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????

Advertisements

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!

The conundrum of Robo Responsibility

Panacea comment for Financial Advisers and Paraplanners

21 Nov 2017

The conundrum of Robo Responsibility

Earlier this month Professor Stephen Hawking issued a chilling warning about the imminent rise of artificial intelligence. During the new interview, Professor Hawking warned that AI will soon reach a level where it will be a ‘new form of life that will outperform humans.’

There is a move afoot to bring the delivery of financial advice into the 21st century. After all with the smart phone, tablet and virtual reality all breaking through boundaries, why should financial advice not find itself in the vanguard of change?

It should work, could work, but will not work until something very simple yet clearly requiring a considerable volte-face takes place.

So, here’s a thought for you lovers of Steve Jobs and even Ned Ludd.

This may take a little of your time but bear with me please.

Steve Jobs reckoned that “Older people sit down and ask, ‘What is it?’ but the boy asks, ‘What can I do with it?”.

Smart technology exists and is readily available in the average home. Algorithm based analytics are there, right now, to deliver for the mass market an automated method of providing the average family with the ability to self medicate their financial ailments and prescribe a solution.

This happens in many areas of web based life today so why not financial services?

The elephant in the room of progress is the word ‘advice’. Because in the financial services world where products are delivered/ sold/ distributed by the intermediated channel the buck of responsibility always stops with the financially weakest part of the process, the advisory firm.

Product failure, rather like design failure in modern airliners, is unheard of. With an airplane the crash blame is pretty much always directed at the pilot.

Robo or automated solutions should work, it is all in the ‘math’? Very complicated algorithms drive the customer to a very specific outcome.

This is where it gets complicated because at the moment should the algorithm prove in five, ten or fifteen years to have had an unforeseen glitch regulatory retrospective retribution will rain down on the advisory firm, not the maker of the programme.

There is a simple solution to a complex problem.

That is to have the algorithms certified as fit for the purpose they were designed for.

Fit for purpose accreditation already exists in other areas of regulation. Aircraft cannot fly in UK airspace without CAA approval. Drugs are certified as fit for purpose and prescription with the Medicines & Healthcare products
Regulatory Agency.

So why can the FCA not approve automated advice models as fit for purpose?

The answer according to Andrew Mansley at the FCA, who I spoke to at some length at the PFS Festival, is that it would be “anti competitive”.

What!!!!!!

There are examples of this statement being used to create chaos and detriment in this industry. The Maximum Commission Agreement springs to mind. For those new to the world of financial services this is an essential read

For those with not enough time served in this industry, you should know that from the late eighties increased commission levels from larger distribution channels were being sought after the OFT got rid of the Maximum Commission Agreement (MCA) as it was seen to be anti-competitive.

I suspect the real reason would be that, in the words of Hector Sants, not known to Mr. Mansley, “if the regulator was to take responsibility for it’s actions, nobody would want to do the job”.

The FCA needs to consider the following simple steps to improve the embrace of automated opportunities.

  1. All robo models should apply to the FCA for approval, that approval will certify what the programme can and cannot do and rather like a fully automated vehicle
  2. The FCA approval will apply to the algorithms and the programme
  3. Any changes, upgrades would require a certification upgrade
  4. The robo technology would require PI cover for any unforeseen failures and not the adviser firm
  5. The advisory firm would NOT be responsible for any advice/ guidance failure of the robo programme as part of the FCA sign off
  6. In October last year, Professor Stephen Hawking warned that artificial intelligence could develop a will of its own that is in conflict with that of humanity. With this in mind, the advice responsibility buck stops with the technology provider and not the adviser

 

Put these in place and both the regulator and the software house would think very carefully about failure, the adviser could engage with more consumers with confidence restored.

We can always dream?

In the business of crime there’s two people involved

Panacea comment for Financial Advisers and Paraplanners

13 Oct 2017

In the business of crime there’s two people involved

It was during this same month six years ago that I first read with some dismay, but an overall lack of surprise, that the then FSA had opted not to license or pre-approve financial services products, due to what it claimed were a “lack of resources”.

I’m sure I don’t have to remind anyone reading this that back in 2011 the consumer had already faced considerable detriment as a result of financial products such as PPI. And the regulator’s helpful response almost every time was to point out flaws in product design, marketing or understanding of the product – all with the benefit of hindsight.

Fast forward to 2017 and the same issues rumble on as a result of the regulator’s inaction to preapprove products before they are made available to consumers. Around this time last week, for example, the news broke that the FSCS had begun accepting claims for bad investment advice in relation to a failed property scheme Harlequin.

Anyone invested in Harlequin would have, at first, been deemed ineligible for FSCS compensation as the product would have been considered a direct investment. But the FSCS reviewed this position and found new evidence that the Harlequin products likely fall under the banner of unregulated collective investment schemes (UCIS), which qualifies them for FSCS protection. The FSCS is also already paying claims against firms for bad mortgage advise and pension switching, if the underlying investment was in a Harlequin resort.

If I’ve said this once I’ve said it a hundred times and I’ll keep doing so in the hope that one day the regulator will finally see the light: regulation should not be about being wise after the event. It should be about utilising experience when things going wrong to make sure mistakes and failures do not happen again. To licence a product as fit for purpose, with that purpose clearly defined, as part of the regulatory process is the surely best way of achieving this? I’d even go one step further to say it’s the single most effective consumer benefit a regulator could put in place.

