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
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's conventional
wisdom is this year's 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's price of the Chancellor's
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
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
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
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
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
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's 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
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.
The issue of PI cover and the effect not only on IFAs but on clients