I am surprised that financial journalists have generally not:
given more coverage to the professional indemnity window slamming in IFAs faces
reported IFAs' compelling argument that the FSA is using its statutory powers arbitrarily in attributing negligence to agents instead of manufacturers
made the connection between this and the flawed reliance of the regulations since 1988 on sales and advice process instead of the design and description of products.
Viewed in the context of products blowing up, such as with-profits and splits, it should be clear that a key element of the FSA's consumer protection strategy is in tatters.
Process regulation carries damaging costs but is not effective at preventing abuse. Agents are either insufficiently independent or insufficiently qualified to prevent the sale of bad products, or good products on bad terms, or to assess and communicate properly the risks of complex products or products with complex payoffs.
Agents do not have the means, now that PI insurers have refused to be the sucker providers of capital, to fund compensation when mistakes are made. The capital adequacy requirement is typically £10,000, less than half the excess on any one potential claim of a type the PI insurers think are stacked against them by the FSA's powers (such as endowments, drawdown and splits). The effect is to weaken protection when consumers take advice from an agent.
The solution is to place the responsibility on the product manufacturers where most of these problems originate (even when agents are involved) and where capital for compensation exists. This will bring financial services into line with other industries where consumer protection is paramount.
This emerged as a widely-supported conclusion of the working party on which I based my recent CSFI paper “The future of financial advice in a post-polarisation marketplace”.
These strategy implications were absent from the CP121 polarisation proposals. Based on discussions with the FSA, I do not hold out much hope they will feature in the conclusions coming forward in December.
It did not help that Sandler fudged the issue of the high cost of regulation in the advice market, pointing to the justifiable cost of consumer protection and at the same time deploring the irrationality of investors paying high charges.
I appreciate that the PI crisis is not an obvious story for a retail audience but disillusionment with with-profits investing definitely is. Unfortunately, it is not an easy story to tell accurately.
It is important to understand the interaction between the solvency regime and the dynamics of market returns. Both aspects have informed my view of the fundamental unsuitability of the with-profits concept and the systematic misrepresentation of its risks.
I have made proposals in the past for solving the problem before it does more damage to confidence in the industry and in savings generally.
The solution involves coercing the life industry into co-operation. Statutory powers and compensation are not an overt part of it, though they sit in the background.
It amounts to a policyholder-driven wind-up, based on who chooses to take up rights to exit an individual asset share, coupled with closure of all the rump funds to new business.
As long as the life industry does not wait too long and thereby risk damaging its reputation irreparably, it has the chance of bidding to retain its customers money in its own direct unitised investment products, in or out of wrappers.
This will make individuals personally responsible for the risks they take, instead of those risks (and outcomes) being driven, as currently, by the life offices doing whatever it takes to remain technically solvent.
Proposals to reform the with-profits contract are not a substitute for an exit strategy. However, I have also argued in the past why these proposals – first put up by the industry, then adopted by the FSA and finally adapted by Sandler – are illogical and unworkable.
The FSA has not officially revised its view and reformed with-profits are on the agenda right now for the Treasury group considering the Sandler proposals. It is therefore very important that this debate is aired now.
My business consulting work increasingly involves innovative or subversive business models, heavily dependent on technology adoption, and empowering consumers where the old model aims to make them captive and dependent.
It is a self-selecting bias, as business leaders are quite aware of my views about how badly consumers are served and of my personal philosophy based on the benefits, individually and socially, of personal responsibility.
The community I work in is therefore the kind of people the Treasury and FSA is looking to, be it to introduce competitive new business formats and revenue models, promote the stakeholder-type products they want to see adopted or make consumer education a core component of their offerings.
The FSA is whistling in the wind as long as it does not deal with the inconsistencies at the heart of the regulatory framework.
Investment By Design, London