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.

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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?

Regulation, will we ever get it right?

mansleepingI had the great fortune to sell my IFA practice 10 years ago, a driver for taking the plunge was that having worked under the ‘control’ of 4 different regulatory regimes- NASDIM, FIMBRA, PIA and FSA, the prospect of never seeing a balance of common sense and fairness painted a very bleak future.

The jury may still be out in that regard, but I think we are at the stage where the Judge may be directing the Jury that a majority decision would suffice.

I am not normally driven to negativity, cynisim maybe, and while I do see an absolute need to have regulation of financial services, it seems to me that wherever there is regulation, chaos and extreme cost is the outcome with blame being laid at the door of the weakest.

Some key facts to digest:

  • Regulation is poorly thought out in just about every industry
  • It is reactionary rather than pro-active
  • It is not always retrospective, although in financial services it seems to be an exception
  • Nobody ever listens to the voice of experience
  • Nobody ever learns from past failings
  • Nobody in regulation admits failure
  • Nobody in regulation takes the blame
  • Everyone in regulation benefits from ‘learnings’ and earnings
  • Regulatory failure is rewarded not punished
  • Regulation is an industry, it is hermaphroditic, capable of self procreation and without something to bash it would have no purpose. As Keith Richards (Rolling Stone not PFS) once said “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.”

 

Regulation should not be pursued at any cost and in such a way, applied like a tattoo only to be regretted when the effect of the alcoholic induced stupor that fuelled its creation has gone away. The NHS is an example of regulation on ‘acid’.

Has the consumer benefited? Many may say no. Access to financial advice for the masses has been exterminated. Even if it was freely available, there is insufficient capacity to service any more than around 10% of the population based on the recent Heath Report and the FAMR will not correct that imbalance as was intended.

In 2009 the great and the good expressed concerns about the impact of RDR and how it will disenfranchise consumers, here but just a few to prove my “Nobody ever listens to the voice of experience” comment

  • Otto Thoresen – CEO ABI, then of Aegon: “The RDR is only helping wealthy customers”
  • AXA April 2009: “We will lobby the FSA to make sure the RDR does not mean less are able to access advice”
  • Institute of Financial Services: “RDR will impair financial advice before improving it”
  • Alasdair Buchanan Scottish Life November 2009: “Sales advice is a real cop out and extremely confusing to investors”
  • Stephen Gay – Aviva June 2009: “The regulator has failed to consider the danger of adviser charging limiting access to advice for those on lower incomes”
  • Lord Lipsey: “Consumers in the middle (not high net worth or money guidance fodder) to be sold products by banks under the contradiction that is sales advice”
  • Walter Merricks former Chief Ombudsman: “I think it would be unwise to count on the assumption that complaints from the retail investment world are suddenly going to go down as a result (of the RDR)”
  • Deutsch Bank report August 2009: “There has been industry talk of 30% or even 50% of IFAs exiting the industry post 2012, which is not impossible”
  • Paul Selly HBOS: “Bancassurers set to benefit”
  • Richard Howells Director Zurich Life June 2009: “The big question mark is still around what benefit it will have for the ultimate consumer. I am still not convinced that all of these changes, when you sit down with a consumer and explain them, actually give rise to a consumer benefit that I can really hang my hat on.”
  • Martin Lewis Money Saving Expert June 2009: “There’s a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy. I do hope I’m wrong. I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash. What I find most galling though is that bank-based advisers – those primarily responsible for PPI miss-selling, endowment miss-selling, investment miss-selling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales.”
  • Janet Walford OBE, Editor Money Management Sept 2009: “I am not paranoid enough to believe that the FSA has a hidden agenda to do away with small IFAs, but the law of unintended consequences may well mean that this will be the result. This is especially the case when set alongside the myriad of other proposals that are costing some £430 million to set up, with ongoing fees of £40 million pa thereafter, a mind boggling amount of cash.
  • Peter Hamilton barrister, Source: Money Management Oct 2009, Scrapping the FSA by Marie Jennings MBE: “The Financial Services and Markets Act does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be…. It is one thing to impose new rules for new entrants to the IFA profession, it is quite another thing to disqualify someone who is already qualified.”
  • David Hazelton of Tax Incentivised Savings Association (TISA) 30/10/09: The RDR could be detrimental to consumers both in terms of higher product charges and an increase in the cost of advice, warns the Tax Incentivised Savings Association (TISA). Implementation costs for the RDR are being “seriously underestimated” and product charges will consequently have to be raised.
  • Robert Kerr, head of retail distribution development at Scottish Widows says: The RDR could have the unintended consequence of “disenfranchising” the majority of consumers from financial advice. “Our key concern is the RDR proposals will act to drive advice upmarket, with financial advice becoming the preserve of the wealthy leaving mass-market consumers un-served,”
  • Nigel Waterson MP when Shadow pensions minister: “While no-one can object to raising the standards of training and competence, should an emphasis on exams take precedence over on-the-job training and experience?

Fines are at record highs for the same bad behaviour from the same suspects, regulatory costs are at an all time high, huge FSCS levies continue to hit ‘small businesses’ when least expected, politicians have no control of those they leglislate to regulate, those employed in financial services regulation have increased, those employed in the financial services sector they regulate have decreased.

The problem with regulation in 2016 is that you cannot regulate for lack of common sense, yet that is what we keep trying to do. Caveat emptor has gone.