The situation with Harlequin, and most other examples for that matter, are always about the advice and not the product. The FCA has been careful to point out that any adviser recommending Harlequin was expected to have carried out thorough due diligence on any Harlequin investments “to fully satisfy themselves that it is a suitable investment”.

In no way aim I suggesting due diligence isn’t a crucial part of the advice process but let’s consider a slightly different approach for a moment. If products were regulated from the outset, and advisers regulated by the FCA were not allowed to engage, at all, with unregulated products – commission paying or not – problems and losses such as this would not happen. And crucially, the tab would not have to be picked up by the FSCS.

I’ve been suspicious for a long time now that the FCA’s decision back in 2011 was really nothing to do with resource and instead was all about responsibility and, ultimately, who the finger points at when things go wrong. Sadly, this latest development in the Harlequin case only confirms my suspicions yet again. It seems that without something to bash the regulator would perhaps feel it has no purpose, or as Keith Richards of the Rolling Stone’s, not PFS, once said of the policing system, “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.”

Some have suggested that the resource needed by the FCA to pre-approve products would have resulted in a huge increase in fees. But then there’s the alternative, logical, argument that perhaps if products were licenced there would be fewer failures to fund? Just a thought…

Death by regulator

Panacea Comment for Financial Advisers and Paraplanners

11 Sep 2017

Death by regulator

We hear that the FCA has announced a ‘Terminator’ inspired marketing campaign, yes, a marketing campaign, to encourage those who have not had a win on the PPI lottery yet to get truly lucky.

The regulator is treating compensation opportunity creation as if it is a DFS sales campaign.

The outcome (iove that word)? The claims management industry has just had a boost in the form of a £42m advertising campaign that has cost them absolutely nothing. This includes advertising and dedicated phone line costs.

And as for this FCA statement:  “If you had a previous complaint about mis-selling of PPI rejected, but now want to complain about a provider earning a high level of commission, you should follow the steps below”.

Since 2011 over £27bn has been paid out in PPI compensation. How much more will this generate?

But the big worry with this campaign is about where it will lead to if FOS complaints are to be rejected and then re-allowed at a later date based on what the firm was paid. Remember, advisers have no longstop, in this case confirmed with words like this from the FCA You can complain about mis-selling of PPI however long ago it was sold to you”.

Words fail me. Will the last compensation payer turn the lights out when they leave?

Email this article Print Share on Twitter Share on LinkedIn Share on Facebook Share on Google+

How much has the shiny new logo cost this time?

Panacea comment for Financial Advisers and Paraplanners

9 May 2017

How much has the shiny new logo cost this time?

In 2013, a Panacea FOI request exposed the rebrand cost for the FSA’s change to the FCA.

It was  £1,061,423 including VAT.

The FOI request went on to confirm the cost of the logo design saying:

“We have spent £48,000 on designing the FCA brand identity, £91,500 on developing the FCA brand guidelines, £57,000 on registering the new logo and on legal fees to resolve registration issues”.

So when we heard that the FCA had decided, after a shelf life of barely three years, to change it’s logo, we though it would be an idea to find out how much?

In their reply, an unnamed individual from the “Information Disclosure Team / Cyber and Information Resilience Department” said We undertook a refresh of the FCA brand to make sure our brand is accessible, open and transparent so that all our audiences understand our role.  In particular, we need to ensure our brand works well for digital use and takes into account accessibility considerations.  This is particularly important as we are planning to launch our first national TV and outdoor advertising campaign on PPI later this year. Consumer research in particular has helped inform our evolution of the FCA logo to ensure ‘Financial Conduct Authority’ is clearly legible and accessible”.

Given that in 2013 so much was spent on rebrand one might ask, purely from a business owner perspective, why the lifespan of a ‘global’ brand is just 3 years? That would suggest that either the brand brief or interpretation was incorrect in 2013.

The reply to our request was answered as follows.

          “Brand refresh 

·         The design cost:

£5,340

·         Legal costs:

£1,440

·         Implementation cost;

£66,410 – we have interpreted this to be the total cost (including the items above) – agency work to audit FCA brand and update logo and design approach, design templates for new brand, effra fonts and logo trademark registration.

·        Stationery cost”

There are currently no stationery costs. As stated above, the existing logo will be phased out over the next year and we will not change signage in our printed material such as letterheads or business cards until either they run out or we change address. 

Over the last 10 years the Panacea brand logo is unchanged, as is the Ford Motor Company’s, Apple and Coca Cola. In 2014, the Coca-Cola brand name alone was worth $67million, accounting for more than 54% of the company’s stock market value at that time.

It is said, a strong, consistent brand will allow the customer to know exactly what to expect each time they encounter your business” 

Steve Jobs said, “Design is not just what it looks like and feels like. Design is how it works”.

In this case, the jury on the ‘how the FCA’s works’ is still out.

The cost of this exercise is quite small in regulatory terms. I am not sure what the effect is on consumers but I am sure that those it regulates will see this as another example of spending other peoples money without being responsible for how or if it works or in this case if you can notice the difference at all.

Can you spot the differences?