View more on these topics

Cutting through the PI confusion

The issue of PI cover and the effect not only on IFAs but on clients

as well is just not being addressed by the FSA. If I hear correctly,

the FSA states that there is no necessity to advise clients that an

IFA no longer has PI cover, where the FSA permitted that IFA to

continue in business because of nonavailability of PI at any price.

This is strange bearing in mind the fact that terms of business

letters have to be given to a client first and this must state that

PI cover is in place to protect that client.

It does seem strange if the terms of business can change, yet clients

be kept in the dark of such a change. In view of the uncertainties as

to whether or not PI insurers will honour claims, especially where

continued “run-off” cover may also not be available and, for example,

the PI company is no longer in the business or even in the country,

the matter of whether or not the PI cover will even be available

years after the advice event leading to the claim.

The squeeze on IFA remuneration levels by Government price controls

on stakeholder and perhaps new proposed savings products mean that

revenues fall, costs rise and IFAs and advice generally will simply

not be available.

Execution-only business may be the only future. The wide

interpretation placed upon the term misselling and failure to accept

that the KFD in its full text probably set out the warnings of risk

mean that the reason why letter, which has to be comparatively short,

is now potentially the weapon used against the adviser in a blame

culture society encouraged by legislation, compliance regimes and

commission-driven lawyers whose interests are over represented in

political circles.

In the US, I understand that clients are frequently required to sign

undertakings that they will not sue their financial adviser if the

advice provided subsequently was inappropriate. Is this a way

forward? Such a move could fail where the free market of willing

buyer, willing seller is compromised by legislative action.

The issue of PI cover is clearly very grave, particularly in view of

the fact that we operate in a business area which is the most

imprecise imaginable, where the effects of the inv-estment market

generally is clearly unpredictable, where last year&#39s conventional

wisdom is this year&#39s total taboo, where the laws of unexpected

consequence of legislation is almost the rule of law and

retrospective legislative chan-ges impact adversely on decisions made

years before in good faith.

The inter-reactive effect of so many imponderables in financial

planning processes and investment advice render some of what we do as

advisers almost crystal ball gazing.

There are so many examples of this from the effect of personal

pension legislation in 1988 to the effect on taxation of insurance

bonds, abolition of pension dividend tax relief and in the future

perhaps the consequence of MIG on holders of small stakeholder funds.

The zero debacle is an example which the FSA did not foresee, any

more than did most fund managers, let alone IFAs. The massive fall in

stockmarkets and annuity rates and the impact on pension fund

withdrawal is just waiting to be the new threat.

Equity release, increas-ingly forced upon elderly householders who

have seen their pension funds fall by an amount equal to the increase

in the value of their property might be a future disaster.

Interest rates and inflation may rise. A severe economic collapse

precipitated by excessive Government spending plans and decline in

revenue from business could precipitate a profits fall and inward

investment decline due to Government policies, making the UK even

more unattractive to for investment.

An increase in unemployment to current German levels could so easily

happen which would add to the nation&#39s price of the Chancellor&#39s

fiscal irresponsibility of taxing industry and savings instead of

consumption. This could easily lead to claims of misselling of

mortgages and equity release.

Is it a Machiavellian suspicion that may be the politicians and their

regulators see no place in their grand design of the future for

financial advice which is, of course, so often targeted at reducing

tax liability?

A regime created which is designed to place the heads of all

financial advisers on the financial block to gradually reduce the

availability of advice so that the Treasury could have more control

over the savings and investments agenda might not be unattractive to

certain political philosophers.

Could it be that that IFA Promotion is doing advisers no favours in

emphasising the benefits of independent financial advice to reduce

tax?

If financial advice is to continue, then the issue of drawing the

line over liability and threats of the excessive compensation culture

will have to be more clearly drawn and the FSA and maybe Parliament

need to make decisions. Costlier than ever or non-availability of PI

cover is not the answer. A so-called mutual PI fund is not even

remotely a starter as the risks are ever present. Risk underwriting

cannot be dispensed with.

Non-disclosure to the client of a change in the terms of business

retrospectively is wrong. There is no issue more in need of problem

solving than this one. It ranks as a priority way beyond tinkering

with polarisation.

Lurking in the background is the future of European harmonisation of

industry and services supply conditions. Also the European Court of

Human Rights. It is likely that these two organisations will be

inv-olved in these issues at some time. It seems to me that the way

ahead to protect the public and their needs must be paramount.

Greater emphasis needs to be placed on the terms, conditions and risk

statements on the product providers literature with tighter

compliance at this level.

While the public must be protected at all costs from bad financial

advice and bent advisers, a much tighter definition must be drawn

about negligence and may be just as the FSA can only be sued over bad

faith, may be something similar needs to be applied to financial

advice.

While making such general comments to try and show a positive way

ahead, I do really wonder if the industry can possibly have a future

when we learn that Barclays Bank has taken 200 or its direct

salesforce and retrained them over a month-long course to be IFAs.

Need I say more?

Mark Davidson of WBS recruitment is on record as saying that IFAs

must get AFPC to stay in the game. There can be no doubt that there

is a need above all for better training and competence.