We have lost the use of that in-built gene of common sense when looking at constructing and applying regulation.. Its loss went along with map reading skills, crossing the road after looking both ways, not talking to strangers, proficient cycling, spelling ability, simple mental arithmetic skills and very many more.

The world has truly gone mad, or at least it has in UKplc’s regulation section.

We have a society that is now readily and speedily offended on somebody else part for just about everything that simply should not matter as much as it does.

We have borders that are not fit for purpose, we have an NHS in meltdown because the service is now aspiration and expectation based, rather than focusing on the basics of it’s original 1948 founding principles (comprehensiveness, within available resources) and a country controlled not by UK based elected politicians but by unelected civil servants, quangos, eurocrats and regulators.

To top that we now have ‘Brexit’.

To borrow that famous Bob Monkhouse quote “ When I said that the proposed RDR regulation would not work, everybody laughed. Well they’re not laughing now.

 

www.panaceaadviser.com

Panacea Adviser survey: 89% of advisers say Robo-Advice is a threat to the industry

Almost nine out of ten financial advisers warn that automated services pose a threat to traditional face-to-face financial advice, research by Panacea Adviser has revealed.

In a survey asking 118 financial advisers whether robo-advice presented a threat or opportunity for face-to-face advice, only 11 per cent described it as a positive for their industry while the vast majority raised concerns that robo-advice could prove damaging to traditional financial advice.

Commenting on the results of the research, Panacea Adviser Chief Executive Derek Bradley, said: “With the amount of attention and industry debate sparked by robo-advice, it is perhaps not so surprising to see such a strong reaction from advisers towards the ‘rise of the robos’. The current mood appears more unusual, however, when you consider that automated services still represent a relatively small market here in the UK while the technology itself is also fairly limited at this stage.

“The US market also offers a glimpse of what looks like a more positive outlook for advisers when it comes to robo-advice. The ability to combine elements of both human and automated advice is actually seeing many traditional advice firms in the US prove more popular than robo-advice models that rely solely on technology.”

ADVISER VIEWS ON ROBO-ADVICE

The research also gathered adviser opinion on both sides of the debate, highlighting some of the key challenges – and benefits – that automated models can bring for advice firms.

Pete Matthew, Managing Director for Jacksons Wealth Management, believes marketing could prove the biggest hurdle for firms looking to adopt robo-advice. He said: “An online service can provide a way of perhaps serving ‘lower value’ clients in the short-term so that they engage with the adviser’s brand, which may well lead to higher-ticket business in the future.

“But while the technology behind robo-advice actually appears to be straightforward enough, the real issue is that most advisers are clueless when it comes to marketing. The world of marketing has changed immeasurably. Now, it is all about providing value to the prospect by educating, entertaining and inspiring clients to take action. The social aspect should not be underestimated either. Increasingly people buy based on the recommendations of social media circles and unless advisers are influencing within these channels, no-one will show up to their fancy robo-advice websites.”

 Alan Hughes, Partner at Foot Anstey LLP, also calls for the FCA to clarify what constitutes ‘advice’ and ‘guidance’ in relation to automated-models. He said: “As robo-advice develops, advisers need to consider carefully how it impacts on the market, what that means for their own business and clients and how they can use this as an opportunity. Robo-advice will never completely replace face-to-face advice but it is a case of “ignore at your peril”.

“Going forward, any further clarity that can be provided on the difference between advice and guidance will be very useful in bringing automated models to market. The FCA should explicitly address these issues and be proactive, rather than just tweaking the regulatory framework and then telling firms that they need to go off and reach their own view.”

Focusing on the regulation of automated services, Derek Bradley added: “A vital UK consideration that would assist in the adoption of robo-advice models is that the FCA approves the technology and their complicated algorithms. Some time taken now could mean that the constant retro aspect of regulation against products or advice is removed and public confidence in a ‘fit to fly’ model will see a greater, quicker embrace by advisers and of course the public.”

 

www.panaceaadviser.com 

Brexit, What next for MiFID?

The Markets in Financial Instruments Directive (MIFID) was an EU regulation initiative that aimed for harmonisation of financial services regulation in Europe’s 31 member states.

The intention was to see increased competition and more consumer protection.

MiFID 1 in EU directive 2004/39/EC was the first step and in April 2014 MiFID 2 was approved that tidied up the original MIFID thinking and by January 2018 MiFID 2 and MiFIR (Markets in Financial Investments Regulation) will take effect.

MiFIR/MiFID II had the potential to boost transparency and increase investor protection and readying the member states for implementation was likely to be a very painful process and no allowance for any transitional stage will make the deadline even harder to meet.

And what about the massive MiFID costs already incurred and about to be incurred by the UK? So far:

  • One-off compliance costs for the UK were estimated to be up to £188 million
  • Ongoing costs from 2017 are estimated to be  between £79.8-£150.4 million
  • The UK will/ would have bear 36% of the estimated total cost of Mifid II
  • Total transition cost estimate is £194.8 million
  • Average annual cost, excluding transition: £112.5 million

*Source: HM Treasury Impact Assessment

Now we have voted to leave the EU, where does the UK go on implementation, almost two years on from when article 50 to leave will have been implemented?

Where does the EU go as the UK market is amongst the biggest of global financial players?

Time for some guidance from the FCA and HM Treasury I think?

Especially as the Stock Exchange is about to be acquired by the ‘Germans’…..or will it now?