Nic Cicutti: Why all the fuss about consolidators?

Nic Cicutti

What’s all the big fuss about consolidators and churning? I only ask because the FCA appears to be raising questions about whether some of the industry’s players are hitting clients with unnecessary charges and moving them into inappropriate investments.

According to Money Marketing, the regulator is asking firms to “provide details of their business plans for the next year, as well as details of how they treat customers gained through consolidation.”

Apparently, the FCA wants consolidators to reassure it they have carried out “adequate suitability checks” before shunting any newly acquired clients onto their own panel of providers.

I confess to being surprised by all this. To understand why I am slightly amazed by this new get-tough stance, allow me to tell you a story – or two.

A few years ago my old pal Neil Liversidge, managing director of West Riding Personal Financial Solutions and Apfa stalwart, wrote a wonderful column in Money Marketing in praise of the art of salesmanship.

Neil’s letter, I noted at the time, flowed beautifully, from its clever opening – “I am a wicked salesman” – to its heartfelt ending: “…It is totally inexcusable for an adviser to fail to sell his client on a product he does need and can afford.”

My only problem with the article, which I recall praising to the skies, was in its attempt to contrast Neil’s own approach with that of so-called “thick journalists, thicker regulators and the exalted boss of Towry”, whose “hypocritical, stupid, snobbish stigma” led them to oppose “selling”.

Not because I objected to being called a “thick journalist” for one second, but because, to my mind back then, “selling” was not the way Towry made most of its money.

In fact, over the next few years, it became clearer how Towry made its money. Throughout the early and mid-Noughties the company grew through a strategy of snapping up mid-sized IFAs, initially from Bradford & Bingley’s IFA-buying spree and occasionally larger ones like Edward Jones.

Six or seven years ago, it was disclosed that Towry, headed by its then chief executive Andrew Fisher, was raking in £6m a year in renewal commissions alone from clients of the firms it had taken over.

Fisher justified this, saying: “It is perfectly acceptable for someone who buys a business that has historical agreements in place to honour that. It is not acceptable to work that way on new business, but the trail commission is part of the value of the business being bought.”

Not only that, but Mr Fisher also told Money Marketing: “I’m surprised that anyone said on your website ‘why isn’t he servicing his clients with that trail commission?’, because legally I wouldn’t be allowed to.”

As if that were not enough, in January 2010 The Times newspaper alleged that Towry was encouraging its advisers to recommend its own in-house investment schemes to clients.

A contract offered to a Towry adviser, and seen by The Times, included bonuses for attracting money into the company’s Independent Investment Management service. The contract set a target for bringing money into the IIM, with the promise of an additional 2 per cent of salary for each 10 per cent margin by which the adviser beat that target.

Yes, I know Towry is adamant it is not a consolidator. It has previously stressed that unlike firms operating through on the basis of bolted-on acquisitions, Towry is acquisitive only as part of a gradual growth strategy.

But the reality, my friends, is churning is nothing new either, whether by life companies or IFAs. To give just two examples, In November 2003, J Rothschild Assurance was fined £250,000 after the FSA its appointed representatives were churning other companies’ products into its own.

Ironically, the information about J Rothschild’s activities came from other life companies, who complained to the FSA about being churned.

Not that the then Association of British Insurers director general Stephen Haddrill quite got the message, telling a Labour party fringe meeting at the time: “If you talk about telephone services or electricity services, you argue there should be competition that should lead to people switching from time to time.”

Meanwhile, a few years ago, Philippa Gee, a highly respected financial planner wrote in Money Marketing about an IFA “who represented a large group”, for whom regular quarterly fund switching was a “golden ticket” for ongoing fees.

Philippa said: “Now don’t think I mean rebalancing by this, I mean they are fully intending to switch their clients’ entire investment sum out of funds which may be performing more than satisfactorily and then reinvest in alternative funds, just for the sake of it.”

The point I am making is this: the underlying point about many consolidators’ rapid acquisition of IFA firms is not to focus on quality organic growth, but to lay their hands on a mountain of funds under management.

We also know the FCA’s paper on platform rebates effectively bans trail commission from being paid on assets held by platform providers. Although there are some life insurance products where trail commission is payable, the end is increasingly nigh.

If so why are we surprised when the potential for churning raises its head even more than usual? The shock, surely, lies not in the act itself but in the fact that, belatedly, the FCA is considering doing something about it.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk