes as intended but it is the one time that results in what we see again and again in client money fraud.

Readers may wish to Google search (other search engines are available- in BBC speak) fraud IFA 2018 where the scale of this fiscal disembowelling can be viewed. It is in millions and guess how it is dealt with?

This type of fraud is called, in legal vernacular a ’Serious large-scale confidence fraud’. A common factor is the targeting of known to be vulnerable victims. Also, they will often be multiple frauds, i.e. many victims are deceived in the same way.

As an example, this accusation could be levelled at the victims of the British Steel pension fund debacle.

These offences are usually charged under the Fraud Act where the maximum sentence permitted by law is 10 years imprisonment.

For this adviser’s type of fraud, sentences of up to 7 years are common if the fraud is in excess of £500,000.

For the now ex IFA, the sentence will see early release for being a good ‘boy’.

I am not sure if the FSCS ever try to recover from the now ex IFAs or indeed if asset confiscation is possible to offset some of the redress, but one thing is for sure, no matter what regulation is put in place, what checks are made, the opportunity is still there for this practice to continue.

When I was a broker consultant in the early ‘80’s, some IFA firms, referred to then as brokers, had client accounts’ and operated something I recall as being broker bonds. A bit like a wrap or platform investment in a way but it was in house.

I cannot recall any frauds but there were regulatory concerns and also concern from my employer at the time that this holding of client money where the investment was in an inhouse designed and built vehicle could be subject to abuse.

So, role on and working lifetime and fraud opportunity continues in abundance. The cost to clients when the opportunity is exploited is massive, the cost to the compliant firms is huge too and of course unexpected when the FSCS come calling.

The time has come to put a stop to regulated firms holding client money when the intended destination is to a regulated providers funds, wraps, platforms. As an extra measure, despite all the good arguments put forward by IFAs, regulated firms should NOT be allowed to deal in unregulated activity or markets, this would relieve the burden on PI insurers, FCSC calls and IFA firms when a regulated advice firm advises upon unregulated products. Unregulated products are often just that for a reason.

The ability of consumers to execute instant electronic transfer of funds really renders holding client money an unnecessary and expensive temptation. To stop this would see PI and other regulatory costs reduce and go some way to restoring trust in an industry, sorry, profession, that has taken a battering and will continue to do so every time money ends up in the hands of someone or something it should not.

Just a thought.

FCA suggests clear out of sales dinosaurs

Panacea comment for Financial Advisers and Paraplanners

29 Oct 2018

FCA suggests clear out of sales dinosaurs

FCA suggests clear out of sales dinosaurs

Arthur’s thought for the day: “You make contact with your customer. Understand their needs. And then flog them something they could well do without.”

I think this may be what one senior figure at the FCA’s perception of financial services sales ‘persons’ is?

David Blunt, head of conduct specialists at the Financial Conduct Authority, speaking at a recent City & Financial conference explained:“Where we want to get to is for firms to have a real sense of personal responsibility for all they do in financial services.

He then went on to say, “Are sales people who have risen to the top the right people to be leading today”? 

As a retired IFA and the founder of IFA community Panacea Adviser, I find his thought process deeply offensive. Is he suggesting that sales people are a sub class. Sounds a bit like the ‘Brexit remainer’ argument about leavers- that they were too stupid, too ignorant, racists, xenophobes……you get the drift.

His Linkedin profile shows him starting his career working for City solicitors Hogan Lovells going on the well-trodden path of articles through to a fully qualified solicitor.

I suspect that David Blunt has little knowledge beyond the walls of regulation and academia. After leaving Hogan Lovells in October 1998, his entire career has been spent in regulation of some sort. Firstly, with a couple of years at the Stock Exchange then from 2000 it has been climbing ever upwards at the FSA and then the FCA.

It was said that intelligence does not fit easily with common sense. The curse of the regulator.

We all agree that happy customers (positive outcomes is the phrase to use in 2018) are the key to any successful business.

But with a working life spent entirely in the world of regulation, I am deeply offended as is the fashion today, on the part of others too, that he should ask the question “ Are sales people who have risen to the top the right people to be leading today”? 

If his Linkedin profile is a yardstick, this is an individual who has no experience of what it takes to raise the money to start a business, especially a regulated business, grow a business, deal with all the troubles that can go with it or has any idea whatsoever about running a business. And amongst the hardest these days is a financial services business.

