Death by regulator

Panacea Comment for Financial Advisers and Paraplanners

11 Sep 2017

Death by regulator

We hear that the FCA has announced a ‘Terminator’ inspired marketing campaign, yes, a marketing campaign, to encourage those who have not had a win on the PPI lottery yet to get truly lucky.

The regulator is treating compensation opportunity creation as if it is a DFS sales campaign.

The outcome (iove that word)? The claims management industry has just had a boost in the form of a £42m advertising campaign that has cost them absolutely nothing. This includes advertising and dedicated phone line costs.

And as for this FCA statement:  “If you had a previous complaint about mis-selling of PPI rejected, but now want to complain about a provider earning a high level of commission, you should follow the steps below”.

Since 2011 over £27bn has been paid out in PPI compensation. How much more will this generate?

But the big worry with this campaign is about where it will lead to if FOS complaints are to be rejected and then re-allowed at a later date based on what the firm was paid. Remember, advisers have no longstop, in this case confirmed with words like this from the FCA You can complain about mis-selling of PPI however long ago it was sold to you”.

Words fail me. Will the last compensation payer turn the lights out when they leave?

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How much has the shiny new logo cost this time?

Panacea comment for Financial Advisers and Paraplanners

9 May 2017

How much has the shiny new logo cost this time?

In 2013, a Panacea FOI request exposed the rebrand cost for the FSA’s change to the FCA.

It was  £1,061,423 including VAT.

The FOI request went on to confirm the cost of the logo design saying:

“We have spent £48,000 on designing the FCA brand identity, £91,500 on developing the FCA brand guidelines, £57,000 on registering the new logo and on legal fees to resolve registration issues”.

So when we heard that the FCA had decided, after a shelf life of barely three years, to change it’s logo, we though it would be an idea to find out how much?

In their reply, an unnamed individual from the “Information Disclosure Team / Cyber and Information Resilience Department” said We undertook a refresh of the FCA brand to make sure our brand is accessible, open and transparent so that all our audiences understand our role.  In particular, we need to ensure our brand works well for digital use and takes into account accessibility considerations.  This is particularly important as we are planning to launch our first national TV and outdoor advertising campaign on PPI later this year. Consumer research in particular has helped inform our evolution of the FCA logo to ensure ‘Financial Conduct Authority’ is clearly legible and accessible”.

Given that in 2013 so much was spent on rebrand one might ask, purely from a business owner perspective, why the lifespan of a ‘global’ brand is just 3 years? That would suggest that either the brand brief or interpretation was incorrect in 2013.

The reply to our request was answered as follows.

          “Brand refresh 

·         The design cost:

£5,340

·         Legal costs:

£1,440

·         Implementation cost;

£66,410 – we have interpreted this to be the total cost (including the items above) – agency work to audit FCA brand and update logo and design approach, design templates for new brand, effra fonts and logo trademark registration.

·        Stationery cost”

There are currently no stationery costs. As stated above, the existing logo will be phased out over the next year and we will not change signage in our printed material such as letterheads or business cards until either they run out or we change address. 

Over the last 10 years the Panacea brand logo is unchanged, as is the Ford Motor Company’s, Apple and Coca Cola. In 2014, the Coca-Cola brand name alone was worth $67million, accounting for more than 54% of the company’s stock market value at that time.

It is said, a strong, consistent brand will allow the customer to know exactly what to expect each time they encounter your business” 

Steve Jobs said, “Design is not just what it looks like and feels like. Design is how it works”.

In this case, the jury on the ‘how the FCA’s works’ is still out.

The cost of this exercise is quite small in regulatory terms. I am not sure what the effect is on consumers but I am sure that those it regulates will see this as another example of spending other peoples money without being responsible for how or if it works or in this case if you can notice the difference at all.

Can you spot the differences?

We had to destroy Ben Tre in order to save it

Panacea comment for Advisers and Paraplanners

24 Apr 2017

We had to destroy Ben Tre in order to save it

For those not old enough to know too much about the U.S. involvement in the 1960’s Vietnam war, and some of the madness surrounding it, this quote has gone down in history as an example of the some of the insanity that was Vietnam.

As with many examples of madness in what should be a sane world, this quote, which I was reminded of recently, is well worth considering alongside. It is Callum McCarthy’s six pillars of wisdom speech at Gleneagles in September 2006.

