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.

Fees, its about the Money Money Money

Ms Jessie J may be a singer and not a regulator but she was correct singing, “It ain’t about the ch-ch-ching ch-ching, it ain’t about the bl-bling-bl-bling, it’s about the money money money.

A recent article in Money Marketing by Robert Reid stirred up a bit of a hornets nest making me reflect upon some of the wisdom imparted in July 2013, by the recently resigned FCA boss, Martin Wheatley.

He was quoted as saying:

“In some cases, firms are charging a percentage of product investment, and clearly it takes away product bias in the sense that we are no longer seeing firms recommending particular products because of the payment that comes to them, but it does not take away ‘dealing bias’, because if you only get paid if people buy a product, then you are going to want them to buy a product rather than pay off debts or do something else.

There are some concerns about whether that is entirely compliant with the philosophy we have set out, and it is something we will come back to.” 

There was considerable anti-Wheatley adviser anger expressed within the Internet ‘ether’ but for once, speaking as a very staunch defender of advisers, I think they may have not focused on the real metrics behind his words and given the reaction to Robert Reids tome, I still think Martin Wheatley actually had a point and advisers should really take notice of them before it is too late as adviser charging of fees as percentages through the product could well manifest itself in a soon to be named miss-adviser charging crisis if Canary Wharf has it’s way.

Advisers should not be afraid of making profit or seeing great inflows of income, after all they have to fund the regulatory cash outflow somehow.

But adviser charging by percentages of funds under management rather than time taken was always going to be sailing a little close to the regulatory wind in a fee only world. And yes, this thought may not go down too well out there, but it is a fact.

Adviser intentions from Panacea winter 2012/13 research carried out with GfK indicated that some 72% of advisers would levy their charges via the product, and astonishingly, a significant number would not use providers who did not allow this facility- product bias?

Results from that very detailed GfK research conducted with over 400 advisers has indicated that post RDR, most advisers are charging fees to the fund.

A leaning toward an initial fee of 3% of funds invested and 1% for ongoing advice per annum across a wide array of segmented servicing models seems to be their stated norm although provider feedback would suggest a lower figure is more the reality, 1-1.5% as an initial fee and .25% to .5% ongoing.

Should we be surprised that the upper percentage of initial adviser fee quoted for a lump sum investment today is very similar to single premium pre RDR basic LAUTRO commission payment, around 3% I seem to recall?

If Frank Carson was an IFA he may say, “it’s the way I tell ‘em”.

But, let’s look at how the FCA may choose to look at this issue, advisers should take note, with the benefit of foresight on this occasion.

Based upon that GfK research, a proposed investment of £250,000 would see the advice fee set at £7,500. But what would the picture be if the FCA asked that the fee be justified based upon an hourly rate?

Of course time taken does not have any formula to accurately indicate an actual duration as every client is different, but given that the average (GfK survey confirmed hourly rate) charged by advisers was £167, the ‘math’ would imply that by comparison the advice on a time basis for a £250k invested amount equated to 44.9 hours.

I am not an adviser any more, but with so much technology resource available today, taking over a working week seems a lot of time to justify for one client? The FCA view may be similar?

For an investment of £100,000, the fee would be £3,000, and a time basis reflection of 17.96 hours. Yet the time taken to fact-find, research, report and execute a transaction or series of them may be less than for an investment of £250k.

Or more?

The FCA will take a view that the RDR was not about professionalism by way of qualifications providing the ability to see adviser payment by a rebrand of commission. It is about reflecting professionalism by charging in the same way as other ‘professions’ (if profession creation was one of the intended RDR outcomes) and that is by charging purely on units of time.

The actual calculation formula of fee payment, either direct from the client or from the fund is not too relevant.

But should it be based on time? And should it be linked to a transaction?

After all, the logical conclusion is no transaction after advice given equals no fee- as Wheatley implies, yet the time taken is almost the same, a service has been rendered and payment is due? Or is this a disguised advice cross subsidy?

