Businesses generally say they welcome competition. Because competition is a “good thing”. Unlike Government interference, which is a “bad thing”. It distorts the market, and distorting the market is always bad. Very bad. Especially when done by politicians.
All that is nonsense, of course. Firms do not want competition. The ideal state for a business is a monopoly. Henry VIII discovered that when he found he could sell monopolies to support his extravagant lifestyle. The letters patent he issued remains in our vocabulary today. In 1515 the City of London gathered together the trade guilds and formed the 48 Livery Companies, effectively monopolies for the City’s businesses.
They ensured gold was assayed, cloth was of a certain quality and beer was not poisonous. They set pay and conditions and controlled apprenticeships. This early consumer protection prevented competition. Tradesmen could thrive without further interference or the annoyance of other traders undercutting their prices.
Nowadays, competition is supposed to be at the heart of business. Supermarkets, washing machine makers, even newspapers, compete on price and quality. The Competition & Markets Authority is there to control the natural desire of firms to do deals and carve up markets. But some businesses seem immune to competition. Twenty years since consumers were first able to choose their electricity supplier, the Government says the market is broken and has promised price controls on the cost of heating our homes.
Details of the plan will shortly be published in its manifesto but the cap will probably be the same as Labour’s 2015 manifesto promise: “Labour will freeze energy bills until 2017, ensuring that bills can fall but not rise.” When that was first proposed in 2013 the Conservatives condemned it as leading to higher, not lower, prices. Newspapers joined in, calling it “back to the bad old days” of 1970s socialism. But now the cap is seen as a sensible and measured response to the failure of switching to make providers compete on price.
It was never going to work. Switching relies on consumer engagement. In other words, people must have so little fun in their lives that they find switching their energy supplier an interesting activity. Rather than control prices through competition it has simply created a large and profitable new industry of commission-earning websites, paid for by all consumers in higher prices.
Financial services firms are also largely immune to competition. People have more loyalty to their bank than to their spouse. As long as basic banking and money transmission is free for those who stay in credit there is little to compete about.
Advisers also seem immune to normal market forces. You would find a beakful of hen’s teeth before uncovering details of most advisers’ prices on their websites. Indeed, after half an hour clicking through “about us”, “testimonials” and “services”, and almost drowning in client propositions and bespoke solutions, you will generally not find any information about how much they charge.
We know from FCA research – due to be updated this month – that the charges are much the same: around £150 to £200 an hour for the minority who charge that way or about 0.5 per cent to 1 per cent of invested assets for the 52 per cent who tax their clients’ wealth.
Their risk-managed portfolios seldom say what percentage of your money will drip out of the bottom of your pot to pay for the promise – sorry, aspiration – of market-beating returns.
Advisers also seem immune to normal market forces. You would find a beakful of hen’s teeth before uncovering details of most advisers’ prices on their websites
As for competing on service, you will never see the crucial word “restricted” on a website even though the FCA has now reluctantly revealed (it took a Freedom of Information request) that about half of all advisers are as much.
That is to say they are only allowed to sell – sorry, advise on – a restricted range of products or cover a limited part of a client’s financial needs. Even the 84 per cent of (mainly smaller) firms that are independent seldom blazon the word as a selling point on their opening page.
The FCA could change all this. It wants “empowered and informed consumers” so firms “strive to win their business” but it fails to support either aim. So here is my plan. Every website and all marketing material should show prominently:
l: How many of the firm’s advisers are chartered or certified financial planners (the top 5,500 of the 33,000 advisers out there) and how many are not.
2: How many of the firm’s advisers are independent and how many are restricted. Is that restriction to a list of products from named providers or to a list of stated areas, or both?
3: What are the firm’s charges (if none, say none) in three groups:
a) fixed fees: How much and for which services?
b) hourly rates: Showing how many hours basic tasks will take.
c) a percentage of the money managed: Initial fee and ongoing, and how it varies with the size of the assets.
These details would empower and inform consumers who could then make a rational choice and let competition work.
Every financial business should welcome that. Shouldn’t they?
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney
He will be joining us at Money Marketing Interactive as a speaker on May 18th