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Chris Gilchrist: FCA ‘advice gap’ fudge puts UK financial services at risk

Chris Gilchrist 700

The FCA’s attempt to bridge the “advice gap” is the single biggest risk to the UK’s retail financial services industry. Early indications are it will result in a “back to the future” fudge in which the banks and insurers are allowed to use a simplified advice process to sell simple products.

A few years ago, then regulator the FSA used to crow about how European regulators were following in its steps by regulating advice and limiting the loot-and-pillage commission-driven sales practices of banks.

Now EU rules governing advice (largely following the UK model) mean incorporating an “advice charge” into products – which is what the banks will demand as their price for entering the market to loot-and-pillage (sorry, service) people who cannot actually afford advice – will require weaselly redefinitions that undermine the principles of RDR.

The regulator’s thinking was and is wrong. For a mass retail market, advice cannot be regulated effectively. It is products that must be regulated. Only if you accept this can you move towards the right sort of product regulation.

Advice really is not the main issue and pretending it is will result in weak product regulation and make costly failures inevitable. But having sold advice regulation to the eurocrats and had it adopted as part of EU regulations, the FCA cannot very well now complain about those rules. So the FCA can only fudge its way into product regulation. It is starting from the wrong place.

As a result of the Financial Advice Market Review, regulators have realised they can only create a dumbo advice regime (sorry, I really cannot think of a better term for limited-scope advice by lowly-qualified people) if they specify the dumbo products to which the advice is confined. They are doing this partly because they are under the cosh from the Treasury and legislators, which have belatedly realised they have created a top-heavy and ineffective bureaucracy.

Because those in top regulatory positions during the last product disasters (remember low-cost endowments and Equitable Life?) have long since retired, the regulator is ready to repeat its old mistakes. Allowing dumbo products to be created outside the authorised fund regime carries risks of similar failures.

There are many ways of creating dumbo products that might appear to satisfy a regulator’s desire for low cost and simplicity but they would be poor value and – if they are outside the authorised fund regime – would provide inferior investor protection.

The only way to preserve the fiction of investor protection would be for the FCA to rely on the balance sheets of the jumbos that sell such products: the banks and insurance companies. In doing so, they would simply repeat the errors that led to the Equitable Life and low-cost endowment disasters. Now, as then, the jumbos will game the system and run rings around the regulators.

The bills for dumbo advice will surely be substantial but they will probably only arrive after today’s Treasury ministers and FCA bosses have collected their gold-plated pensions. Advisers will have to lobby hard to ensure the Financial Service Compensation Scheme levy in respect of dumbo advice sticks solely with the dumbo jumbos that provide it.

Chris Gilchrist is director of Fiveways Financial Planning



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There are 14 comments at the moment, we would love to hear your opinion too.

  1. So your solution is Chris????
    As usual i hear silence !

  2. Chris is right in his analysis. But I would go farther.

    We are inches away from an Animal Farm regulator in which some distributors are more equal than others. Despite their regulatory and claims record – the banks will soon become untouchable – not only too big to fail but too big to be regulated.

    However, the regulators will still want their £1bn pa empires – so expect the regulator to turn their guns on the little guys. Facts won’t come into it. If the combined PR machines of the FCA and the Treasury want to demonize the Independent sector they will do so. Particularly if, as currently, the majority remain unrepresented.

    The banks can have the private ear of Treasury ministers and influence the regulator by the back door.There are directly authorised 24,000 advisers in the UK. I doubt more that 10% are represented. Unless firms wake up to what is heading towards them they will act too late to be effective.

    Remember Edmund Burke: “All that is necessary for the triumph of evil is that good men do nothing.”

  3. Chris’ solution is loud and clear:

    “For a mass retail market, advice cannot be regulated effectively. It is products that must be regulated”.