So, how would advisers explain to the FCA that the following* is ‘TCF’ in a fee based, advice driven, post RDR world when charging advice to the fund?

Scenario 1: Advice charged to fund at 3% plus an ongoing 1% per annum, £7,500 (provider charges are on top):

Male 40 attained pays £200,000 as an SP pension contribution, it is grossed up to £250,000.The fund at age 65 and assuming a return of 4.9% would be £1.40m.

Scenario 2: Advice paid direct by the client on an ‘average’ hourly rate  £7,500 provider charges are on top:

Male 40 attained pays £200,000 as an SP pension contribution, it is grossed up to £250,000.The fund at age 65 and assuming a return of 4.9% would be £1.85m

*Research data provided by a leading life office 26th July 2013, assumptions are an extreme!

So over a 25-year term, the eventual real cost to the client of initial and ongoing advice for this single premium contribution when charged to the fund would be a staggering £450,000 less of course the impact of adviser charge hourly billings.

If the client was charged on time, the hourly rate would be??????? Well you work it out on your own hourly rate!

It would be interesting to see a comparison of time based charging v percentage when levied to the contract over the term of the contract.

But I believe that what Martin Wheatley was actually saying is that the FCA ‘thinkings’, unlike the FSA, would indicate that basing charging on percentages of FUM, both initial and recurring, is not right.

Where I did take issue with Mr. Wheatley is that in 2013, after many years of progress toward an RDR world (where the FSA, as was, agreed with the concept and amounts involved when charging a percentage of funds under management to the contract) he was sending strong signals that the FCA did not see it ‘appropriate’ that this previously agreed level and type of charging should continue. The suggestion being that advisers should prepare to hear that stable door slam soon despite very many adviser post RDR businesses being based on this charging methodology.

The more cynical conspiracy theorists among us may have very strong suspicions that the FCA was wanting to find yet another way to get rid of advisers by making it impossible for them to remain in business as the imposed income reducing possibilities of RDR cannot ever match the increasing and varied calls of cash from the regulator, FSCS and the FOS.

In fact the only way advisers can remain in business with such a proposed ‘chocking off’ of income flow is that there is a similar ratio reduction in regulatory fees, by that I mean those of the FCA, FOS and FSCS.

After all, consumers could see much lower advice costs if firms did not have to ensure they are treading dangerous and deep fiscal water just to see survival in the face of the huge costs that regulation forces upon them.

And where is the consumer in all this? Research continues to show that there is a significant reality gap between what advisers think consumers will pay for advice and what consumers would actually pay.

Not a good ‘outcome’ as they say, if advice for all, but at a cost, was the intention.

Coulda, woulda, shoulda? At last an Ombudsman refuses to apply rules retrospectively

A breath of fresh summer air blew through the world of ‘Ombudsmanning’ when the Pension ombudsman Tony King recently made a ruling in relation to a pension ‘liberation’ claim where a transfer was requested one month before the Pensions Regulator issued guidance to providers about such cases.

When making his decision he said, “I cannot apply current levels of knowledge and understanding of pension liberation/scams or present standards of practice to a past situation.”

This decision should set a precedent and if followed by the FOS would remove the need for any longstop campaigns to continue.

This is the very bedrock of reasoned decision making where previous regulation and FOS considerations have fallen well short.

The FOS practice of applying a kind of ‘coulda, woulda, shoulda’ to decision making, often failing to give reasoned consideration to previous ombudsman’s rules in the adjudication process, will have seen many good businesses closed, liabilities parked with the FSCS and the resulting need to increase and apply one off unexpected unbudgeted levies placing unfair burdens on the firms left.

The decision from Mr King is simply one of fairness and common sense.

But is anyone listening at the FOS, over to you Ms Wayman?

What do the FOS, schools and NHS have in common?

Well, if recent reports and our survey results last year are to believed the common ground is that people lie to gain advantages that are not theirs to have.