Sales are bad, sales-people are bad, regulators are good is the message spouting forth? Really?

Any business is built on the fact that it has something that somebody is prepared to pay for. Tangible, or in the world of financial services, intangible.

Any business requires somebody to sell the services, goods, or in the financial services world someone to ‘sell’ the ‘advice proposition’.

Nobody ever bought a financial services product. Historically they were ‘sold’ it, often by direct sales.

That is bad in 2018, it is now by advice.

Bad like the new ’snowflake’ thinking about Churchill, Cecil Rhodes, Bomber Harris or even this month ‘Prince Charming’. All have done bad things it seems. Disney’s ‘Prince Charming’ is probably top of the pile for kissing Snow White without permission.

Back in the day, the reward for the ‘sale’ was described as a commission, successful sales people made a lot of it, the unsuccessful ones fell by the wayside.

By the way, people saved then, paid into pensions, had life cover and did not see advice as something to pay for as it was already included within the sales process- excuse the simplicity, but life was simpler then.

Today, success in sales is not measured in terms of commission, it is now called something else. It is a metric referred to as fee income- based upon advice from a professional. That person being highly qualified with a ‘proposition’ to offer but, with a product invariably attached.  As an aside that will doubtless bring scorn waves raining down, in most cases the fee for the ‘propositions advice proposal’ is closely resembling what was previously known as commission.

A successful advisor is measured in fee income. But really it is still ‘sales’. After all, if an advisor can find no paying clients to give advice to, they fall into the same category as those back in the day, a failure.

Mr Blunt should note that in financial services provider firms there are huge numbers of people who rely on advisors promoting their advice solutions for their livelihoods.

He should also note that most financial advisors are small business owners, if they are sole traders or in partnership, they carry responsibility to the grave at the moment for their actions.

I think that is what is called ‘personal responsibility’.

In any business, the sales people are the driving force yet for some reason, sales in financial services is a dirty word.  Even Hogan Lovells require business getters, people who can get new clients that they can charge fees to.

There are some fantastic people in this industry, many have come from a sales background. I am not sure how many regulatory staff have made the transition to sales in a commercial environment.

Oh, there is one, Rory Percival.

David Blunt “must be on them stair rods” (as Arthur would say), he should be careful what he wishes for.

There may be some out there like me, looking back over the failings of the various regulators we have had- NASDM, FIMBRA, PIA, FSA, FCA, asking Mr Blunt what consumer detriment his actions and those whose actions he manages could be accused of causing. After all, with some 19 years of his working life being spent in Canary Wharf (plus the last couple of weeks in Stratford) and looking with the #metoo generation mindset, there must be something?

But silly me, as ‘Sir Hector’ once said, if you want a regulator to take responsibility for what they do, nobody would want to do the job.

Those in regulation are the one’s who have failed the consumer. They are always right after the event, never show foresight or a willingness to apply forward thinking to regulation.

They kill businesses with that lack of foresight burnished with cost.

It is the consumer who suffers by way of firms passing on those increased costs and charges incurred paying to keep them safe from the detriment the regulator ‘coulda/ shoulda’ spotted years ago.

The question I would ask is “Are people who have risen to the top of the regulatory world with no real-world commercial experience or business success, the right people to be leading regulators today”?  

FCA suggests clear out of sales dinosaurs

FCA suggests clear out of sales dinosaursArthur’s thought for the day: “You make contact with your customer. Understand their needs. And then flog them something they could well do without.”

I think this may be what one senior figure at the FCA’s perception of financial services sales ‘persons’ is?

David Blunt, head of conduct specialists at the Financial Conduct Authority, speaking at a recent City & Financial conference explained:“Where we want to get to is for firms to have a real sense of personal responsibility for all they do in financial services.

He then went on to say, “Are sales people who have risen to the top the right people to be leading today”? 

As a retired IFA and the founder of IFA community Panacea Adviser, I find his thought process deeply offensive. Is he suggesting that sales people are a sub class. Sounds a bit like the ‘Brexit remainer’ argument about leavers- that they were too stupid, too ignorant, racists, xenophobes……you get the drift.

His Linkedin profile shows him starting his career working for City solicitors Hogan Lovells going on the well-trodden path of articles through to a fully qualified solicitor.