  4. I’ve been saying for years that products must be regulated. FOS and FSCS cover should be limited to defined ‘kite-marked’ mainstream products. Everything outside that frame, UCIS, tax-dodging schemes and the rest,should not be compensatable by the FSCS and the FOS should have no jurisdiction. Those unhappy with the advice given should be forced to use the courts. This would have two over-arching effects. Firstly those adviser firms like ours who don’t operate in the not-so-smart-Alec world would not be paying out compensation for those who think they know better ways to advise – but invariably don’t. Secondly those clients who do want to play on the motorway would have to exercise some self-responsibility and diligence or risk losing out. Caveat emptor in other words. But the politicians and regulators are too cowardly to do this. So the responsible firms and their clients will continue to pay for the greedy and reckless when their bets don’t come off. The simple truth is that the regulator and the government are frightened of kite-marking the next Arch Cru and being held responsible for the losses resulting. So the buck will continue to be passed. And the unpleasant brown stuff will continue to run down hill.

  5. Product regulation is the only way forward properly and unless the Treasury mandate the Regulator to this, it will never happen. We will never get product regulation from the FCA for one reason and one reason only. They will have to approve the products and if it all goes t*ts up in years to come they will be at the sharp end of a very big stick. They will not be able to fudge anything as their stamp will be on the products. They will not be able say anything grey like “We looked at this very carefully and have concluded that what provider X or Adviser Y has done is not what was meant at all. Our guidance could not have been clearer and so it is our determination that the accused fork out”
    Their current principles and outcome based regulation is perfect for them as it leaves them with so many ways to come back at the industry for donkeys years to come. We have what we have and there is no getting away from it. All that will happen is that the FCA will use a bigger hammer to start really bashing their “square” plug into a round “advice” hole. They will not admit their tenure has been a catastrophic and calamitous failure from the regulation of the advice sector. All they will do is keep on piling more crap on to its already disgraceful rulebook in order to provide a stay of execution. Chief Exec, chair and exec board member has one job and one job only. To keep themselves in a job by creating work for the organisation for long enough that they get to the end of their role. They then move on leaving someone else in charge to start their ball rolling over the next 3 or 4 year term. It is how bureaucracy works.
    Everyone knows you don’t need the kind of regulations (and hence costs) in place to provide pensions, ISA bonds UT’s to the mass market but the regulator refuses point blank to look at actually doing what is right to reduce costs to clients, costs to businesses and costs to providers. It would be self defeating as far as the regulator goes as they would need less staff and much lower budgets which no quango organisation will ever voluntarily do.

  6. Gary’s and Neil comments are spot on….problem is, these words will be read only by those (a) those of us in the industry who will take good note thereof….and (b) those within the Treasury and Regulator who sit at a desk all day and are charged with sussing out all the interesting articles, like this one, to see what we all comment on….and they will take note, then IGNORE….knowing that these sensible, rationale, reasoned arguments will not see the light of day in the Public Domain….so what the public doesn’t see, the Public takes no note of…..the powers that be know full well that as long as we can only fight from within, no news will get out to an unsuspecting public which will yet again fall into those welcoming traps of the big boys….
    Until we have a system in this country that allows for public scrutiny of the Regulator and Treasury in their dealings with financial services across the board, nothing will change….so throws up the need for those bodies that represent the good advisers that in turn represent their clients, to do what they should be doing and making this a real public issue, in a concerted and serious collaborative effort… I dreaming?

  7. Surely this is the Treasury’s meddling? They set up the FAMR and they are the ones likly to promote the banks and Insurers being allowed to offer two-bob mass market advice solutions.

    • I tend to agree with you Matt…….. is this not, the very clear evidence that our so called regulator is nothing but the governments rottweiler for-ever barking at our feet ? And surely the only reason the Treasury has been forced to meddle is this rottweiler (FCA) is broken ? forever snarling and biting the good and letting the corrupt walk out the back door with the plasma screen TV’s ?

