The aim is to “help consumers to achieve a fair deal from the financial services industry and have confidence in the products they buy and in the advice they take”. All very laudable and not an issue that anybody can take umbrage with.
The FSA says the current business model is bust so let us search for the problems and flush out some alternative answers.
I am aware of the apocryphal tales of advisers taking upwards of 6 per cent commission on £600,000 investment bonds and of cowboy sales outfits churning their client base with 8 per cent commission on single-premium pensions.
Is commission the problem or is it the individual advisers? Many advisers take the same 3 per cent on bonds as is generally paid on Isas and unit trusts, so the problem would appear to be with the individual advisers rather than the method of remuneration. If so, it is a regulatory issue and one where it would seem that the FSA is found wanting.
Many advisers have long argued for a cap on comm-ission so that the bias argu-ment becomes blunted. This, together with a more focused approach by the regulator, offers a fundamentally sounder step forward than the proposed upheaval suggested within the RDR. After all, the regulator can easily police the matter of high commission by ensuring that the providers provide information on firms’ commission levels in the same way that they currently advise on clawback issues.
Identifying what constitutes misselling is an article in itself. Suffice to say that, in general, complaints to the Financial Ombudsman Service have typically been 42 per cent about insurers, 33 per cent about banks/ building societies and 13 per cent about IFAs.
Given that the above facts have been gleaned from the last three annual ombudsman reports, it paints a detailed picture highlighting that IFAs enjoy far better and healthier relationships with their clients and suffer far fewer complaints than these alternative distribution channels. Why is it then that the IFA model is under threat while virgin consumer fields are being opened up to the mooted primary advice model which has been designated for bank and insurer use?
The risk and reward model is being turned on its head. Recent events such as the bank charges’ fiasco and the inappropriate selling of PPI plans point the finger at the most glaring examples of potential misadvice. On this factual basis, it is the non-IFA channels which are deserving of the closest scrutiny.
One of the RDR’s stated aims is to reduce what is called the protection, retirement and savings gaps. Have these gaps widened because of product design, lack of trust and an inability to understand the concepts, as suggested? Might it be that consumer apathy is to blame? Might the pension gap be down to a mix of the recent market crash and the introduction of stakeholder pensions, which failed to interest investors and failed to incentivise advisers? Could it be that the nanny state mentality, with its blend of pension credits and council tax rebates, has financially anaesthetised a sizeable section of consumers who feel that inaction is the best course? Another factor could be the shock-horror stories which various financial journalists love to publish. Most are negative regarding the financial services industry and over time this negativity may have seeped into the collective unconscious, making it less likely that consumers will seek out advice or products.
To paraphrase poet Pete Morgan, our enemies have sweet voices and it seems that almost any outrageous proposal gains some degree of credence if it first waves the flag of consumer protection. Look beneath the plausible phrases and the unproven assumptions. When you uncover the facts, they tell another story.
Alan Lakey is director of Highclere Financial Services