The so-called pillars on which RDR was to be founded were:


1.    an industry that engages with consumers in a way that delivers more clarity for them on products and services;

2.    a market which allows more consumers to have their needs and wants addressed;

3.    remuneration arrangements that allow competitive forces to work in favour of consumers;

4.    standards of professionalism that inspire consumer confidence and build trust;

5.    an industry where firms are sufficiently viable to deliver on their longer-term commitments and where they treat their customers fairly; 

6.    a regulatory framework that can support delivery of all of these aspirations and which does not inhibit future innovation where this benefits consumers. 

The Heath Report Two (THR2) had been created to examine the consumer detriment caused by the regulator’s actions in introducing the Retail Distribution Review.

The Heath Report Three (THR3) will be published toward the end of May.

As Garry said “It did not seek to be a learned academic document but to assemble in one place a clear description of what RDR has created and suggest lessons that might learnt”. 

In April 2014; the Panacea Team, Lee Travis, now at PFS and Garry Heath met the with the FCA which dismissed the survey of 1,752 advisers, representing over 50% of the direct authorised IFA firms, as “unimportant

At that April meeting, the FCA informed us that it would issue an internal review early in the autumn which we expected to be in praise of RDR.

In the end, the FCA commissioned European Consulting and Towers Watson to produce and issue two lacklustre reports, which were quietly released in the week before Christmas to a distracted media – hardly the action of a confident regulator.

These reports suggested that there was “no evidence of consumer benefit” leaving the FCA to opine that RDR’s “longer journey will benefit consumers”.

As Garry observed, this is reminiscent of Mr Micawber’s hope “that something will turn up”.

With the advisory community barely having the capacity to service some 10% of UK consumers financial planning needs and with the remaining 90% who do not want or cannot afford to pay for financial advice, we seem to be in a similar situation to the one described by Captain Miller’s, US Army Corps of Engineers  Commander, Task Force Builder, 1968  46th Engineer Battalion  159th Engineer Group ,recollection of Major Booris’s reasoning for destroying a whole village with so much firepower.

In the case of RDR only one of the six pillars stands, number 4. And as we all know you cannot build any sustainable structure on just one pillar. It just falls down. The regulator has ensured that the other five cannot be built as the ground beneath it has been destroyed by too much regulator firepower.

In the Vietnam movie ‘Apocalypse Now’, Captain Willard, played by Martin Sheen, asks a seasoned vet while riding a helicopter over enemy terrain “why do you guys sit on your helmets”?

The answer could be the same reason why IFAs only have a 10% capacity for advice?

Compliance and the Stupidity Paradox

Panacea comment for Financial Advisers and Paraplanners

13 Feb 2017

Compliance and the Stupidity Paradox

Compliance is an important part of the whole world of financial services and indeed many other worlds of business and governments.

In the world of financial services regulatory compliance “describes the goal that organisations aspire to achieve in their efforts to ensure that they are aware of and take steps to comply with relevant laws, policies, and regulations.

The rules are well defined, as we all know, in the FCA handbook. For the avoidance of any doubt, the regulator has even provided an introductory guide.

Regulated firms must follow FCA rules. The rules it would seem are clear (to the author/s) but the interpretation and purpose of them at times makes little sense.

A book, published in 2016 by the City University of London called the ‘Stupidity Paradox’ investigated common sense in decision-making.

Professor André Spicer’s research included input from management consultancies, banks, engineering firms, pharmaceutical companies, universities and schools.

The ‘outcomes’ of investigations into the ‘Stupidity Paradox’ revealed many examples of when common sense decisions are simply ignored.

Examples included: 

  • “Executives who more interested in impressive power point shows than systematic analysis.
  • Companies ran leadership development initiatives which would not be out of place in a new age commune.
  • Technology firms that were more interested in keeping a positive tone than addressing real problems.
  • Marketing executives who were obsessed with branding when all that counted was the price.
  • Corporations that would throw millions into ‘change exercises’ and then, when they failed, do exactly the same thing again and again

I just love the last one.

Professor Spicer’s concludes by asking, “Why could such organisations, employing so many people with high IQs and impressive qualifications do so many stupid things”.

I am reminded of the definition of a camel. It being a horse designed by committee.

I have worked since the early 80’s in the industry thought six different regulators- NASDIM, LAUTRO, FIMBRA, PIA, FSA and FCA. The average lifespan of a regulatory body being some six years.

With the exception of the FSA transition, rulebooks, even staffing, for the predecessor bodies have been subject to rewrite and new hire, not a roll over. The FCA transition was a re-skin.

