FSCS levy and some blue sky thinking

Regulation comment for Financial Advisers and Paraplanners

31 Oct 2016

FSCS levy and some blue sky thinking.

We hear that the new chief executive, Andrew Bailey, has confirmed the introduction of a product levy will be considered as part of the regulator’s upcoming consultation on the funding of the Financial Services Compensation Scheme.

The time is right for Mr. Bailey to also consider (alongside this very sensible idea that always seems to get ‘kicked’ into the long grass) the use, or in reality, the miss use of banking fines in this consultation?

FCA fines were to be used to offset the cost of regulation. But not any more.

Why, well here’s the thing as they say.

Over the last century or two the nations wealth and success was built on our vast below ground natural resources.

Coal, tin, oil, sand, cement, gravel extraction have all played their part but many fear that these resources have a limited life as dwindling stocks make it more expensive to recover.

Alongside all natural resources there is a tax raising opportunity but if stocks of natural resource reduce or become exhausted this will, in turn, see tax revenues reduce and that spells trouble for HM Treasury.

But the nation has turned to another ‘natural resource’ because of some very clever HM Treasury ‘fine-fracking’ on the part of the last government

This table contains the FCA’s own information about fines published during the calendar year ending 2016 and up to the 12th October.

The total amount of fines levied so far in 2016 is £22,127,442.

  • In 2015 £905,219,078 was levied
  • And in 2014 £1,471,431,800 was levied.

The FCA will deduct its costs from these huge amounts and the rest will go to HM Treasury. The FCA was obliged by statute to pay away £1.370bn of the 2014 fines to the Treasury, the equivalent of 70% of all alcohol and tobacco levies for 2014.

In April this year the FSCS announced a £337m levy for 2016/17.

The FSCS levy in 2015/16 totaled £319m.

So over the last 3 years some £2.4bn in fines has been levied that could have seen zero FSCS levy for a good number of years with the polluter paying. Just do the math!

Banking fines should be used to reduce the burden of regulatory cost, in particular that of the ‘oh so’ contentious FSCS levy that hits, in particular, small IFA businesses the hardest.

Any thoughts yourself?

Do let us know here via our quick survey, details will be shared with Mr. Bailey.

FSCS and the release of data, your data

Panacea comment for Financial Advisers and Paraplanners

24 Oct 2016

FSCS and the release of data, your data

Advisers may be concerned to know about the continued, contentious handling of personal data by the FSCS where claims are received.

In particular where the adviser has retired and the firm in question was NOT in default of the scheme some 20 years later.

With regulators looking at personal responsibility from company directors, in the words of Hector Sants, all advisers should be very afraid, and to the grave it would seem?

When a ‘consumer’ approaches the FSCS (looking to claim compensation) as the firm from whom advice was obtained is no longer trading and not in default (as the adviser has retired) the FSCS, if requested by the ‘consumer’, is releasing information as to the whereabouts of that now retired adviser, whether or not the adviser has consented to that release.

In correspondence seen, the FSCS is stating that it has the right to release such data when requested; quoting guidance it says it has from the Information Commissioners office (ICO).

This states, “ Where the FSCS has rejected a claim for solvency reasons (firm not in default) and the consumer wishes to pursue a claim, disclosure is permitted under the Data Protection Act 1998.

They go on to refer to the fact that they have received guidance from the ICO to that effect- providing this summary. 

Now here is the situation, and advisers should rightly be very concerned as this could happen to anyone and illustrates only too well the need for a longstop.

The date of the advice being claimed against (relating in this case to affordability surrounding a mortgage protection policy with CI) was in 1997, almost 20 years ago.

If the firm was in default and the FSCS did accept such a complaint, it would be dismissed as they do recognise the longstop.

The advisory firm- a partnership in this case, closed in a correct way in 1998 with full PIA regulatory approval and it is not in FSCS default.

The adviser made it clear that he did not wish his address to be given and he gave some specific, valid reasons in response to the FSCS’s asking.

These reasons were dismissed out of hand, without any explanation as to why other than to refer to ICO guidance.

The adviser told the FSCS that he would complain to the ICO. He felt it was unfair to release his details when the firm was not in default and that the complaint would have been dismissed under FIMBRA, PIA and FSA rules as well as the FSCS own rules by way of being out of time on so many levels, including the FSCS’s own application of a longstop.

As a result the FSCS then advised the ICO, to whom that complaint about data release was made, that the complaint was made to “delay the consumer in getting compensation”.

The FSCS, in saying it can release data so long after the date of the advice being given, reasons that “considerable weight has to be given to the legitimate interests of the customer”.

In this case the decision seems very unfair, surely the adviser has rights too?

Tell us what you think about the FSCS and especially their funding in this short survey, have they got it right? We think they have not.

Do you?

April fool, decide for yourself?

 

April fool, decide for yourself?

All advisory firms in a post RDR world have had to look carefully at their proposition, segment their client base and decide what to charge their clients taking into account the underlying costs of running their business.

This would include things like staff cost, regulation, accountancy, capital adequacy, legal, utilities, insurances, office premises, FSCS, taxes, NI, pension contributions etc.

These numbers would then be incorporated into some P&L software and in Mr. Micawber speak, doing the ‘math’ on the tried and tested formula of “Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six pence, result misery”, and see what the outcome is for them.

Financial advisers in fee block A013 may be interested to know that for the fee year 2015/16 the latest forecast for FCA regulatory fees to be invoiced was £74.85m.

So, with this thought in mind, we asked if the regulator could confirm what it actually costs to regulate this group of adviser firms.

