FOS compensation hike. Hand me the black cap, will you

Panacea comment for Financial Advisers & Paraplanners

20 Mar 2019

FOS compensation hike. Hand me the black cap, will you.

We highlighted in November the need for firms to respond to an FCA consultation on a proposed FOS compensation limit hike of 200k taking the maximum  pay-out to £350k.

It was announced with very little time to respond.The consultation opened 16 Oct and closed 21 Dec so slightly over two months.

Just one hundred firms, including Panacea responded.

Rory Percival commented in our LinkedIn discussion that “100 is a fairly typical response rate, more than many consultations, and hardly the fault of the FCA. Don’t get me wrong; I have serious reservations about the result but to suggest the process is unfair is in itself unfair”.

The FCA said that “proposed changes to the ombudsman service’s award limit will ensure more complainants receive fair compensation when the ombudsman service upholds their complaint against a firm”.

At Panacea, we believe that this will see the end of smaller IFA firms due to impossible capital adequacy requirements caused by higher excesses to deal with £350k claims and a PI market that just will not want to play.

It will be the end of anyone looking to start a new firm because of capital adequacy constraint.

It will mean that PI premiums will get so high that only the largest firms could afford it.

And, you guessed it, more firms falling into FSCS default with fewer firms being left to pay the increasing calls for cash.

Truly, this is the industry, sorry profession, that will destroy itself.

Why have they done this, or is it an April Fool a bit early?

FCA chief executive Andrew Bailey reckons that: “Consumers and small businesses struggle with the cost and time needed to take firms to court, so it is essential they can receive fair compensation from the FOS when things go wrong.

And then, that now sickeningly often used regu-speak:

“We have listened carefully to the feedback we have received and believe our approach is right”.

Really? What feedback and from who?

The consultation period was very short. The implementation date just weeks later.

My view at the time of the consultation announcement, possibly quite wrong, was that the outcome was already decided and the consultation was to make sure that the process appeared to be correctly followed.

100 respondents is pretty poor and in itself an indication of the adviser community’s lack of trust and openness in a flawed system. Historically, I cannot think of any consultation that that has seen an outcome that was contra to what either the Treasury, consumer groups or the regulator wanted.

We were right regarding the outcome, this was not a consultation at all.

Rory Percival reckoned, again in our LinkedIn discussion, that “just because the FCA didn’t agree with responses, it doesn’t mean it didn’t consider the issues appropriately or that its approach was unfair”.

This sounds a lot like Lord Meltchett’s Court Martial of Blackadder.

Blackadder’s court martial was, shall we say, less than fair. Lord Melchett was the judge and Darling the prosecution. Meltchett opens the case by saying, “The case before us is that of the Crown versus Captain Edmund Blackadder, alias the Flanders Pigeon Murderer. Oh, and hand me the black cap, will you – I’ll be needing that.” 

Now that’s consultation?

I rest my case.

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.

Is it all still ‘Pete Tong’ at the FOS in 2018?

Since 2011 we have been conducting research via a simple survey to gauge what advisers think about service levels and standards delivered by the FOS, in particular looking at their processes and the fairness of the system.

The first survey ran in 2011, then 2014 and finally, our last was in 2016, with the same questions.

A particularly disturbing trend was the increase of firms who had experienced false or manufactured accusations from complainants in an attempt to gain compensation, which went up from an already large 64% in 2011 to 74% in 2014.  

2016 continued to show a consistent negativity of experience.

So, what does 2018 look like?

Another two years have passed, and we want to know, will 2018 see any improvement on the:

  • 71% of advisers that felt FOS adjudications are unfair?
  • 69% of advisers that felt adjudicators help create complaints where no complaint existed?
  • 85% of advisers that felt FOS rules place an adviser or firm in a ‘guilty until proven innocent’ position from outset?

FOS Review

Channel 4 ‘Dispatches’ itself tackled the FOS earlier this year, painting a rather bleak picture of operations. As a result of the programme, FOS Boss Caroline Wayman has launched a review so it could “better understand and address the concerns” raised by Dispatches. This will be reported to Parliament shortly before summer recess.

Hopefully our survey, which will be shared with the FOS and Nicky Morgan (Chair of the TSC), will prove timely, and for Ms. Wayman provide a view of the FOS from an adviser perspective. And the industry itself can ponder if things have got better or not since 2011, 2014 and 2016.

Please complete the anonymous, 5-minute survey below and share it with your colleagues.

Your input is important, vital and greatly appreciated.

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?

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Surely still not Pete Tong at the FOS?

15 Mar 2016

Surely still not Pete Tong at the FOS?

The Financial Advice Market Review (FAMR), just published, says that The Financial Ombudsman Service (FOS) “has a crucial role in ensuring redress for consumers, and building confidence in the financial services sector, providing a quicker, easier alternative to the courts”.

The FAMR’s view on the role of the FOS was “that an effective financial advice market depends on consumers having access to a fair, objective means of resolving disputes with firms” but noted that the review highlighted concerns “about some aspects of how the Financial Ombudsman Service operates”.