What does ring loud and clear is that regulators do not, in the most part, seem to learn from past mistakes. Not only are ‘learnings missing, they more often than not refuse to accept responsibility or blame for past mistakes.

The FCA is now approaching four years old. So, in theory only another two to three years to go until yet another metamorphosis occurs. In that time it has seen two chief executives and a significant turnover of very senior staff embarking on a journey working for the firms they used to regulate.

Regulation is an industry. The thousands of pages in the FCA manual require firms in turn to employ thousands of people with high IQs and impressive qualifications to interpret the rules and ensure that their business implements them to the letter.

FCA research from 2015 found that 88% of large firms and 44% of small firms increased the amount of time and money they spent on compliance and the cost of regulation, according to New City Agenda is some  £1.2 billion.

But, and here is the big BUT. The finer interpretation of some rules would suggest that rather like in the Italian Highway Code, red lights are a suggestion, some rules make no sense in their implication.

We would love to know what examples you have of the Stupidity Paradox in financial services regulation today?

The Stupidity Paradox: The Power and Pitfalls of Functional Stupidity at Work (Profile Books), by Mats Alvesson and André Spicer.

André Spicer is Professor of Organisational Behaviour at Cass Business School, City University London.

Mats Alvesson is Professor of Business Administration at Lund University and a Visiting Professor at Cass Business School.

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.

Happy 30th birthday Big Bang

Regulatory comment for Financial Advisers and Paraplanners

26 Oct 2016

Happy 30th birthday Big Bang

It was the great Gordon Gekko who said, “Moral hazard is when they take your money and then are not responsible for what they do with it.”

With these words of wisdom, I felt it might be time to reflect upon the fact that 30 years ago, on 27 October 1986, the closeted clubby world of the City was subject to a positive tsunami of changes that today, for those of us old enough to remember it, was called the “Big Bang”.

I was working in the City at the time and the financial services world, as we knew it changed forever from that date. The late starts, long lunches, early finishes were no longer fashionable, everybody started dressing like Mr. Gekko, huge mobile phones were ‘hand borne’ not hand held, the colourful LIFFE boys would strut their stuff around the Royal Exchange between trades and generally life seemed to have a very particular and agreeable buzz.

Over the past 30 years what was once a rather staid gene pool of public school chums in pin stripes, a veritable gentleman’s club of friends and relatives, had morphed into a US-stylisation of business practices.

With it came the skyscrapers of Canary Wharf and the City all linked with the considerable diversity introduced by foreign banks as plus points, but, the downside was that it came with a certain killer instinct that would mean even your friends and colleagues were not guaranteed a particular benefit without a cost attaching.

But in the post big bang world, as Mr. Gekko would say, “if you need a friend, get a dog”.

Regulation and financial services have not always been easy bedfellows yet upon reflection the world did seem a nicer, gentler place in many ways in the years building up to that 1986 Big Bang.

Social media did not exist then. What led to Big Bang was that the London Stock Exchange was coming close to, if not actually being found out without the enhancements of Google searches.

The stock market was really an almost regulation free (when compared to today) cartel, fixing commissions and linking this with trading floor admission complexities that would do the Royal & Ancient some credit.

It was a posh, gentlemen’s club version of the old London markets of Smithfield or Billingsgate- but with manners.

We saw a closed shop for the benefit of brokers and stock-jobbers all safely contained in their pin striped, bowler-hatted bunker which in the coming brave new world of class and professional barrier deconstruction would not be seen as acceptable any more.

Margaret Thatcher had been in power for some 7 years and the Thatcher vision of wealth creation by way of the state selling the public something they already owned was underway.

She was warned pre big bang, that this vision would lead to a new culture of ‘unscrupulous practices in the City‘, according to a release of government papers in 2014.

Her Cabinet secretary Sir Robert Armstrong said that a ‘bubble’ was being created that would be pricked” and “that corners were being cut and money made in ways that are at least bordering on the unscrupulous”.

But despite the warning, we still “Told Sid” and the nation rode a gravy train of expectation with flotations of once staid mutual institutions like the Halifax and Abbey National building societies- yes, remember them?

The merchant banks were in gorge mode on these flotations. SG Warburg, Schroders, NM Rothschild, Samuel Montagu, Hill Samuel and Morgan Grenfell were there doing it “very large”.

US investment banks like Goldman Sachs and Salomon Brothers (remember them too?) were also keen on some action but leading up to Big Bang it was not too easy for them to get into the club.

But change was on its way, the days of fixed commissions and closed shops were being replaced by the need to be competitive.

