Feel brave enough FCA?

Regulatory update for Financial Advisers & Paraplanners

24 Jan 2019

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 31^st 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

First of all Panacea followers, this is our 1,000^th 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 31^st 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.

Go to immediately jail, do not pass go

Panacea comment for Financial Advisers & Paraplanners

7 Jan 2019

On day two of 2019 yet another IFA has been jailed for fraud. Neil Bartlett, 53, of Delamere Road, Ainsdale, used £4.5m of his victims’ money to fund some of the usual, favoured by all fraudsters, indulgencies of foreign travel, top hotels, prostitutes, exotic cars, boats and gambling.

In this case, again, like so many others, it involved investing other people’s money, pensions and often life savings into what they thought was a safe investment account with interest.

By safe, that means it is being paid to the advisory firm to disperse according to the advice plan. But in a not uncommon twist, Bartlett had created a sole trader account with the same name as the company he worked for and paid himself the money.

It is clear that in just about every case of fraud it involves client money being paid to a client account for onward distribution. Ninety-nine times out of one hundred all goes as intended but it is the one time that results in what we see again and again in client money fraud.

Readers may wish to Google search (other search engines are available- in BBC speak) fraud IFA 2018 where the scale of this fiscal disembowelling can be viewed. It is in millions and guess how it is dealt with?

This type of fraud is called, in legal vernacular a ’Serious large-scale confidence fraud’. A common factor is the targeting of known to be vulnerable victims. Also, they will often be multiple frauds, i.e. many victims are deceived in the same way.

As an example, this accusation could be levelled at the victims of the British Steel pension fund debacle.

These offences are usually charged under the Fraud Act where the maximum sentence permitted by law is 10 years imprisonment.

For this adviser’s type of fraud, sentences of up to 7 years are common if the fraud is in excess of £500,000.

For the now ex IFA, the sentence will see early release for being a good ‘boy’.

I am not sure if the FSCS ever try to recover from the now ex IFAs or indeed if asset confiscation is possible to offset some of the redress, but one thing is for sure, no matter what regulation is put in place, what checks are made, the opportunity is still there for this practice to continue.

When I was a broker consultant in the early ‘80’s, some IFA firms, referred to then as brokers, had client accounts’ and operated something I recall as being broker bonds. A bit like a wrap or platform investment in a way but it was in house.

I cannot recall any frauds but there were regulatory concerns and also concern from my employer at the time that this holding of client money where the investment was in an inhouse designed and built vehicle could be subject to abuse.

So, role on and working lifetime and fraud opportunity continues in abundance. The cost to clients when the opportunity is exploited is massive, the cost to the compliant firms is huge too and of course unexpected when the FSCS come calling.

The time has come to put a stop to regulated firms holding client money when the intended destination is to a regulated providers funds, wraps, platforms. As an extra measure, despite all the good arguments put forward by IFAs, regulated firms should NOT be allowed to deal in unregulated activity or markets, this would relieve the burden on PI insurers, FCSC calls and IFA firms when a regulated advice firm advises upon unregulated products. Unregulated products are often just that for a reason.

The ability of consumers to execute instant electronic transfer of funds really renders holding client money an unnecessary and expensive temptation. To stop this would see PI and other regulatory costs reduce and go some way to restoring trust in an industry, sorry, profession, that has taken a battering and will continue to do so every time money ends up in the hands of someone or something it should not.

Just a thought.

In the business of crime there’s two people involved

Panacea comment for Financial Advisers and Paraplanners

13 Oct 2017

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

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

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

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

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

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

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

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

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

FSCS levy and some blue sky thinking

Regulation comment for Financial Advisers and Paraplanners

31 Oct 2016

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 12^th 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

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?

 

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

• Rules V principles based regulation, rules provide frameworks to refer to
• Simplification of rules, permissions etc. 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.
• Regulation creates a mess wherever it manifests itself
• No notice is taken of the Regulators code, why?
• The consumer must take some responsibility for bad decisions
• Mail trail on trail commission removal matters to Mark Garnier

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 22^nd 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.

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?