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Exclusive: Martin Wheatley warns on unsuitable Budget products

In a year which has left the FCA battered and bruised, the man at the helm continues to come in for close scrutiny. After over three years at the regulator, and two years into the RDR, FCA chief executive Martin Wheatley is in a position to reflect on what has gone before and admit where things have gone wrong.

In an exclusive and wide-ranging interview with Money Marketing, Wheatley talks frankly about the FCA’s mistakes, including the notoriously problematic independent and restricted definitions and the fallout from the closed book review.

He continues to ring alarm bells for advisers who charge fees based on product sales, and raises concerns about the kind of due diligence providers are carrying out in their bid to bring out Budget-ready products in time for April. 

Post-RDR report card

Following the publication of the post-implementation RDR review last year, Wheatley believes the reforms have chalked up early successes, such as financial advice becoming more of a profession and emerging signs of less product bias, with more cheaper investments being recommended.

“There were a lot of objectives of the RDR, some of which we see being met, some which are starting to be met, and frankly some which are still unproven.

“We do not believe low-fee products are inherently the right way forward, but we believe if you are acting in the best interest of your customer there will be a broader range of products you are proposing.”

Clarity of charges remains a sticking point, and Wheatley is concerned some clients still do not understand what they are paying for. He accepts advisers may not be able to spell out specific charges until they know how much time and effort will be involved. But he does not believe this should be a barrier to providing indicative costs.

“I understand advisers will not be able to give a total charge upfront, but they should be able to say to a client what they should typically expect as part of the service, and what that typical cost would be. That is where we have found it a little disappointing that firms don’t appear able to do that.”

There have been long-held concerns about how far the FCA will go in policing advice charges, though the regulator and trade bodies have dismissed the prospect of an outright ban on charging based on a percentage of assets invested.

But Wheatley has been warning on “contingent charging” and “dealing bias” since 2013, and it is clear he remains unconvinced about basing advice charges purely on product sales.

“We want it to be clear what people are paying for, and that is the bit that is still unclear. Contingent charging is something we have raised questions about, and we have some questions about whether that is delivering what we think the answer is, that is, separating out the advisory part from the acquisition and purchase of the product.”

Money Marketing’s own figures, based on Freedom of Information requests, put the total cost of the RDR at £2.6bn by 2017. Wheatley admits the cost of the RDR will be “substantial”, but hopes that the flip side to the cost/benefit equation will be consumers placing greater trust in their advisers.

“Given the problems we have had with Arch cru and Connaught, it is interesting whether those products would have been sold in a world where there was not that commission payback. There clearly is a cost [to the RDR], but I hope there will be benefits, and one of the benefits frankly is fewer scandals that fall on the Financial Services Compensation Scheme and then on the industry.”

He says while higher regulatory costs will ultimately be met by consumers, better transparency and disclosure will give clients the ability to compare both the quality and cost of advice.

Aside from the lack of clarity over charges, consumers are also failing to get to grips with the definitions of independent and restricted advice  – a problem advisers and the wider industry repeatedly tried to forewarn the regulator of.

The FCA has now accepted these need to be revisited and is consulting the industry on how best to go about this.

Wheatley says: “Obviously we created the RDR and required that these were the definitions to be used, so if there’s a problem with it, we take responsibility for that. We are not going to back away and say that is not our problem, that is just how firms describe themselves. The architecture we created was not clear enough.

“We want to hear from the industry on what a better model would look like. We absolutely accept this is part of what we designed that has not worked so well.”

‘Being the story’

The FCA has been hammered over the way it reacted to reports last March on its plans to review insurers’ closed book business. After briefing The Daily Telegraph ahead of the business plan being published, the regulator was slow to react as providers’ share prices tumbled in the article’s wake. A word Wheatley uses a lot to describe what happened is “underestimated”: the FCA underestimated how price sensitive the information was, and the market reaction.

“We are used to being the story when we have planned that. We understand we handle a lot of very sensitive information, and we handle that properly day in and day out. But what happened that day was we created a market situation and we were unprepared for having to respond very quickly.” He is adamant the same situation will not happen again.

Former director of supervision Clive Adamson begins six months gardening leave this month following the debacle, while director of long-term savings and investments Nick Poyntz-Wright, who gave the ill-fated briefing, remains in post.