The City was no longer a place for “Gentlemen and Players.”

It was becoming a world of young and thrusting ‘spiv’ market traders who had literally switched venue, being recruited from the perceived ‘low rent’ market environs of Petticoat Lane, Billingsgate, Smithfield and Covent Garden.

And those guys brought their trading skills and “Loadsamoney” culture to the previously hallowed ground of the City and the Stock Exchange.

But now they worked, shouting in trading ‘Pits” or shouting at banks of computer screens waiting for that big deal, greeting it with more shouting and of course the resulting huge bonus moment.

The big success story of Big Bang was Warburg’s swallowing up of Ackroyd and Smithers, Rowe & Pitman and Mullens & Co who in turn were swallowed whole by UBS, then UBS/Phillips & Drew/Swiss Bank empire.

In the feeding frenzy Barclays paid huge money indeed for Wedd, Durlacher and de Zoete and Bevan, Deutsche Bank ate up Morgan Grenfell, Midland Bank (who are they) bought W Greenwell and this then got digested by HSBC. Kleinwort Benson bought Grieveson Grant, and NM Rothschild, Smith Brothers.

And what of the “Gentlemen and Players”?

Well they all retired to their stockbroker belt houses and country estates swapping pin stripe for tweeds, having “trousered” some very serious money.

With this sea change we saw the disappearance of those traditional and cautious values, my word is my bond, trust, nods, winks and tips were all to be replaced by what is now seen in many quarters as a reckless abandon, using somebody else’s money to trade on your own account for the benefit of the Banks who employed you and more importantly yourself.

If it all went wrong, the bank carried the losses until, as we saw with the spectacular 2007 banking collapse, the taxpayer did if nobody else seemed interested.

So when the indigestion disappeared from this bout of Mr. Creosote like fiscal gluttony, was Big Bang a success, was big beautiful?

Sir Robert Armstrong had the correct vision and Gordon Gekko I think has proved to be the master philosopher. The banks, post big bang, did take our money and were not responsible for what they did with it.

The largest banking fine in history levied this year has shown only too clearly that for rogue traders, in Gekko speak, “there is a very big difference between rehabilitation and repentance” and as far as casino banking and regulation is concerned, there is some way to go on both counts.

This would never have happened in the world of ‘Gentlemen and Players’?

Just a thought.

 

A banking morality tale

Panacea comment for Financial Advisers and Paraplanners

20 Oct 2016

A banking morality tale

Wells Fargo Fined $185 Million for Fraudulently Opening Accounts.

The following first appeared in the New York Times last month and showed that old banking habits die hard. In fact the scandal was so great that the US Senate, House Financial Services Committee decided to intervene. 

For years, Wells Fargo employees secretly issued credit cards without a customer’s consent. They created fake email accounts to sign up customers for online banking services. They set up sham accounts that customers learned about only after they started accumulating fees.

September saw these illegal banking practices cost Wells Fargo $185 million in fines, including a $100 million penalty from the Consumer Financial Protection Bureau, the largest such penalty the agency has issued.

Federal banking regulators said the practices, which date back to 2011, reflected serious flaws in the internal culture and oversight at Wells Fargo, one of the nation’s largest banks. The bank has fired at least 5,300 employees who were involved.

In all, Wells Fargo employees opened roughly 1.5 million bank accounts and applied for 565,000 credit cards that may not have been authorized by customers, the regulators said in a news conference. The bank has 40 million retail customers.

Some customers noticed the deception when they were charged unexpected fees, received credit or debit cards in the mail that they did not request, or started hearing from debt collectors about accounts they did not recognize.

But most of the sham accounts went unnoticed, as employees would routinely close them shortly after opening them. Wells has agreed to refund about $2.6 million in fees that may have been inappropriately charged. 

Wells Fargo is famous for its culture of cross-selling products to customers — routinely asking, say, a checking account holder if she would like to take out a credit card. Regulators said the bank’s employees had been motivated to open the unauthorized accounts by compensation policies that rewarded them for opening new accounts; many current and former Wells employees told regulators they had felt extreme pressure to open as many accounts as possible.

“Unchecked incentives can lead to serious consumer harm, and that is what happened here,” said Richard Cordray, director of the Consumer Financial Protection Bureau.

Wells said the employees who were terminated included managers and other workers. A bank spokeswoman declined to say whether any senior executives had been reprimanded or fired in the scandal.

“Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request,” the bank said in a statement.

