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Definition will end the compensation culture

I have been extremely concerned about the whole subject of misselling since 1998 and the events following September 11 and the current PI crisis have intensified matters to a point where I wrote to Money Marketing last week asking that we try to act as practitioners to address this issue.

I thought that it may be helpful if I wrote to expand on why I feel a definition of misselling is well overdue. I was a graduate entrant to insurance in 1985 and for the first 10 years of my career, I worked as a broker consultant.

In the early years, the industry was a mess, characterised by unqualified advice, churning, sales written solely for the profit of the adviser and incompetence. In those days, you could be a taxi driver one day and a financial adviser the next. We deserved all the criticism we got and more and I was relieved that the Financial Services Act came in.

I wanted a professional industry and to see the wide boys expelled and prosecuted.

In 1995, I started my own practice as an IFA and at that time I recall having a great deal of pride in setting up a brand new company based on what I felt were excellent professional standards. Proper fact-finds, proper research, reasons-why letters and commission disclosure were all in force at that time and I regarded them all to be excellent working practices. Since that time, I have seen additional regulations brought in, some good, some bad, and my initial enthusiasm has waned significantly but this is not the purpose of this letter.

In the late 80s and early 90s, I had the fortune to work extremely closely with a national firm of IFAs. From the outset, they were a cut above the rest of the industry, adhering to standards of professionalism and expertise that I had hitherto not seen. They set up a specialist transfer unit for pensions and handled all the transfers for that organisation nationally.

They were salaried and usually transacted business via the post. The unit was universally regarded as excellent and the business procedures they followed were regarded as first class. The information came direct from the trustees, the schemes were analysed in detail, transfer analysis on every case, spouses benefits and escalation fully considered. Many transfers were rejected by the team and the ones that went ahead were usually transacted on reduced commission terms.

In 1996, I picked up a client who had received advice from that team. He had transferred about £32,000 from a finalsalary scheme in late 1991 and the team had got commission of 3 per cent. In early 1998, he contacted me to say that he had been contacted about a redress payment. At that time, his fund stood at £75,000 and had grown by around 12 per cent a year compound. The redress payment was £71,000.

Some years later, I found out that the unit had had several such cases and the reason they were exposed was because they could not prove that they had covered the issue of falling annuity rates adequately. This has haunted me ever since. At that time, the annuity risk was not considered a major factor. Had it been, insurers would not have incorporated annuity guarantees into contracts.

Also, that unit had a profile such that it was very strictly monitored and had anyone thought it relevant, it would have been covered in the same detail as everything else.

The problem with this case for me is that it does not fit the commission-hungry pro-file or a deliberate attempt to mislead.

In fact, the company did their best to adhere to the highest standards of procedures and professional ethics. Subsequent unforeseen events of plunging annuity rates then rendered the investment decision a poor one. The other major issue I have with this case is that there were five parties involved – the client, the adviser, the company, the trustee and the actuary.

How come only the adviser was responsible? What about the trustee with a duty of care to all members. Also, the fact that the fund could grow at 12 per cent and still result in such redress makes one seriously doubt the competence of the actuary and the transfer analysis systems of the day.

What is clear is that someone discharged a huge liability and essentially got someone else to pay for it. Annuity rates are cyclical and inevitably will rise. With long-term gilt yields, it can only be a matter of time before this whole subject becomes very heated if compensation is proved to have been paid needlessly.

My fear now is that with the double blow of 1 per cent products and September 11 crippling the financial strength of life offices, we will see more and more attempts to gain compensation on with-profits contracts. Also, armed with 20/20 hindsight, investment trusts could eventually be the source of compensation. The problem is that it is the adviser who undoubtedly will be brought to account so no wonder the PI insurers are increasing rates and refusing cover. We have come a long way as a profession since 1985 and while incompetency and misselling still exists, the vast majority of advisers do the very best job that they can for their clients.

As my letter in Money Marketing last week stated, we need to define exactly what a compliant sale involves so that once it is deemed compliant, it cannot be challenged later. What is the point of transacting £1,000-worth of commission or fee income only to get a £71,000 compensation bill?

We all make honest mistakes and PI cover should be there to cover that eventuality, not where you feel you have done a good job but unforseen events thereafter impacts negatively on the client. It comes to something that I now keep past CII text books and have used them to justify the advice given in years past – other advisers may wish to do the same.

In the absence of a clear definition of misselling, I think that we will always be looking over our shoulder and that with the current compensation culture, we will see ever-spiralling costs, ever-increasing red tape increasing criticism and financial advice ceasing to be profitable.


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