Advisers have called for more heads to roll, including Wheatley’s.

He says: “One of the questions is always about accountability and responsibility. I have been criticised for not gripping it quickly enough when it did come to my attention. I have lost my [maximum £115,000] bonus for the year, so I have taken a disciplinary action against myself, and the same has happened with others. But you have to keep things in perspective. If every time anybody made a mistake they lost their job, we would all be looking for jobs I suspect.”

Difficult questions

Over the last year the FCA has carried out a thematic review into the annuity market, a market study and a further review into annuity sales practices, all of which have pointed to widespread failings in the way providers’ behaviour contributes to consumers not shopping around for the best deals. But Wheatley rebuffs suggestions the regulator has failed to effectively tackle the problems in the retirement income market.

“There is a lot that has been happening, but one of the difficult questions is we cannot just go back five, 10 or 20 years and say because we do not like what we are looking at today, contracts entered into in the past have to be rewritten or invalidated.

“I get challenged a lot on retrospective regulation, and I am very clear you can only be held to account against the standards that prevailed in the day. The things we are asking for today were not being asked for in the past. You cannot go back and rewrite history, but what we can do is to say: ‘Let’s make sure these things are much clearer in future.’”

He says chief among the things that need to be highlighted to consumers is the option of an enhanced annuity and adds he finds it “staggering” that a married person would take out a single-life annuity “with no real challenge”.

On the Budget reforms, Wheatley is clear that despite the guidance guarantee many consumers will still need advice, but is worried not everyone will get it.

“The beauty of an annuity is at least you make a decision. Faced with complexity, one of the problems of the human condition is we prevaricate or put it off. And then we rely on very simple stimulus, so if someone says you can have £1,000 in the bank tomorrow if you make a decision, people are going to make snap judgements. The problem is how do we go from a situation where everybody knew a decision was to be taken that gave them an income for life, to one where they have got multiple different decisions. They are going to need advice to cope with that.”

Wheatley says the fact the average pension pot is around £20,000 poses problems for making advice viable.

“It is not enough to merit the amount of effort that needs to go into understanding someone’s situation. The worry is not those with the largest pots, but those with a £20,000 pot when the cost of providing advice may be excessive relative to the pot size. Maybe the guidance service will answer all these concerns, but there is a question of whether people with that size pot will get to a proper outcome.”

He believes the timescale the Government has put in place to deliver the new pension freedoms is “challenging” in terms of both designing the guidance and suitable products.

“I know a lot of firms are looking at what products they might offer, but the whole process of product design is quite a complicated one. The providers themselves will have been struggling to do the level of proper due diligence testing on the products they would need to do in order to feel comfortable. It is challenging.

“It creates problems for us if providers rush out products that are not properly thought through.”

Different animal 

Advisers have been sceptical of Wheatley’s early claim in 2013 that the FCA will be a “very different animal” to the FSA. But Wheatley says the FCA has taken a new approach compared to its predecessor, such as intervening earlier where it sees risk of consumer detriment. He cites the restrictions around the sale contingent convertible bonds, or “CoCos”, as an example of the regulator stepping in to protect retail investors.

Wheatley says the FCA is also using its regulatory tools in a different way, such as requiring firms to contact consumers where there may be redress payable, rather than allowing space for claims firms to do this instead.

He says the FCA has also placed greater emphasis on actual rather than textbook consumer behaviour, and has been more ready to admit where its actions have fallen short.

“We have made mistakes with the RDR, and we have been honest to say where the mistakes are our’s. And the same goes for the Davis review, we made some mistakes, we accept responsibility, we make changes and we move on. We are more prepared to change our stance.

“I would say, contrary to what your blogging readers would say, there is a huge amount of change and the FCA is a very different organisation.”

For the year ahead, Wheatley says the financial services industry will have to grapple with a dramatically different pensions landscape and that the regulator will be responsible for spotting any potential scams or failings in the market “before they do too much damage”.

He says the recently announced restructure of FCA supervision will mean a greater focus on smaller firms, and that the regulator will continue to boost its level of communication with these firms.

