The year is 2012. The US President Arnold Schwarzenegger – has just extracted his country from the Iranian quagmire. Prime Minister Gordon Brown heads a coalition Government, having been rewarded with Lib Dem support for keeping Britain out of the latest chapter of the war on terror. The US has finally caught Bin Laden who is now on trial in the Hague war crimes court.
The Conservative leader William Hague is odds on to win the next election though, as the English in particular are proving to have no taste for coalition Government though his victory is expected to lead to Scottish independence.
The stock market is just returning to the sort of levels last seen in the closing months of 2007 while housing still booms as Britain’s population has crossed the 70 million barrier. Britain, if it stays together looks certain to overtake Germany as the EU’s most populous country, despite the constant rainy summers. Wimbledon has put a roof on number one court.
Steve McClaren is a knight of the realm for taking England to the finals of the 2010 world cup, but this has proved controversial because they lost to Northern Ireland on penalties – a last hurrah before the Province finally united with the Irish Republic. Britain still has the pound but the privatised BBC has just been bought by Rupert Murdoch’s NewsCorp.
The financial world is still called the “City of London” but it is now a much sought after residential area, as all the banks have moved east to Canary Wharf. Money Marketing and Money Management are the last two publications servicing what is left of the investment and pensions adviser market with seven firms to advise millions of people.
Hector Sants has just stepped down as chief executive of the Financial Services Authority. The position will not be filled as EFSA, or ASFE as it is known in France, takes over regulation on behalf of Brussels.
The following write up of Sants’ tenure appears in Money Marketing written by the newspaper’s first woman editor.
“It all started so well for Hector Sants. When the hedge fund problems surfaced in the Lichtenstein widows and orphans fund, hitting several offshore centres, then coming “onshore” with a vengeance, Sants’ appointment seemed an inspired one.
Not only had he proved unflappable. He had understood exactly the sort of the temptations many of the big investment banks had succumbed to as they watched the upstart hedge funds corner all that performance and of course all those performance related fees.
When the wheels came off, Sants helped unravel the complex relationships, demonstrating an understanding of the transactions and cross holdings that would have defeated the smartest actuary.
The Bank of England and Federal Reserve bailouts provoked the ire of occupational pensioners and Equitable Life annuitants and the 401k savers in the States following the scandal there. But most in the City of London believe the money was well spent. Bailing out three banks had been expensive but it preserved everyone from systemic failure. Sants was crucial in identifying the key pressure points and in selecting the timing of the intervention. Crucially he also had the confidence of Gordon Brown and Ben Bernanke.
But that deftness of touch deserted him when it came to the retail market. This is a shame because for his first few years, Sants was held in much higher regard in the media than either of his two predecessors. Sir Howard Davies would obviously rather have been Bank of England Governor. He had carried out the job description of setting up the FSA and bringing together all the little regulators but people had tired of the single transferable speech about Manchester City and he had tired of financial services. He was plainly bored stiff by the end of his tenure. There had also been misselling on his watch, the one thing he was meant to stop above all.
The next man in the job, John Tiner actually cleaned up some of the problems left behind by Davies but the boasting on his departure had not gone down well. The fact he was paid for six months after he left his post, had made him briefly Britain’s best paid gardener.
But the really embarrassing disclosure was that having claimed to have cleaned up the life sector, the FSA had actually been slow to act on the vicious circle its own regulation had created.
The insurers warned the FSA that their with profits funds were becoming forced equity sellers and prey to hedge funds in early 2001, at least two months before the regulator had acted to ease the regulations.
The disclosure was one of the last significant ones about FSA policy before the Freedom of Information Act was repealed. The loss to the investors and savers of middle Britain had come to billions when the losses were totted up.
Yet when he took over the sun seemed to be shining on Sants before the misselling started.
The problem was that he had overseen a situation where existing advisers had been busted out of business by capital adequacy and exams.
Many had sold their books of business which actually proved to be worth more than many people had thought. They were half way to moving to a trail based model anyway.
The two big winners were Towry Law and The Money Portal though some robust intermediaries such as Hargreaves Lansdown and Best Invest weathered the storm too. However overall access to advice fell dramatically – even more than the FSA’s own estimates. The market also suffered from much less scrutiny with IFAs now lost and the old hard sales practices began to creep back in.
Life companies stemmed their losses medium term as switching decreased but their future was bleak. They now faced the prospect of being regulated out of existence in favour of fund managers and fund manager distributors like Fidelity and Skandia. For the UK public it was seen as a missell too far.
It hadn’t been the established multi-ties either. St James’s Place, Openwork, Intrinsic and the like. They had by and large got their compliance right.
The problem had come with primary advisers. As general advisers had been phased out, not enough IFAs had moved upmarket and very few moved down. They sold up and retired or retrained. What had happened was a new graduate recruiting drive had brought in the much talked about new blood – the recession when it finally hit meant there was an adequate pool to hire from. But freed from the threat of an ombudman referral and with no price caps, the wrong funds had been sold hand over fist. Compliance departments now cleared all manner of practices which pre 2010 would have been called misselling.
Consumers had been duped and now they knew it. One of the biggest scams had been the pre-personal accounts funds with high charges and flavour of the month asset allocations.
They were no protection against the cruelties of the bear market. Several funds had offered “guarantees” but had bust them. Sants has taken the blame. He had made getting the Retail Distribution Review through a priority. Much of the criticism centred on the fact that Sants regarded the RDR as a his first test of strength with Brussels and with advisers and failed to listen to warnings.
The suitability letter had been dumped for primary advisers on his own insistence with the FSA chief ignoring the protestations of the chief ombudman in the cause of some badly defined “greater public good”.
But thousands of the less well off had saved in the new primary plans even as creditors closed in during the recession. To make matters worse they had also been sold the wrong sort of insurance by the new multi-tied primary direct sales forces.
Which? damned Sants on its cover as the man who brought back the direct sales force with all the problems.
To rub salt in the wounds, Chancellor Balls’ even briefed against him despite the fact that Balls set the whole ball rolling.
It all seems a little unfair really. Sants made an honest attempt to widen savings and clear up abuses but unfortunately in the process the FSA tore up twenty years worth of regulatory experience and abandoned many of the weapons it had against misselling. It came a cropper. Sants would have been better off implementing his own review not the one demanded by ministers.
In the year 2012, as he sits in his garden considering what hardy perennials can withstand Britain’s tropical rains, Sants must wish he had ripped up the RDR before it ripped through his reputation.”
Returning to the present day, as the review rumbles on, one can only wonder if Hector Sants who has- we are reassured- sat in on many discussions about the retail market, really appreciates what his underlings and for that matter the banks and insurance lobby are getting him into with primary advice. We can only hope he hears the alarms going off.