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Categories:Other

FSA has failed to deliver its message on risk

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Having just returned from the Money Marketing Retirement Summit, I have been reflecting on its content and messages. It is clear that longevity is the key risk we all face and one speaker, Joe Jordan of Met Life (not the Scottish footballer but just as imposing with his views), delivered his message in a manner that made it memorable and transferable.

Another presentation that made an impact, as you may have suspected, was the one on the RDR. It reinforced some unpalatable truths, that is, those operating fee offset are no further forward than those still hooked on commission.

It went on to emphasise that the exams were masking the real issues. If you cannot explain what you deliver - what you provide in excess of product selection and implementation - your turnover is heading south at speed after the RDR.

What brought these two sessions together was the fact that the solution for increasing longevity is the very kind of problem that people will pay for advice on. Managing someone’s income in the decumulation phase is a major opportunity for professional advisers as the option of annuities becomes increasingly less than attractive and extremely inflexible, which is why I have been focusing on this area for some time.

Despite its upside, we need to ensure that if we decide to advise in an area where risk management is crucial, we do so in a way that is acceptable to the regulator. That is why the offer of an FSA session on risk and suitability seemed appealing. Little did I know.

I attended the FSA session on risk and suitability at the QE2 Hall in Westminster. Quite why it had to be in such an expensive venue was forgotten when we saw the set and the floral arrangements. It is ironic that suitability was being debated yet the venue was far from being that.

The phrase “excessive for purpose” springs to mind. If the content had taken my mind off this, I would not have mentioned it but the lack of content was palpable.

We were told what was wrong with investment advice and what was wrong with risk and suitability. Were we shown the right way? No, that was kept a secret.

Some asked for help with due diligence and the responses were as much use as a chocolate teapot. When asked about psychometric testing, the FSA responded that it is neither good nor bad - I think that means they do not understand it. In fact, it was clear that they think flogging products equals advice.

The people attending were there to learn and were there in the main with an open mind. They left thinking that the regulator is out of touch and more interested in entrapment than education or improvement.

The event was a consummate failure in communication. The original paper had enough fragility, it is nothing short of tragic that this was carried into the live event. If it had been a concert, I would have demanded my money back as the “main act” failed to show.

Perhaps we need to reinforce the point by conducting some research with the public to arrive at the best way to get risk across to the layman in a format that works.

Robert Reid is managing director of Syndaxi Chartered Financial Planners

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Readers' comments (9)

  • I think you'll find that the venue was used because the PRA Launch Conference had been held there in the morning - so actually it was probably cheaper to hire for the whole day and make use of it in the afternoon. With regards to content - who knows...

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  • "Some asked for help with due diligence and the responses were as much use as a chocolate teapot" pretty much says it all.

    Again, to quote from the Statutory Code of Practice For Regulators: "The Code stresses the need for regulators to adopt a positive and proactive approach towards ensuring compliance by helping and encouraging regulated entities to understand and meet regulatory requirements."

    And: "Regulators should consult and involve regulated entities and other interested parties in designing their risk methodologies, and publish details of the methodologies."

    Then there's also: "Regulators should provide general information, advice and guidance to make it easier for regulated entities to understand and meet their regulatory obligations. Such information, advice and guidance should be provided in clear, concise and accessible language, using a range of appropriate formats and media requirements more easily."

    And: "Regulators should provide targeted and practical advice that meets the needs of regulated entities.".

    And so on and so on. I have raised with AIFA the FSA's wilful disregard for the Code, only to be told that, in their opinion, it's worded in such a way as actually to allow those who wish to excuse themselves from taking any notice of it to do exactly that. What kind of feeble response is that? Whilst the Code states "The regulator is not bound to follow a provision of the Code if they PROPERLY conclude that the provision is either not relevant or is outweighed by another relevant consideration" the preceding paragraph says: "The duty on a regulator to “have regard to” the Code means that the regulator MUST take into account the Code’s provisions and give them due weight in developing their policies or principles or in setting standards or giving guidance." That seems pretty clear to me.

    From reading Rob's report on this event, though, all the FSA seems to want to do is criticise the way in which it perceives practitioners to be doing things at present whilst offering nothing in the way of guidance as to how we might doing our job better.

    It's a similar situation to when firms were trying to draw up their TCF plans. They'd submit them to the FSA for approval, the FSA would reject them, the firms would ask what the FSA considered to be unsatisfactory and all the FSA would say was "Go away and do it again". Changing what? Just go away and do it again. What is it you're not happy with? Just go away and do it again. Starting where? Just go away and do it again. What kind of regulatory guidance is that? None at all. And yet the FSA, without reference to anybody, bleeds the industry £500m a year. It's appalling.

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  • The FSA would have every client risk-graded on a scale of 1-100 and every product/fund/security assessed in similar fashion. They live on a planet, in a different universe from where Joe Public and his adviser lives.

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  • When a bank holding your life savings can close its doors because of serial regulatory failures (alright, the taxpayer has bailed out savers this time around), every investment carries risk.

    Attempts to determine how much absolute risk attaches to any investment is impossible and even relative risk between different investments is difficult to determine given how fixed interest funds performed during the credit crisis.

    IFAs do their best whilst the regulator pontificates and then casts its pearls of wisdom with the benefit of hindsight.

    In any case, if the FSA, the government and HMRC all stopped meddling with the rules (especially tax issues surrounding pensions and other assets), IFAs could be more confident about helping clients to make plans for the future. As it is, these morons can turn good advice into poor advice (a la contracting-out decisions) simply by changing the rules.

    If a flat rate pension is brought in, will people who have remained contracted in to S2P retain this benefit or would they have been better off re-directing NI contributions into a personal pension ?
    How many disgruntled people will lodge complaints against their IFA when the guilt lies with the government.

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  • (1) Are you already wealthy ? if so you can do what you like.
    If not:
    (2) Are you more concerned about the possible loss of capital now or not having enough to live on when you retire ?

    Only the wealthy can afford to have an attitude to risk without reference to risk capacity.

    A risk free investement is one where the risk is not apparent.

    So throw away all risk Questionnaires and fund risk classification, talk to your client and get them to commit to they type of risk that they are going to have to take.

    Not taking a risk is NOT an option.

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  • @9.32am

    And the PRA launch needed a lavish venue because..?

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  • @ 12.32: Because it was a show for bankers by banking regulators (who are mostly ex-bankers)...

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  • It would be simpler to shorten the title of this article - "The FSA have failed"
    Enough said.

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  • Only on risk?

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