  8. Everything that the commentators say here is correct.
    Authority without responsibility is always the pre-cursor to abject failure.
    However, as long as the FCA and the FOS are untouchable, unaccountable, and continue to employ unsuitable staff who have little or no relevant industry experience, they will also continue to feather their own nests with massive salaries, unjustified bonuses and huge pensions that are only available within the bloated public sector.
    As a consequence, these rapidly escalating and uncontrolled costs will eventually destroy the entire adviser community, by which time it will be too late and the regulators will then move on to regulate some other unsuspecting industry.
    In the meantime, PI insurance is becoming unobtainable, or so saturated with exclusions as to be worthless.
    In the meantime, just watch as the FOS continue to award ridiculous compensation orders that are well beyond the means of the average IFA firm, and see how these awards then fall on the FSCS and result in even higher, unaffordable levies.
    And all at a time when the FCA are trying to reduce the cost of advice.

  9. I just don’t see how product regulation either can or ever should replace the regulation of suitability. A perfectly sound product or the funds within it that are entirely suitable for one type of investor may well be entirely UNsuitable for another.

    For example, at the moment I’m overseeing for a client aged 78 a review she’s been offered by one of the big banks of advice she was given five years ago to invest in an ISA. Two of the three funds recommended are J P Morgan Emerging Markets and Natural Resources, both of which were and are totally incompatible with her risk profile. Both have performed dreadfully and she’s never received any periodic reviews. The product may have been quite suitable but the funds recommended within it are manifestly not. Having examined the suitability report, it looks to me pretty clear that the client was steered towards giving the answers that the adviser wanted from her rather than what she would have given had she properly understood the implications of her answers, i.e. the type and potential behaviour of the funds that would be recommended as a result. That’s a suitability issue not a product issue and, of course, her original adviser has long since disappeared over the horizon so I shall also be investigating the issue of trail commission.

    Yes, the FCA should regulate products (my proposals as to how it could go about approving them have been set out elsewhere) and it should respond swiftly to any reports of something going wrong (which it’s so often failed to do), but the importance of regulating suitability should never be sidelined.

  10. Chris, I rather agree with Julian. In the late 60s my aunt sold a big house in Devon and was briefly wealthy. Her adviser told her to play safe and put in a building society. And so inflation impoverished her. So there are two issues. First, is the product structure designed to stop dumb or malign providers wrecking investors? That is rightly a regulator’s issue. See Arch Cru, with profits bonds etc, etc. The authorised fund structure is, as you say, a model – as long as the trustee and ACD underwrite it. ( No more Capita) Second – is it suitable for the investor? If inflation is the threat a defensive fund full of bonds and cash is wrong. If the stock market is booming, equities are wrong. This is a matter of judgement of the investors’ needs and the economic environment. Anyway – to hell with regulations. Effective enforcement is what we lack.

  11. The main part of the article – music to my ears. Product regulation? I’m not so sure. Julian has a point.

    @ Richard Wright. Answer. It’s not our problem. We aren’t social workers and there are plenty of people with the wherewithal, who do want advice and are willing to pay for it. Why would an IFA want to work on the Tesco model of pile it high sell it cheap? That’s been tried before and it ended in tears. SDPQR* is not a sustainable adviser business model.

    * Small profit quick return.

  12. In response to Julian and Richard: I don’t say advice shouldn’t be regulated. I think the model that emphasises advice over product is wrong for a mass market. I think a reasonable analogy is the pharmacist vs GP. Go to a pharmacist and be sold a product, with a bit of advice thrown in- fine for simple ailments. Go to a GP for proper advice on serious illness – and you want a trained expert supported by referrals to experts, professional disciplines etc. Your main risk with the pharmacist is being stupid and ignoring what it says on the packet. Your risk with the GP is his failures of diagnosis and prescription. Public policy says, limit the stuff the pharmacist can sell so it is quite hard to kill yourself except by being very stupid, and only have very well trained, competent and ethical people as GPs. In our financial world, most people rarely need the equivalent of GPs=IFAs – most forms of protection are pharmacist-style purchases, likewise mortgages, loans, bank accounts etc. So make it easier for people to buy this stuff from the equivalent of pharmacists, but limit the risk by specifying what they can sell.

  13. Product regulation…… big tick, yes please
    Product levy ……. big tick, yes please

    Common sense ? alas…. sadly no, we happen to live and work in a industry where common sense and forward thinking is ignored with impunity

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