Head honcho of the retail distribution review
Financial Services Authority
cc Ed – “something must be done!” – Balls
May I first of all apologise for introducing myself in such a public way, and second of all, say that I believe I have left it far far too long to write to you. However, there are matters that are so pressing I simply must raise them with you, in particular on that most vexatious of issues – the retail distribution review.
I hear from sources that you are a very reasonable person and I do believe that if I voice any criticism of actions you are about to take, only for you to then not take them, you will understand.
We are of course endeavouring to find out what you are going to say next week – that is, after all, our job as journalists – a profession, or indeed trade, which most people believe – Tony Blair excluded – is a necessary evil. But at the moment you have most of the industry who have seen anything of the RDR so scared witless they will not utter a word about what it contains. So I must write to you based purely on speculation.
The first issue I am writing to you about, in a series of three letters, is the banks. Now, just like journalists (and arguably regulators), I would say that banks are a necessary evil, certainly in the capitalist system which is very much in worldwide vogue these days.
However, I would caution that you be very wary of what you do with them or indeed what rewards you hand them.
I do not know if you are about to hand them some significant advantage from your review next week but the market is awash with speculation that you are – indeed to such an extent in frank discussions with fund management groups they say they can, if they have to, dust down their plans to go direct.
I would urge you to consider more than anything else, not the honesty of the banks in their heartfelt belief that they can do a good job of providing advice, but that you work out just how high it will be in the pecking order of their respective organisations and exactly what sort of rate of return they will expect on their investments.
We know that banks have, for some time, been making a lot of noise about how they can distribute products and advice. Some are not actually doing a bad job of it these days. Barclays, for example, is very serious – to such an extent that it has hired in a great deal of talent from the retail market with what they describe as a ‘best of breed’ multi-tie.
Whether it is a best of breed service may be a moot point – many advisers would say not. But at the very least it does not appear to have selected any ‘worst of breed’ products with which to stock its shelves. Anecdotally, it is doing a roaring trade.
The potential for detriment would seem to come from potential flaws in the advice process and one would hope that their systems are such that this would not happen.
Other banks are also making moves on funds, for example HSBC, which has links to many fund managers while others actually own independent financial advisers. Indeed since that nasty business with the precipice bond – banks seem to have cleaned up their act. Lloyds TSB even has its own FSA former managing director to boast of in Carol Sergeant which must stand them in great stead on the compliance conference circuit.
All I would ask, however, is that you put yourself not in the shoes of whatever bank lobbyist is informing you of how they can help in the coming years but say of the typical bank finance director.
This person – whoever he or she will be – will have some very definite ideas of where a bank wants to play. He – let’s face it, it will mostly be he – will want to see significant rates of return across all businesses. He will probably despair of life, pensions and equity-style investments and wonder why he doesn’t get a bigger share and make more money from it.
But mostly he will be happy with bank accounts, credit cards and loans and the PPI on them which until recently provided the heftiest commission in the market. The loss of the latter will vex him somewhat along with other populist issues such as not being able to tax the public for using cash machines but by and large he will be content. He may look to financial services to help him.
If he gets it right, with a bit of luck he will be chief executive one day, complete, of course, with a non-contributory final salary pension which probably doubles his not unsubstantial salary in real terms.
He is also looking wide and far to see if he can merge with another European bank or perhaps fighting off the advances of private equity. But does he really care about financial services? Ask him what his expected rate of return on capital invested is. Ask him how long a time frame he is prepared to wait for this return. Will he, for example, wish to wait some ten or twenty years until the trail-based commission builds up on the products. Oh yes, and can he sell them a loan too?
Also ask what part of the market he really wants to serve in this supposedly brave new world. Where do the numbers add up for him? IFAs have moved up market for a reason. The sums the banks do – and we assume that they can add – are the same as those that apply to all advisers. The most wealthy customers are the ones they really want to serve – just ask HSBC’s customers in Canford Cliffs.
On the compliance front, before any bold steps are taken might I suggest that you take a very long hard look at how Lloyds TSB sold that foolish precipice bond. No doubt the regulator has seen in detail how advisers sold and missold them probably because the advisers concerned rightly or wrongly refuted the accusations of a missale. But you should try and find out what sort of pressures were applied within a bank for something to go wrong on this scale. Who designed the product, who prioritised the product, what incentives were provided to the salesforce to sell it, did the board get involved, was it all an honest mistake? Why did compliance go so wrong and why didn’t they catch it sooner. Note that this was in the middle of a bear market. It can do terrible things to previously sensible people. A call to Carol might be in order for she would probably know what happened by now. She also doesn’t think principles-based regulation will work for the retail market but that of course, is another story.
In this way you will be able to look not just at the problems you always hear about in the advised sector of the market. But you will be able to get a flavour for some you may confront in future.
And yet because in some ways your organisation is getting better at what it does, that is, preventing misselling, you may not confront this particular nightmare.
But I still think the crux is whether – regardless of what they say – whether the banks will deliver more savings particular in equities where lots more people should be saving. To quote a Money Marketing story from a few weeks back, Barclays Financial Planning national sales director James Davies said: “A bancassurer that brings the right people through, segments the client base and gets the proposition right is a severe threat to the IFA marketplace. Everyone wants a slice of your action.” He did not say they weren’t really interested in the mass market.
But try a couple of easy tests. Line up the profits made by banks in the last few years. Then look at the profits available from overseas and then consider what “return on capital” calculations were made. Then think about the returns from the currently advised financial services sector. They are not that great in comparison. I humbly submit it will not be a priority.
If those sorts of numbers are good enough. Try something more anedoctal. Go to your bank and look at the carpet. It will probably be about ten years old with at least two holes worn in it with fraying edges and with stains from several splilt skinny lattes. Certainly the ones on Oxford Street are like that anyway.
Think about what this means for how interested the banks are about the mass market. Not very, I would suggest, unless they can lend some mug punters some money at some extraordinary, and of course unregulated, rate of return.
So my advice on behalf I think of most advisers would be please do not give the banks an unlevel playing field. Let them compete on the one they have now. It is actually level at the moment. It is just that banks don’t really want to play, and they probably never will.