With this observation ringing loudly in the ears of financial advisers, the findings of our latest FOS survey may, we hope, act as a source of constructive criticism. According to our latest survey all is not well at all at the FOS.

The results will be shared with HM Treasury, the TSC, FOS and the FCA.

Once again we find that:

  • an overwhelming majority see that in 2015, FOS adjudications are unfair- 71%.
  • Adjudicators actually help create complaints where no complaint existed- 69%
  • FOS rules place an adviser or firm in a ‘guilty until you prove your innocence’ position from outset- 85%.

Download our free survey now, complete with comments.

2015 is as consistent as our previous years findings from 2011 onwards. It is the hundreds of heartfelt comments that really tell the story.

The publication of the FAMR report sees a number of recommendations published, numbers 22, 23, 25 and 26 in fact.

It will be interesting to see if they are acted upon in 2016, I am sure our 2017 investigations will assist in that discovery.

Panacea’s input to the financial advice market review (FAMR)

In November, I was asked by Harriet Baldwin MP (who many may remember came to a Panacea ‘Meet the MP’s event” shortly after her election in 2010) to contribute to the HM Treasury Financial Advice Market Review (FAMR) due to the size, influence and knowledge of the Panacea community.

The Financial Advice Market Review, as you will be well aware, was launched in August 2015 to examine how financial advice could work better for consumers. It is co-chaired by Tracey McDermott and Charles Roxburgh, Director General of Financial Services at HM Treasury.

The meeting with HMT’s Tara Fernando and some treasury seconded FCA officials lasted some ninety minutes where a number of concerns with regard to the five specific FAMR reference sources were discussed for the benefit of the consultation.

There was a great willingness to listen.

It was very clear that there was a considerable lack of understanding around many issues of IFA concern. I think this is because there is a knowledge gap, possibly caused by a failure or desire to fully understand how intermediated distribution works and why. And to understand advice responsibility anomalies such as the current lack of longstop.

It is also clear that regulators do not understand that savings and protection products are sold to the mass market, not actively purchased.

The Treasury and the FCA appear to have no knowledge of the workings or long history of commission payments, the maximum commission agreement or its reason for removal.

You may find the following bullet points with some supporting links, that were the subject of some detailed conversation, to be of interest:

1. The extent and causes of the advice gap for those people who do not have significant wealth or income 

  • Heath Report an overview, access to the report and podcast
  • Commission v Fee the RDR/ GFK report
  • Fees and the post RDR world
  • UK advice & distribution model
  • The FCA was trumpeting the fact that adviser numbers had gone up since RDR and the industry should as a result rejoice.
  • From January 2012 to July 2013 23,406 registered individuals (RI’s) have left the industry and 9,573 have joined.
  • For 2014, 5,979 RI’s have moved firm, 6,799 are no longer authorised and 4,576 have become authorised. Some 17,332 changes in one year and a 2,223 net loss of RI’s. Hardly something to shout about.

2. The regulatory or other barriers firms may face in giving advice and how to overcome them

  • Cost, known’s and unknowns, FSCS funding is wrong, unpredictable and unfair.
  • PI cover, retrospection of regulation makes pricing impossible, a claim makes even getting it a herculean task (air bag analogy)
  • New blood, the aspiration of many to start a new advisory firm has been dampened to say the least. The costs are enormous.
  • FOS perceived bias FOS survey, a link to 2014 survey and to the 2011 survey
  • FOS has no affordable right of appeal, unlike ABTA for example
  • Longstop removal and some other notes on the subject. Regulators today are in many ways a ‘doppelganger’ of the trade unions of the 1970’s, creating unrealistic, restrictive working practices at high cost allowing little or no competition. And we all know how that ended.
  • Many small firms live in fear of the FCA and will not raise their heads above a paparapit to voice concerns for fear of retribution. Very worrying but perhaps ‘Sir Hector’s message was received and understood
  • The ‘Waterbed effect’. It’s effect 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.

3.  How to give firms the regulatory clarity and create the right environment for them to innovate  and grow

4. The opportunities and challenges presented by new and emerging technologies to provide cost-effective, efficient and user-friendly advice services,

  • Simplified advice, but what is it- needs defining
  • A solution: to licence a product as fit for purpose, with that purpose clearly defined, as part of the process is the single most effective consumer benefit a regulator could put in place. It is the CAA equivalent of being fit to fly, it is the Food Standards Agency equivalent of safe to eat, it is the VOSA equivalent of saying your car is safe to drive.

5. How to encourage a healthy demand side for financial advice, including addressing barriers which put consumers off seeking advice

  • Consumers should understand that advice comes at a price but that price and the method of how it is actually paid should be determined by the client and adviser firm together and not a regulator.
  • Is commission still a dirty word?
  • Maximum Commission Agreement (MCA) during the 1980s and perhaps earlier there was an apparent unresolved conflict in government policy between investor protection and the belief in unrestricted competition. OFT objected!
  • Pro bono working in IFA firms was the norm in a pre RDR world
  • It is not in a post RDR world
  • The circle game? FSA told consumers advice under RDR wouldn’t cost more. Right possibly, but fewer now have access to it

The review will close on the 22nd December 2015, you have just a few more days to contribute.

Here is a link.