This is a damning indictment of UKplc today. It demonstrates very clearly that if you do not qualify for something that is not by right yours, a simple little ‘white lie’ will see (that brilliant regu-phrase) a ‘positive’ outcome.

What is a positive outcome for one is a detrimental outcome for others.

The NHS has highlighted the fact that valuable resource could be saved if free prescription entitlements were more closely monitored. The somewhat archaic process of checking a box with a pen on a prescription form followed by a squiggle will result in £237m of free medication for so many beggars belief.

The NHS has form in this area. That is why so many overseas health tourists have taken the UKplc for a ride over the years. Foreign visitors and short-term migrants cost the NHS £2billion a year, an official report warned in 2013 and only around 16 per cent of the money was clawed back.

UKplc is it would seem, far too polite to question entitlements to state benefits. NHS frontline workers and pharmacists are not wishing to be involved in a few simple checks to determine entitlement because they do not see it as their responsibility.

Top state schools are having a problem too. It would seem that their popularity has seen potential student’s parents claiming postcode residency rights that they simply do not have, just to get little ‘Wayne or Waynetta’ into the school of their choice. The result is that hundreds of children have been banned from the state schools of their choice because their parents simply cheated the system to win them a place.

This is not fair on those who do have the postcode good fortune and I am pleased that at last some parents are paying the price for lying.

Now this brings me nicely on to the FOS.

Our 2011 and 2014 surveys found that adviser firms had experienced very high levels of fraudulent attempts at getting compensation. A particularly disturbing trend was the increase to the already large 2011 percentage (64%) of firms who had experienced false or manufactured accusations from complainants in an attempt to gain compensation? In 2014 it stands at 74%. The ambulance chasing section of the legal profession has not helped this situation.

If trust is to be restored in the financial services industry professional practices and moral standards, this should be matched by an injection of cynicism by the FOS.

A firm should not be treated as an “Operation Yew Tree’ suspect by the FOS where the complainant is seen to automatically be believed. Maybe that is why they need so much more office space.

We note that in November, both Mark Garnier MP and Caroline Wayman, the new FOS boss made reference to our survey in a Treasury Select Committee meeting. With 2015 well and truly here, perhaps Ms Wayman could start to act on some of our findings before even more damage is done to the industry with compensation being paid and reputations damaged when they simply should not have been.

Investigations should be based on facts not he said/ she said fishing expeditions.

And that brings me back to the NHS.

It will take until 2018 for a computer system to be available to dispensing chemists to do the appropriate checks on free prescription eligibility. In the meantime what is wrong with these outlets and indeed hospitals doing a few simple checks themselves?

This is common practice in many European countries. In Spain for example, you can forget about free treatment unless you carry an NHS card.

More requests for proof are made at a supermarket checkout to buy a bottle of wine than are asked at a chemist to fulfill a prescription order.

More time is spent on ensuring you can only buy one pack of ‘paracetomol’ so that you do not overdose yourself than on checking if someone is entitled to sometimes thousands of pounds worth of free drugs.

For financial advisers, the money laundering checks for a small ISA investment are more rigorous than check made by the NHS who are about to deliver thousands of pounds of free treatment to somebody not entitled to it.

Madness, and it’s only January.

Miracles happen, or is it just wishful thinking?

The restoration of trust in the industry is vital for its success going forward. But trust works both ways. Firms should have trust in the regulator and the regulatory process that should be nurtured by a mixture of clarity, fairness and pragmatism.

Ombudsman decisions should be based upon the evidence available and/or the balance of probability. They should not be based on ‘coulda, woulda, shoulda’. This survey, exactly like the one we did in 2011, makes it clear that ‘creative Ombudsmanning’ is still at work and that is not fair. Until firms have confidence in a consistency of fairness of adjudications and clear evidence of impartiality, an unobstructed path to regaining trust is just not there.

