The Three Certainties of Human Life are Death, Taxes, and more regulation

The Three Certainties of Human Life are Death, Taxes, and more regulation

“The regulator has found concerns over value for money in drawdown, including significant variance in charges, which can be complex, opaque or tough to compare, so has set out plans to force firms to show a one-year charge figure in pounds and pence in the key features illustration they provide to consumers”.

It is a commercial world out there and I can think of no other industry that has a regulatory insistence that charges for what they make/ build/ sell have to be granularly declared.

When you buy a new house, is there a breakdown of building and material costs supplied with the contract? The same with a new car: design.testing, parts and labour. A prescription drug does not come with a breakdown per tablet for research, development and testing, a holiday cost does not breakdowns for flights, hotels, food, drink or flight. Supermarkets do not declare what the business costs are for selling you a pack of sausages.

A bit simplistic I know but if regulation stops messing with fixing what in many cases is not broken and more people use a financial adviser, the world of independent advice and consumer trust may be a better place.

As an owner in the 1970’s of a waterbed (with the attendant life affirming fond memories) the illustrative metaphor of the movement in a water-filled mattress seems to be a common sense albeit simplistic description supported by a little known mathematical formula called Bode’s Sensitivity Integral.

Bode’s waterbed theory ‘outcome’ is already well illustrated in the mobile phone and utilities industries where regulation and political interference fixes or manipulates the prices of basic products and services only for consumers to see complicated pricing structures ensue by way of significant increases in the price of peripherals and additional services as a direct consequence.

Thiseffect is a phenomenon that should increasingly cause concern to those who regulate the industry and those it regulates in regard to pricing and the detriment the post RDR world has wrought upon the intended beneficiary- the consumer.

It is the natural but not necessarily intended potential to squeeze one part of a complicated and complex regulated business model (and the attendant regulatory processes) to cause a serious bulge elsewhere in the process.

So, the theorising in RDR should have foreseen that in achieving:

  • the elimination of bias in the market
  • ensuring the adviser is the true agent of the consumer
  • clarity over the costs of advice
  • and various other factors,

the industry would no doubt see the bulge appear somewhere else.

And this has been seen in costs in every conceivable way and particularly for consumers.

Cost is something that FCA regulation incurs for firms, often with little thought of logic or affordability and with little benefit analysis being done on the consumer impact and detriment it created.

So how else did the theory manifest itself?

In ensuring the adviser is the true agent of the consumer, the result was that the mass-market consumer did not, does not want to pay for advice that had previously been seen as free.

When a consumer is able to obtain lower prices from an adviser or a provider for drawdown, is it possible that other consumers will have to pay more for the same input from another adviser or provider firm as a result?

Is this bad for consumers?

The asymmetric exercise of regulatory or consumer power can lead to consumer detriment through raising other consumers’ advice and provider charges- the Waterbed effect.

While a large and powerful provider firm or distribution channel improves its own terms by exercising its market power in getting cost reductions, the terms of its lesser resourced competitors can deteriorate sufficiently so as ultimately to increase the average price of advice – the Waterbed effect.

It seems to me that the only organisations in the world of financial services that should raise serious “concerns over value for money, including significant variance in charges, which can be complex, opaque or tough to compare” are the FCA, FOS and the FSCS. 

We never see a breakdown of costs, budget breakdowns yes but costs????

IFA Antony Cousins at SPF rightly comments that “value for money has always been important to clients, however with returns from financial products expected to be lower over in the short to medium term, the level of charges are now even more relevant.  For many years Financial Advisers Fee Agreements have had to specify the exact service(s) being provided and the associated initial and ongoing cost in pounds and pence, hence I see no reason why providers illustrations for drawdown should not follow this model”.

He goes on to note that this should be“coupled with an educational programme to enhance customers understanding of a highly technical area would remove some of the scepticism in the industry”. 

There is some suspicion that the FCA are more concerned about clients going direct to providers in this drawdown market and not taking advice where we have to stipulate and review all these costs.

Regulation has created a race for the bottom on price. I am not sure that the average consumer ‘buys’ financial advice on the cheapest cost. I think that for the mass market consumer it could be about not paying anything at all as they see the pension plans providers they have been invested in for years should provide that advice for free.

This is in turn a problem for providers who are predominantly distributing their products via the intermediated channel. They do not want to carry out work, with added customer care regulatory liabilities or redress, that they see, is an IFAs role. But if the client has either been disenfranchised by RDR segmentation or just does want to pay what else can be done.

Waterbed effect at work again????

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Cobbs Paradox

Cobbs Paradox could be another descriptive for the regulation of financial services in the UK today.

Cobb’s Paradox states, ‘We know why projects fail; we know how to prevent their failure – so why do they still fail?’

Thirty plus years of regulation with five different regulators and actually, there is an answer, but the question seems to have become unpopular.

As an industry, a regulator cannot prevent every product or advice failure, but a regulator should know enough to prevent most of them if they use what they know smarter?

The use of the ‘Rumsfeld’ argument- There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know” could be an interesting starting point.

Let’s say the FCA are perfect at estimating the probability of better outcomes success. With an estimated 75% probability of success 25% are going to fail some of the time, but they can’t prevent or predict which of the individual ‘outcomes’ will ultimately fail.

So, if you can estimate the probability of success for a universe of ‘outcomes’ and your estimates correctly predict the success/failure ratio of that universe of ‘outcomes’ over time, then you have, essentially, prevented project failure to the maximum extent possible.

But you still have failed projects.

The FCA collects huge amounts of data from firms. Data holds all sorts of interesting opportunities to be explored, and not in the way most would expect.

Data can take many different forms. Regulators are often asked what they do with it all.

The answers may be obtuse, but you can be sure that data can be looked at in so many ways to throw up trends, habits, behaviors’, attitudes. It can be searched and analyzed in simple forms; it can be searched and analyzed in highly complex ways.

This all no doubt builds a very detailed picture of advisers and consumers, their attitude to service and risk management.

The FCA correctly requests data from companies in a bid to understand the markets it is tasked with regulating.

Financial services companies are of course also obliged under law to provide data to the FCA under certain circumstances. For example, under the EU Markets in Financial Instruments Directive (MiFID), financial services companies that outsource data processing activities are generally required to ensure that regulators have “effective access” to data for auditing purposes.

In future the FCA said that the data it collects will be “effectively governed and controlled” and “clearly specified”.

It said it would put review systems in place to ensure it stopped collecting data from businesses where “it no longer meets our needs”.

What all that means is not entirely clear, but to quote another ‘Rumsfeld-ism’

“If you try to please everybody, somebody’s not going to like it”.

 

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