The reply should be the cause of some concern.

  • Dear Mr. Bradley
  • Freedom of Information : Right to know request
  • Thank you for your request under the Freedom of Information Act 2000 (the Act) for information aboutFCA Regulatory Fees, specifically:
  • The amount levied in FCA regulatory fees for firms in the A013 category (Advisory only firms and advisory, arrangers, dealers, or brokers) in 2015.
  • The actual cost incurred by the FCA for regulating those same firms in the A13 category (Advisory only firms and advisory, arrangers, dealers, or brokers) in 2015)”
  • Following a search of our paper and electronic records I am writing to tell you that we do not hold the exact information you are seeking, for the reasons set out below.
  • Point 1: We have still to complete our invoicing for the fee year 2015/16, but our latest forecast for FCA regulatory fees to be invoiced in respect of A13 fee block for the period is £74.85m.
  • Point 2: We no longer carry out an exercise where the actual costs are calculated against each fee block compared with the fees invoiced. We consulted on stopping this exercise, referred to as a ‘true up’ exercise in CP10/5 (March 2010) Chapter 9 paragraphs 9.16 to 9.20 http://www.fsa.gov.uk/pubs/cp/cp10_05.pdf. We did not receive any objections to that proposal.
  • The amount of our annual funding requirement (AFR) allocated to fee-blocks is based on where we plan to use our resources in the next fee-year. We consult on the fee-rates to recover these allocations in our annual March fees-rates consultation paper (CP) and feedback on responses in a June Policy Statement. For 2015/16 the allocation to the A013 fee-block was confirmed as £74.9m in Policy Statement PS15/15 Chapter 2 which includes our feedback on responses to the March CP.http://www.fca.org.uk/static/documents/policy-statements/ps15-15.pdf.

 

If I may draw on another Dickens quote from ‘Little Dorrit, “I am the only child of parents who weighed, measured, and priced everything; for whom what could not be weighed, measured, and priced, had no existence.”

The FCA, who seem to have a data metric on just about anything and everything cannot quantify what it costs to regulate this fee group?

I find this hard to believe. A regulated firm would not be deemed fit and proper if it had no idea of what it costs to run their business.

The time has come for some openness. To simply say that “We no longer carry out an exercise where the actual costs are calculated against each fee block compared with the fees invoiced” is just not good enough. This is a simple P&L exercise surely?

And as for not getting any objections to their ‘true up’ exercise, I think they should assume that they might well have one or two now.

This is NOT an April Fool.

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.

FSCS funding, the third way

The Tory party conference can always be relied upon to deliver some interesting sound bites.

One of the better ones for the financial adviser community was the most welcomed observation from Mark Garnier MP who sits on the Treasury Select Committee and has done so for some five years.

I know Mark and have met with him on a number of occasions. He seems a very decent, intelligent, forward thinking guy.

So when hearing and welcoming the news that he felt that banking fines should be used to reduce the burden of regulatory cost, in particular that of the FSCS levy, perhaps a further consideration for Mark is to investigate is why are the fines so very large and not levied on individuals? The reality, I suspect, is that these fines are not a punishment, they are just a tax revenue raising opportunity that nobody could possibly object to…..ever?

Over the last century or two the nations wealth and success was built on our vast below ground natural resources.

Coal, tin, oil, sand, cement, gravel extraction have all played their part but many fear that these resources have a limited life as dwindling stocks make it more expensive to recover.

Of course with all natural resources there is also a tax raising opportunity but if stocks of natural resource reduce or become exhausted this will, in turn, see tax revenues reduce and that spells trouble for HM Treasury.

But we need no longer fear where the nation will turn to get more ‘natural resources’ from because of some very clever HM Treasury ‘fine fracking’ on the part of the last government.

He is 100% correct in saying that a debate was needed about where the money went.

For those that have no idea on the sheer magnitude of banking fines, this may help in understanding where they go and why.

A decision taken by Parliament on 27th February 2013 has seen a very big fiscal ‘gusher’ explode out of the ground in the form of 2014 banking fines being paid away to HM Treasury.

Banking fines levied by the FCA in 2014 were £1.462bn.

To put some contextual scale to this massive amount, the total revenue raised for alcohol and tobacco in 2014 was £1.97bn- that equates to 4% of total UK taxation revenues according to HMRC figures.

The FCA was obliged by statute to pay away £1.370bn of the fines the Treasury, the equivalent of 70% of all alcohol and tobacco levies for 2014.

In the run up to the May 2015 election this is where the money was spent according to a reply to a Panacea FOI request reply:

£35,000,000 to the Armed Forces

£10,000,000 to Armed Forces covenant

£40,000,000 toward veterans’ accommodation

£20,000,000 to Childcare, but exactly what is not known

£10,000,000 to medical training, again, exactly what is not known

£10,000,000 to Blue Light charities, exactly which is not known

£10,000,000 to Youth United

£5,000,000 to the Imperial War Museum/ WW1 gallery refurbishments

£ 1,100,000 an approximate VAT rebate for the Tower of London poppies sale to allow more money raised to go to charity. This is not a government donation. It is a fine redistribution and a very cynical play upon public sentiment and the war dead of WW1.

That gave a grand total of £141,000,000 going toward good causes leaving a pre election pot of £1.322bn left over.

Note, no money to MAS, FSCS or Pensionwise- the most morally obvious homes for such largesse.

I wish Mark and his TSC colleagues well but fear that the Manchester conference sound bite will fall on very deaf ears at HM Treasury.

The only real worry for HM Treasury will be what to do if the banks rehabilitate themselves.

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?