“My message to advisers is many parts of the financial services industry lost the focus on the customer and became transactional. It’s to the great credit of the advice community that they never did. They stayed very focused on the customer and I hope the importance of that relationship stays there. The combination of the RDR and the annuity changes means there will be even more importance placed on the receiving of good quality, robust independent advice. For the industry that is a healthy sign for next year.”

Read the full Martin Wheatley interview transcript here

Martin Wheatley: Then and now

Excerpts from Money Marketing interviews in 2012 and now:


Then: “The fact is RDR is a big change; the effects of it are not 100 per cent understood. We have to be flexible enough to come back and revisit some of the rules if we see the wrong outcomes.”

Now: “There were a lot of objectives of the RDR, some of which we see being met, some which are starting to be met, and frankly some which are still unproven.”

The FCA’s approach

Then: “Expect us to be very forthright and clear with our views. We will try not to hide behind process, or legal documents, or complex consultation.”

Now: “We have made mistakes with the RDR, and we have been honest to say where the mistakes are our’s. And the same goes for the Davis review. We are more prepared to change our stance.”

Regulatory costs

Then: “Clearly the costs of failure have been high. With Keydata, and potentially with Arch cru, we have seen a significant cost to the industry and then seen that cost cascade through.” 

Now: “There is a cost to RDR, and it will be substantial. The cost of regulation has to be met, and ultimately will be met by the consumer. But people want to be able to compare both the quality and cost of advice.”


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There are 17 comments at the moment, we would love to hear your opinion too.

  1. Where I really do sympathise with the Regulator is the fact that the Treasury and the Government behave as lose cannons.

    They have a Regulator that they have empowered to protect the public and ensure an orderly market. Yet they shoot from the hip and make announcements and policy (EG All these annuity and pension changes) without apparently passing this by those whom it has charged with ensuring no manure hits the ventilator.

  2. To quote Mandy Rice-Davis

    “well he would say that wouldn’t he”

    Don’t get me wrong I quite like MW but he does make a lot of “stabs in the dark” of what RDR has prevented and what it will prevent ? opinion not fact !!

    The big question; 2.6 billion !!! that’s a serious amount of money on smoke and mirrors !!

  3. …”I have taken a disciplinary action against myself” – WTF?!?!

    This comedian just gets better and better as time goes on. That said, I did have a good giggle as someone tried to convince me earlier today that this chap is NOT really a comic but is actually in charge of our Regulator – thank the stars that they must have been joking!

    F.A.O. Mr ‘I’m always right and you’re always wrong – Inflexible’ Wheatley, please decipher the following and take note… #stationary-and-blind-four-legged-fury-animal-with-antlers

  4. Connaught only paid a 1% trail commission. The comment above further demonstrates how far removed these people are from reality.

  5. Adamson gets 6 months gardening leave!! Why?

    He is not going to a competitor/ He is not a threat to FCA’s business model (other than Foot in Mouth syndrome!).

    Make him work for his pay. In full and to the last minute……….I cannot see any reason why this should not be the case.

  6. What a shame he has lost his bonus. Hell why should he get a bonus he is paid a large salary for making a mess of Financial Advice for the mass market. He should resign and lose his salary

  7. On what basis can Mr Wheatley possibly (with any shred of credibility) rebuff suggestions that the regulator has failed to effectively tackle the problems in the retirement income market when the FCA refuses even to acknowledge the simple solution of mandating OM as the default option?

    As for “the problems we have had with Arch cru and Connaught”, might not a rather more appropriate wording be “the problems that we failed to identify and take swift action upon to minimise the impact of these two particular train wrecks”.

    As for “for advisers who charge fees based on product sales”, doesn’t that pretty much encapsulate in a nutshell the SJP business model, with which they [SJP] claim the regulator to be entirely happy?

    Still, when he says “we created the RDR”, at least he’s more or less admitting, at last, that the FSA and the FCA are one and the same.

    Grand words from Mr Wheatley but most of them don’t really seem to match reality.

  8. “We consulted on rules that allowed you to do contingent charging, we never suggested you shouldn’t do it, and we then made rules to this effect allowing you to do it. But now you’re doing it, and complying with the rules, we’re ‘concerned’ and are going to have a go at you anyway.”

    Lawlessness or what?