The present FPC exam is an inadequate measure of ability for any

serious adviser. However, the AFPC structure probably does not

provide the right next step. The present exams offered by the CII do

not seem to cater for the fact that most advisers have not done

serious exams for many years and the tight timetable for answers,

especially in the K10 and K20 papers, is unnecessary and perhaps the

format is insufficiently case study related and requires more

prescriptive learning by rote than is required as opposed to the

application of facts and date that are always available.

I feel that there is a need to provide an intermediate exam which is

broadly based so as to build upon FPC 1 2 & 3 and should be

compulsory for all advisers beyond a very simple range of financial

products.

There is an urgent need for inter-reactive exchange bet-ween Aifa,

the regulator, probably the Treasury, as it is quite clear that it

has its own agenda, consumer interest groups and above all the PI

companies, whereby a regime is created which allows the industry to

plan a longterm future.

A conference on the matter should be called. Failure to do so will

result on the collapse of the industry or perhaps advisers being

based outside the UK. (EU changes may facilitate this). The

financial threat to IFAs now is so significant that being an IFA is

now deemed to be a very high-risk business to be in unless you have

no assets which can be threatened.

A final word of warning. I have a client who is in international

banking. His son was one of those responsible for helping to draft

the FSA rules and is now a compliance officer for a big life company.

When the rules were being compiled, the father said to me that his

son observed that the regulatory regime plans were so complex and

tightly drawn that he considered that it would make life very hard

for financial advisers.

The father has stated to me that the enforcement of the new

money-laundering rules and financial institution&#39s fears of

regulatory compliance and the enforcement of the prescriptive rules

plus consequence of any mistakes so severe that the effect was to

drive out a significant amount of international banking business from

the UK. It is going where enforcement is relaxed such as France,

Switzerland, Bermuda and wherever bank-ers do not live in such fear

of a Draconian enforcement and interpretation of regulations.

We have seen this all before in the UK with the gleeful enforcement

and gilding of EU directives over every aspect of out lives by the UK

regulators, enforcers and legislators who seek to add their own

expensive accoutrements to make business even harder to conduct in

the UK than ever.

There is a sad obsession with interference in our lives now as an

institutional agenda. This is related to the obsess-ive official

hatred of those who dare to wish to drive a car or have the temerity

to want to stop it for a few minutes, let alone for a day, close to

their work.

The red tape culture is strangling us in our business. Sadly, the

real problem can be summed up by pointing out that those who enforce

the regime in a society which has an excessive blame and compensation

culture are not those who suffer the consequences. Those who live by

it and enf-orce it are the ones who gain most from it.

A blame and compensation culture provides work for legislators,

regulators, enforcers, lawyers, judges, solicitors, bailiffs and the

like who provide no added value. If that culture leads to the

non-availability or non-cost acceptability or gross marginalisation

of prov-iders, then the public suffer.

IFAs are not the only ones to experience this. Ask a scaffolder about

his PI cover problems. Directors cover is almost unobtainable. I understand

that solicitors typically pay 10 per cent of income to PI. Hardly

surprising that they charge £200 an hour. Surgeons have similar

problems. Is it why we are now so short of surgeons?

The law of unexpected consequences is the vital but little understood

law and our legislators need to mug up on it before they unleash

their drafters and lawyers to do their worst. The cost in terms of

uncompetitive industry and loss of jobs and lower living standards

and indeed loss of the very services to the public, which we are

trying to serve, sets us on a slippery slope.

We will all lose, unless we balance reasonable protection of the

public and a totally litigious and compensation-based society. The

problem is drawing that line.

Recommended

Depolarisation will lead to narrow panels says E&Y conference

Polarisation will lead to IFAs moving to narrow panels offering consumers a restricted choice according to a survey of delegates at the Ernst & Young Financial services Summit in Edinburgh today. A poll of delegates shows 74 per cent believe depolarisation will lead to major IFAs offering a narrow product range, while 26 per cent […]

When the wind-up blows

I have been discussing the winding up of final-salary pensionschemes, which I expect will be the subject of many more articles inthe coming years.The main thrust of those articles is likely to be that a scheme canbe wound up without any further financial liability on the employerso long as it is fully funded on an […]

Talkback

“No, I&#39m not that impressed. Sesame as in Sesame Street makes us looklike a Mickey Mouse industry.”Roger Versteeg, Versteeg Lister & Co “It doesn&#39t really concern me as I&#39m not a Misys member, but I thinkit is a fairly trivial name for a fairly important industry.”Gregory Braithwaite G Braithwaite/The Ethical Partnership “No. It made me […]

Chartwell Investments – Chartwell Capital Secure Plan

Type: Guaranteed equity bond Aim: Growth linked to the performance of the FTSE 100 index Minimum-maximum investment: £3,000-no maximum, £7,000 Isa Term: Six years Guarantee: Original capital returned in full regardless of performance in index Return: 20% growth at the end of three years if index grows by 20% or more, 30% growth at the […]

Phone - thumbnail

Pension Wise — now taking calls…

Those with decent-length memories will recall that in the 2014 Budget statement George Osborne announced the new (and entirely unexpected) pension freedoms. The new rules come fully into force in less than two weeks.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment