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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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.

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

The Three Certainties of Human Life are Death, Taxes, and more regulation

The Three Certainties of Human Life are Death, Taxes, and more regulation

“The regulator has found concerns over value for money in drawdown, including significant variance in charges, which can be complex, opaque or tough to compare, so has set out plans to force firms to show a one-year charge figure in pounds and pence in the key features illustration they provide to consumers”.

It is a commercial world out there and I can think of no other industry that has a regulatory insistence that charges for what they make/ build/ sell have to be granularly declared.

When you buy a new house, is there a breakdown of building and material costs supplied with the contract? The same with a new car: design.testing, parts and labour. A prescription drug does not come with a breakdown per tablet for research, development and testing, a holiday cost does not breakdowns for flights, hotels, food, drink or flight. Supermarkets do not declare what the business costs are for selling you a pack of sausages.

A bit simplistic I know but if regulation stops messing with fixing what in many cases is not broken and more people use a financial adviser, the world of independent advice and consumer trust may be a better place.

As an owner in the 1970’s of a waterbed (with the attendant life affirming fond memories) the illustrative metaphor of the movement in a water-filled mattress seems to be a common sense albeit simplistic description supported by a little known mathematical formula called Bode’s Sensitivity Integral.

Bode’s waterbed theory ‘outcome’ is already well illustrated in the mobile phone and utilities industries where regulation and political interference fixes or manipulates the prices of basic products and services only for consumers to see complicated pricing structures ensue by way of significant increases in the price of peripherals and additional services as a direct consequence.

Thiseffect is a phenomenon that should increasingly cause concern to those who regulate the industry and those it regulates in regard to pricing and the detriment the post RDR world has wrought upon the intended beneficiary- the consumer.

It is the natural but not necessarily intended potential to squeeze one part of a complicated and complex regulated business model (and the attendant regulatory processes) to cause a serious bulge elsewhere in the process.

So, the theorising in RDR should have foreseen that in achieving:

  • the elimination of bias in the market
  • ensuring the adviser is the true agent of the consumer
  • clarity over the costs of advice
  • and various other factors,

the industry would no doubt see the bulge appear somewhere else.

And this has been seen in costs in every conceivable way and particularly for consumers.

Cost is something that FCA regulation incurs for firms, often with little thought of logic or affordability and with little benefit analysis being done on the consumer impact and detriment it created.

So how else did the theory manifest itself?

In ensuring the adviser is the true agent of the consumer, the result was that the mass-market consumer did not, does not want to pay for advice that had previously been seen as free.

When a consumer is able to obtain lower prices from an adviser or a provider for drawdown, is it possible that other consumers will have to pay more for the same input from another adviser or provider firm as a result?

Is this bad for consumers?

The asymmetric exercise of regulatory or consumer power can lead to consumer detriment through raising other consumers’ advice and provider charges- the Waterbed effect.

While a large and powerful provider firm or distribution channel improves its own terms by exercising its market power in getting cost reductions, the terms of its lesser resourced competitors can deteriorate sufficiently so as ultimately to increase the average price of advice – the Waterbed effect.

It seems to me that the only organisations in the world of financial services that should raise serious “concerns over value for money, including significant variance in charges, which can be complex, opaque or tough to compare” are the FCA, FOS and the FSCS. 

We never see a breakdown of costs, budget breakdowns yes but costs????

IFA Antony Cousins at SPF rightly comments that “value for money has always been important to clients, however with returns from financial products expected to be lower over in the short to medium term, the level of charges are now even more relevant.  For many years Financial Advisers Fee Agreements have had to specify the exact service(s) being provided and the associated initial and ongoing cost in pounds and pence, hence I see no reason why providers illustrations for drawdown should not follow this model”.

He goes on to note that this should be“coupled with an educational programme to enhance customers understanding of a highly technical area would remove some of the scepticism in the industry”. 

There is some suspicion that the FCA are more concerned about clients going direct to providers in this drawdown market and not taking advice where we have to stipulate and review all these costs.

Regulation has created a race for the bottom on price. I am not sure that the average consumer ‘buys’ financial advice on the cheapest cost. I think that for the mass market consumer it could be about not paying anything at all as they see the pension plans providers they have been invested in for years should provide that advice for free.

This is in turn a problem for providers who are predominantly distributing their products via the intermediated channel. They do not want to carry out work, with added customer care regulatory liabilities or redress, that they see, is an IFAs role. But if the client has either been disenfranchised by RDR segmentation or just does want to pay what else can be done.

Waterbed effect at work again????

Stop the shorting monster

Panacea comment for Financial Advisers and Paraplanners

17 Jan 2018

Stop the shorting monster

A short sale is a transaction in which an investor sells borrowed securities in anticipation of a price drop and is required to return an equal number of shares at some point in the future.

A short seller makes money if the stock goes down, a lot of money if it drops a lot.

Shorting is legal. But is it morally acceptable?

This is a question that many outside the financial services industry will be asking, especially when there is such a baying for the blood for directors’failures, political failures, huge salaries being paid for gardening leave and in particular the huge sums of money being owed to small contractors and in fact to Carillion by those it worked for.

Hedge funds have made paper profits of hundreds of millions of dollars over the last year. Shorting of Carillion stock will have done their bit to boost the coffers.

The thirty thousand small firms in Carillion’s supply chain now face an anxious wait to see if they will be eligible for any government help to pay an estimated £1bn of outstanding bills. Many will fail, quite possibly because without the cash they cannot pay their tax bills on the 31st January, but the hedge funds will have no such dilemas

Rudi Klein, chief executive of SEC Group, which represents thousands of small businesses, said it was “inexcusable” that Carillion had “imperiled the supply chain”.

Hedge funds shorting will not have helped.

Conservative MP Bernard Jenkin amazingly came out with that great stock phrase so often used in times of collective failure, on Tuesday’s Channel 4 news, that he would be calling the company’s management, employees and customers as part of a bid to “learn lessons” from this unholy governmental fuelled mess.

What!!!!!

Why not the hedge funds too, who could see only too well that this was coming ages ago?

I think all those small businesses who worked on Carillion contracts that had payment terms of 120 days may think that this is too little too late.

Perhaps now is the time for the FCA to look at shorting and considering banning the practice as shorting just rubs salt into a very large and gaping Carillion wound and will continue to do so when this type of thing happens again, which it will.

Just a thought.

Regulation, competition and consumers

Panacea comment for Financial Advisers and Paraplanners

2 Jan 2018

Regulation, competition and consumers

Please do not get me going so soon in 2018, after all it’s only the first full working week of January

The FCA has released the minutes of its November 9th board meeting. Buried within the text was an interesting section on competition. The minutes noted that:

The Board received the draft Approach to Competition document outlining how the FCA seeks to promote competition in the interests of consumers. It was noted that surveys had shown that competition was the least understood of the FCA’s objectives and so the document would form a useful piece of communication, demonstrating that FCA regulation promotes competition, which is fundamental to making markets work well.

There is something very wrong, very wrong indeed. Could it mean that somebody in Canary Wharf is having a Damascene conversion.

By default or intent, the various regulators over the years I have been active in the industry, from Nasdim, FIMBRA, PIA, FSA and FCA have spent their time in ensuring that the very last thing done is to promote competition. In fact, the very daily act of regulation would seem to be to do the exact opposite.

I think we could look back at many examples of this such as the removal long ago of the maximum commission agreement to RDR, the removal of commissions and a move to fee-based advice.

I had the great fortune to sell my IFA practice 12 years ago, a driver for taking the plunge was that having worked under the ‘control’ of four different regulatory regimes- NASDIM, FIMBRA, PIA and FSA. The prospect of never seeing longevity of regulatory regimes, the application of common sense and fairness all went to paint a very bleak future.

The jury may still be out in that regard, but I think we are at the stage where the judge may be directing the jury that a majority decision would suffice.

I am not normally driven to negativity, cynicism maybe, and while I do see an absolute need to have regulation of financial services, it seems to me that wherever there is regulation, consumer detriment and extreme cost is the outcome with blame being laid at the door of the weakest.

Some key facts to digest:

  • Regulation is poorly thought out in just about every industry
  • It is reactionary rather than pro-active
  • It is not always retrospective, although in financial services it seems to be an exception
  • Nobody ever listens to the voice of experience
  • Nobody ever learns from past failings
  • Nobody in regulation admits failure
  • Nobody in regulation takes the blame
  • Everyone in regulation benefits from yearnings, learnings and earnings
  • Regulatory failure is rewarded not punished
  • Regulation is an industry, it is hermaphroditic, capable of self-procreation and without something to bash it would have no purpose. As Keith Richards (Rolling Stone not PFS) once said “In the business of crime there’s two people involved, and that’s the criminal and the cops. It’s in both their interests to keep crime a business, otherwise they’re both out of a job.”

Regulation should not be pursued at any cost and in such a way, applied like a tattoo only to be regretted when the effect of the alcoholic or love induced stupor that fuelled its creation has gone away.

Has the consumer benefited?

Many may say no.

It would seem that the FCA may be considering that as a distinct possibility

Access to financial advice for the masses has been exterminated. Even if it was freely available in the fiscal sense, there is insufficient capacity to service any more than around 10% of the population based on the recent Heath Report and the FAMR will not correct that imbalance as was intended.

The problem with regulation over the years and as we enter 2018 is that you cannot regulate for lack of common sense, yet that is what we keep trying to do. Caveat emptor has gone at the expense of the consumer rather than in their defence

We have lost the use of that in-built gene of common sense when looking at constructing and applying regulation. Its loss went along with map reading skills, crossing the road after looking both ways, not talking to strangers, proficient cycling, spelling ability, simple mental arithmetic skills, writing, eating with a knife and fork and very many more.

The world has truly gone mad, or at least it has in UKplc’s regulation section.

We have a snowflake society that is now readily and speedily offended on somebody else part for just about everything that simply should not matter as much as it does.

We have borders that are not fit for purpose, we have an NHS in meltdown because the service is now aspiration and expectation based, rather than focusing on the basics of its original 1948 founding principles (comprehensiveness, within available resources) and a country controlled not by UK based elected politicians but by unelected civil servants, quangos, eurocrats and regulators.

To top that we now have ‘Brexit’.

I did say do not get me going so soon!