  9. every time this happens warning on budget products by paid specialists.

  10. What truly amazes me about Mr W is exactly how far removed he is with his idea about RDR successes or otherwise and the actual reality of it.

  11. If every time anybody made a mistake (insert) OF THE MAGNITUDE OF THE SIZE OF THE MISTAKE MADE HERE they lost their job, we would all be looking for jobs I suspect.

    Yep. Martin. That is the real world!

  12. So MW is ” staggered” that single life annuities are bought instead of joint life annuities…. it shows how little this man knows of the intricacies of clients circumstances, views and behaviours. Which is why we are advisers and he is a regulator. He should think before he speaks on such complex matters

  13. I have read all of the PIR RDR reports. None of them produces convincing evidence that anything much has changed for the better.

    More people have passed exams. That at least is a fact, and can probably be attributed to RDR. Does it mean that advisers are more professional? After all, they are the same people they were before, serving in many cases the clients they served before. How many have gone back to clients to say “now I’ve been back to school, I realise that last year I was talking bollocks”? The insistence on qualifications did not need the RDR, and it cannot be taken as a proxy for quality of advice, which must be near impossible to measure objectively.

    At least 80 per cent of advisers are working on a percentage of initial investment initially, with a further percentage charge annually. They call it fees, but if it looks like commission, walks like commission and quacks like commission then it is probably commission. The FCA could easily have insisted that any and all charges should be quoted and reported in cash. It may not have made any difference. I seem to recall that 20 years ago the new disclosure rules were anticipated with dread, and yet the world did not stop. But RDR set out to get rid of commission – this was central to the whole case – and it has failed.

    Grasping at straws, the FCA proudly tells us that sales of higher commission products have fallen. They mean bonds. The supporting evidence is in the Europe Economics report. Bond sales halved between Q1 09 and Q3 12. They spiked in Q4 12, but appear to have returned to the path of long term decline. If there is RDR causality, it is at best tenuous.

    Bond sales could have been eliminated, if that is what Mr Wheatley wanted, by persuading Mr Osborne to change the tax rules.

    There are suggestions that advice charges are actually going up. This squares with the sharp rise in sales of trackers. If I want to keep one per cent a year for myself (most advisers make do with less) the easiest way to keep the overall cost presentable is to go for the cheapest fund. If this is happening it is, of course, our old friend commission bias.

    Product prices have come down, says our friendly regulator. I suspect that the major factor here has been the fight for the D2C space, which would have happened with or without the RDR.

    So six years, millions of trees, billions of costs, amounting to what?

    People do not understand independent and restricted labels, and the big man admits they don’t work, without acknowledging that anyone who knew anything about this busines could have told him that years ago and saved him the trouble.

    Consumers choose advisers they think they can trust, and then they trust them, while also taking the view that most other advisers are dodgy. Where they demand advice, price is not their primary consideration. These startling insights, courtesy of another expensive consulting firm, are not new.

    But Mr Wheatley is not happy. He wants them to shop around on price, and will fiddle with the regulations until they do. But they won’t. Ever.

    In sum, what precious little the RDR has achieved could have been achieved at a tiny fraction of the cost. And through all these reports, amounting to a couple of hundred or so pages, I found no mention of Protection. I thought that was the first call, but then, I never got further than the dear old FPC

  14. May I thank Mr G laws (above)

    A very good “Carlsberg” moment !

    “Probably” the best account of the RDR I have heard thus far !!

  15. @Graeme – Very good comments.

    I nearly stopped at FPC and left the industry (I bet there are some who wish I had) and were it not for a skiing accident which resulted in me spending 2 weeks reading an R04 manual I might not have done the level 4 and stayed in the industry. The exams can become a bit addictive so I now sit a couple a year, but they don’t make me a (significantly) better adviser than I was when I only had the FPC.

  16. What I still don’t understand is how good old SJP can continue to operate a contingent fee based commission model with back end charges that is apparently “RDR compliant”.

  17. @Simon – You should have come to this months PFS seminar as I raised that very question publicly in questions and answers at the end of FCA presentation on fee charging post RDR and then spoke to Rory Percival about the issue afterwards. He would not be drawn on specific companies I am afraid though.

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