Ombudsman decisions should reflect the processes, rules and rigour that a previous, relevant and applicable Ombudsman would have to take in an adjudication process. Decisions increasingly seem to be made, if our survey is to be a guide, with the benefit of hindsight and an application of today’s regulatory expectations rather than the rules and standards of previous regulators like FIMBRA, PIA and the FSA. That does little to support the ethos of an Ombudsman’s role of being an independent resolver of disputes and again, little towards regaining trust in the industry.

Experience and understanding of the markets one regulates is vital to ensure good Ombudsman decisions. Is it not therefore, by default, important that those who adjudicate on complaints have an equal understanding and, even more importantly, extensive experience of what was accepted practice and regulation then, not what is now and work back?

Tony Holland, the PIA Ombudsman, ensured all his adjudicators had relevant industry standard qualifications, this rule also applied to himself. His recommendation to Walter Merricks to ensure this practice continued when taking on the FOS role was ignored.

To see so many advisers seeing fraudulent claims is a frightening statistic and it does little in the ‘support department’ for regaining trust in the industry if you are fighting a battle to see trustworthy behaviour from your clients. The ability for some consumers to lie knows no bounds it would seem.

Stress is a big part of any complaint resolution process, for both sides. It is worsened however for the adviser firm when the complaint is simply and clearly a fabrication that could/ should be recognised very quickly in the adjudication process but for some reasons often fails to be.

Grooming’ – a word not often applied to financial services.  70% of respondents have seen awards made for an event hat has not actually happened or has not been complained about. This is way too high. The FOS role should be to adjudicate on the balance of evidence available and/or probability. It is not a licence to ‘go fishing’. Although I have no evidence to support the view, some say that the FOS process is target driven; the more cases that find their way into the system means bonuses for those concerned. If that is true, again, this does not help restore trust in the industry.

This is effectively a form of commission?

We have seen changes to the employment tribunal rules where, amongst other measures, the claimant has to lodge £1,000, which they forfeit if the case is found against them. These new rules have seen a dramatic reduction in claims

The key to good adjudication is the evidence available; it is inconceivable that the UK justice system would have survived for so long if 86% of those in the ‘dock’ felt that the judge or jury had already made up their mind before hearing the evidence. In many FOS cases it would seem from the survey that evidence is secondary to the need to ensure the consumer is the winner. This is not a game of consumer winners, or losers, it is about the perception of both parties view of fairness of decision making.

The latest figures released revealed in regard to employment tribunal cost changes show that between 2012 and 2013 there was a 79% reduction in claims. I feel a similar outcome would occur if a liability deposit cost applied to FOS cases. That would also have the effect of reducing the regulatory cost of doing business that in turn could be passed back to the consumer.

Walter Merricks said, quite unashamedly, that at the FOS, ‘we make the law’. Link that to failure or inability to supply evidence by the claimant and instead of placing a firm in a strong position the exact opposite is achieved and it is no wonder advisers feel the system is unfair.

The long stop is such a contentious issue, it is also the case that the Ombudsman’s rules make it clear that any decision made should give consideration to the Ombudsman’s rules applicable at the time the advice was give. The ‘Merricks’ interpretation of the word ‘consideration’ linked to the FSMA 2000 actions around the longstop have led to the unfairness problems we have today. It is immoral and most would take the view it is an illegality that requires legal challenge if reasoned argument fails to persuade.

It is encouraging to see the stoicism of advisers in the face of much adversity; really the question to ask (that for obvious reasons we could not) was: ‘Are you planning to enter the industry within the next two years?’

At the moment the costs and liabilities incurred by poorly thought out, ever changing and often retrospective regulation makes taking on new entrants an unattractive option for many firms. And an impossibility to start a new firm from scratch, ie no clients like many of todays long standing firms did.

To summarise, and as noted in our submission of the survey to MP’s and the regulator, “consumers absolutely have rights that should be strongly protected, but in doing so the adviser consensus seems to be that those rights would appear to be taking precedent over everything else. Confidence in a fair and unbiased Ombudsman service is vital and the right of all who use or engage with the service, the complainant and those complained about”.

To see the full survey results with all the comments, simply download this pdf.