I suspect that David Blunt has little knowledge beyond the walls of regulation and academia. After leaving Hogan Lovells in October 1998, his entire career has been spent in regulation of some sort. Firstly, with a couple of years at the Stock Exchange then from 2000 it has been climbing ever upwards at the FSA and then the FCA.

It was said that intelligence does not fit easily with common sense. The curse of the regulator.

We all agree that happy customers (positive outcomes is the phrase to use in 2018) are the key to any successful business.

But with a working life spent entirely in the world of regulation, I am deeply offended as is the fashion today, on the part of others too, that he should ask the question “ Are sales people who have risen to the top the right people to be leading today”? 

If his Linkedin profile is a yardstick, this is an individual who has no experience of what it takes to raise the money to start a business, especially a regulated business, grow a business, deal with all the troubles that can go with it or has any idea whatsoever about running a business. And amongst the hardest these days is a financial services business.

Sales are bad, sales-people are bad, regulators are good is the message spouting forth? Really?

Any business is built on the fact that it has something that somebody is prepared to pay for. Tangible, or in the world of financial services, intangible.

Any business requires somebody to sell the services, goods, or in the financial services world someone to ‘sell’ the ‘advice proposition’.

Nobody ever bought a financial services product. Historically they were ‘sold’ it, often by direct sales.

That is bad in 2018, it is now by advice.

Bad like the new ’snowflake’ thinking about Churchill, Cecil Rhodes, Bomber Harris or even this month ‘Prince Charming’. All have done bad things it seems. Disney’s ‘Prince Charming’ is probably top of the pile for kissing Snow White without permission.

Back in the day, the reward for the ‘sale’ was described as a commission, successful sales people made a lot of it, the unsuccessful ones fell by the wayside.

By the way, people saved then, paid into pensions, had life cover and did not see advice as something to pay for as it was already included within the sales process- excuse the simplicity, but life was simpler then.

Today, success in sales is not measured in terms of commission, it is now called something else. It is a metric referred to as fee income- based upon advice from a professional. That person being highly qualified with a ‘proposition’ to offer but, with a product invariably attached.  As an aside that will doubtless bring scorn waves raining down, in most cases the fee for the ‘propositions advice proposal’ is closely resembling what was previously known as commission.

A successful advisor is measured in fee income. But really it is still ‘sales’. After all, if an advisor can find no paying clients to give advice to, they fall into the same category as those back in the day, a failure.

Mr Blunt should note that in financial services provider firms there are huge numbers of people who rely on advisors promoting their advice solutions for their livelihoods.

He should also note that most financial advisors are small business owners, if they are sole traders or in partnership, they carry responsibility to the grave at the moment for their actions.

I think that is what is called ‘personal responsibility’.

In any business, the sales people are the driving force yet for some reason, sales in financial services is a dirty word.  Even Hogan Lovells require business getters, people who can get new clients that they can charge fees to.

There are some fantastic people in this industry, many have come from a sales background. I am not sure how many regulatory staff have made the transition to sales in a commercial environment.

Oh, there is one, Rory Percival.

David Blunt “must be on them stair rods” (as Arthur would say), he should be careful what he wishes for.

There may be some out there like me, looking back over the failings of the various regulators we have had- NASDM, FIMBRA, PIA, FSA, FCA, asking Mr Blunt what consumer detriment his actions and those whose actions he manages could be accused of causing. After all, with some 19 years of his working life being spent in Canary Wharf (plus the last couple of weeks in Stratford) and looking with the #metoo generation mindset, there must be something?

But silly me, as ‘Sir Hector’ once said, if you want a regulator to take responsibility for what they do, nobody would want to do the job.

Those in regulation are the one’s who have failed the consumer. They are always right after the event, never show foresight or a willingness to apply forward thinking to regulation.

They kill businesses with that lack of foresight burnished with cost.

It is the consumer who suffers by way of firms passing on those increased costs and charges incurred paying to keep them safe from the detriment the regulator ‘coulda/ shoulda’ spotted years ago.

The question I would ask is “Are people who have risen to the top of the regulatory world with no real-world commercial experience or business success, the right people to be leading regulators today”?  

*The brilliant actor who played Arthur Daly was George Edward Cole, who died aged 90 on the 6thAugust 2015