By now we should all know the FCA seeks to find effective due diligence without defining it empirically. What is safe to rely upon: charges in brochures or illustrations? Given recent personal experience, I would say neither.
Vertically integrated businesses remind me of It’s A Knockout, when the Joker is played and they double up when they win. It is very hard to determine what is really being charged.
In Canada, the changes they refer to as CRM2 will deliver a far superior level of disclosure to that which we have in the UK – where it is possible for firms to use default illustrations that bear no connection with their current level of charges. This seems to be endemic at the private banks and discretionary fund managers, where it is often hard to find one member of staff that understands what is being levied.
Being able to drill down requires us to have the power to demand full details on charges and how they are applied. Currently, we do not have that right and, quite frankly, that is ridiculous.
We can rarely obtain an illustration from defined contribution schemes and when we do they are suspect. Yet we are required to determine the charges in the current product. Why are DC schemes allowed to pick and choose when illustrations are to be made available, if at all? The level of ongoing charges will be under the spotlight for the foreseeable future and I can see some firms having to issue rebates following an FCA review.
We hear much of “safe withdrawal rates” in respect of drawdown and the current level is between 3.5 per cent and 4 per cent. But given some firms’ ongoing charges are as high as 2.75 per cent to 3 per cent this does not leave much margin for the client.
As EY senior adviser Malcolm Kerr once observed, a 1 per cent charge where a person is taking 5 per cent withdrawals from an investment bond represents 20 per cent of their income. It is an uncomfortable truth but one worth considering nonetheless.
For due diligence to evolve we need more accurate and easily obtained data, rather than the situation we have at present where we are operating with one hand behind our back. So in light of all this, then, what can we do to ensure due diligence is up to scrutiny?
We need to consider the frailties of the information and we need to put pressure on the FCA to review disclosure that allows cherrypicking of detail on charges and how they are applied. We need a level playing field within occupational DC schemes and have them be forced to deliver the same access to information as under a group personal pension plan.
We also need to be able to determine what a provider has in place regarding long-term plans. This is particularly true in the Sipp area, where consolidation is taking place but with two distinct objectives. Some providers are seeking to build a larger, more sustainable business, but others are making no effort to integrate their purchases, simply building scale with no savings and a plan to sell it all off again soon. What the later objective delivers in service terms, your guess is as good as mine, but the last thing we need is zombie Sipp firms.
Firms’ due diligence processes are determined to be insufficient so we need to absorb what is missing and make sure they are correct while challenging what is required but not readily obtainable. There is no doubt that managing risk in adviser firms comes in many forms and ignoring that is not an option.
Robert Reid is a director at The Ideas Lab