One Wells customer in Northern California, Shahriar Jabbari, had seven additional accounts that he did not consent to, according to a lawsuit he filed against the bank last year in federal court.

When Mr. Jabbari called the bank asking what he should do with three new debit cards he did not authorize, a bank employee told him to dispose of them, according to the lawsuit. 

Mr. Jabbari said in the lawsuit that his credit score had suffered because unpaid fees on the unauthorized accounts had been sent to a debt collector.

Banking regulators said the widespread nature of the illegal behavior showed that the bank lacked the necessary controls and oversight of its employees.

Ensuring that large banks have tight controls has been one of the central preoccupations of banking regulators after the mortgage crisis.

Such pervasive problems at Wells Fargo, which has headquarters in San Francisco, stand out given all of the scrutiny that has been heaped on large, systemically important banks since 2008.

“If the managers are saying, ‘We want growth; we don’t care how you get there,’ what do you expect those employees to do?” said Dan Amiram, an associate business professor at Columbia University. 

It is a particularly ugly moment for Wells, one of the few large American banks that have managed to produce consistent profit increases since the financial crisis. Wells has earned a reputation on Wall Street as a tightly run ship that avoided many of the missteps of the mortgage crisis because it took fewer risks than many of its competitors.

At the same time, Wells has managed to be enormously profitable, as other large banks continued to stumble because of tighter regulations and a choppy economy.

Analysts have marveled at the bank’s ability to cross-sell mortgages, credit cards and auto loans to customers. The strategy is at the core of modern-day banking: Rather than spend too much time and money recruiting new customers, sell existing customers on new products.

Wells Fargo markets itself as the quintessential Main Street lender, stressing the value of creating long-term relationships with customers over earning a quick buck.

But that apple-pie approach was undercut, regulators say, by a compensation program that encouraged employees to push the limits.

“It is way out of character for one of the cleanest banks around,” said Mike Mayo, a banking analyst at CLSA. “It’s a head-scratcher why so many employees felt comfortable crossing the line.”

In many cases, customers took notice only when they received a letter in the mail congratulating them on opening a new account.

Many of the questionable accounts were created by moving a small amount of money from the customer’s current account to open the new one.

Shortly after opening the sham account, the bank employee closed it down and moved the money back, according to regulators.

But Wells employees were still most likely able to get credit for opening new accounts in meeting their sales goals, the regulators said.

In addition to the fine from the consumer protection bureau, Wells paid $35 million to the Office of the Comptroller of the Currency and $50 million to the City and County of Los Angeles. The Los Angeles city attorney worked with banking regulators on the case. 

The bank stressed that the refunds have been relatively small — averaging about $25. The bank hired an independent consultant that reviewed tens of millions of accounts from May 2011 through July 2015.

The bank said it refunded money to customers if there was even the slightest possibility they were charged improperly because of unauthorized accounts.

“As a result of our customer-first methodology, we believe we included accounts that were actually appropriately opened and authorized by a customer,” the bank said in a statement.

Even regulators concede that the financial harm to consumers was not large. But the more troubling aspect, they said, was how the behavior reflected a broader culture inside Wells’s retail operations.

“Consumers must be able to trust their banks,” said Mike Feuer, the Los Angeles city attorney. “Consumers must never be taken advantage of by their banks.”

Stock of Wells Fargo, which is the largest bank in the country by market capitalization but fourth-largest by assets, rose 13 cents on Thursday, to $49.90 a share.

USA Today reported that “Wells Fargo CEO John Stumpf has agreed to give up $41 million in unvested stock awards following the board of directors’ investigation into the bank’s sales practices, the company said Tuesday.

Additionally, Carrie Tolstedt,

Wells Fargo’s former head of community banking, will forego all her unvested equity stock awards valued at $19 million and will not receive retirement benefits worth millions more. 

Tolstedt was responsible for the division during the time employees allegedly created sham accounts to meet sales targets. She has announced she will retire at the end of year.

And the footnote to this is that last week John Stumpf resigned with immediate effect. The California Department of Justice has launched a criminal investigation into Wells Fargo.

And while all eyes have been on Wells Fargo in the wake of the bank’s fake accounts scandal, Fortune Magazine notes that “there is another, not so apparent culprit at the heart of the crisis: the U.S. Securities and Exchange Commission.

Under SEC Chair Mary Jo White’s watch, the agency has failed to enforce disclosure requirements at Wells Fargo and elsewhere at a time when trust in big business has hit historic lows”.

And the lesson that UK banks should learn from this is?

And the lesson UK regulators should learn from this is?