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Lakey: FSA rewriting of IFA history persists

What a week. It started with unintentional humour from Hector Sants of the FSA who stated, without a twitch, smirk or blush, “I have been a proponent of accountability to Parliament.” We then heard that the FSA is confident that Europe will allow it to gold-plate Mifid II so that the RDR experiment can be legitimised.

When I first entered the industry, regulation did not exist and neither did the compliance industry as there was not any regulation to comply with. The term “broker” was used to describe those who claimed to offer advice on products across the whole of the market.

In those days Allied Dunbar, Abbey Life and a plague of smaller unit-linked insurers dominated the market with innovative products and pushy sales methods and whole of market advice represented a minority of product sales.

The introduction of regulation via Fimbra and Lautro served to push the value of the independent brand and within 15 years the phrase IFA and an understanding of independent advice caught hold with a sizeable section of consumers.

This was undeniably to the advantage of consumers and ensured that, generally, better advice and better products were marketed.

Little did we know that this period represented a pinnacle, that the term IFA would be tainted and circumvented in a calculating manner by the very body charged with a statutory objective to promote market confidence, financial stability and consumer protection.

Looking back, we can see that none of these objectives has been met. Manifestly, all three are in worse shape than they were 10 years ago when the FSA rose phoenix-like from the ashes of the PIA.

Back in 1999, then Treasury Secretary Alan Milburn described the incoming FSA as “a world class regulator”.

The reality is that it has been a total failure and, having blundered over the banking crisis and the anti-consumer nonsense known as depolarisation, it is now dotting the i’s on this manifesto of destruction by effectively discarding the independent brand.

Rather than making it the choice of preference, the FSA has seen fit to lay waste to the IFA sector by using the RDR to eliminate 30 per cent of the IFA population.

To this catalogue of wanton vandalism we can add revisionism which has resulted in the meaning of the word independent being modified. The consequence being that the vast majority of current IFAs will have to discard the independent descriptive and use the deceitful “restricted” moniker.

I do wonder though whether overall this is of overwhelming importance.

After all, the nonsense of depolarisation was the first nail in the coffin of independence and consumer understanding. Every successive hammer blow has embedded additional confusion. Many firms will now have the task of explaining to their clients that while they are no longer independent they are still whole of market.

Will my clients be disadvantaged by a change of descriptive? Apart from the costs involved with this exercise, very little will change for my clients in that I will still search the market for the most appropriate solution and I will continue to explain the difference between tied and whole of market.

The rewriting of history persists while the rest of us continue to feed the hand that bites. To paraphrase boxing promoter Don King, only in financial services.

Alan Lakey is partner at Highclere Financial Services


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. “feed the hand that bites”? Shouldn’t that be the FSA (like some mad dog, drunk with power) continues to bite the hand that feeds it?

    That aside, a good article, as usual, Alan. I’ll always remember David Severn spouting the FSA line that polarisation was “past its sell-by date” when, in fact, polarisation never had a sell-by date. It’s as right now as it ever was, even if most IFA’s don’t run up the expense of undertaking a comprehensive comparison of every product on the market for every single client scenario. Clients simply wouldn’t be prepared to pay for such an exercise and they probably wouldn’t be interested in trying to get to grips with some great tract explaining in wearisome detail just why most providers and their offerings have been discounted. The problem, of course, is that the FSA has no idea of commercial practicalities.

    Oh well, we struggle on anyway, with the FSA on one side, providers on the other and, in the middle, the great majority of clients who don’t want to get out their cheque books to pay for advice entirely independent of a packaged product solution.

  2. Sad to say Alan, I’m one of those who, after 20 years in the ‘IFA’ business, has decided that December 31st 2012 is the final countdown. I understand the need to provide our public with a product that meets the 21st century, but what’s happening is not the answer. Good luck all, but ‘I’m out’!

  3. One day soon the FSA will wake up and say “what has happened to the Financial Services Industry – it seems to have shrunk rather rapidly” and then perhaps realise they dont have much of an industry to regulate anymore. Will they then finally admit they are the major drain on resources which really should have been diverted to improving customers returns.
    Maybe reduce the size of their headcount and exit their luxury premises. Governments are about to ditch banks to appease their electorate. About time this Governement gave regulators some terms of reference as to what they can and cannnot do and eliminate the imposition of ideology and mantra. We know what were doing, does the FSA!!

  4. to: Kevin Archer.

    I disagree. The FSA – or whatever acronym they go by at the time – will just get a job at a bank.


  5. Alan, you might have included in your histry lesson critique, the stupidity of Gordon Borrie and the OFT who insisted on abolishing the Maximum Commissions Agreement, on the basis that ‘competition would bring commission rates down’.

    What occurred of course, as anyone with a brain predicted, was the reverse, and I would argue that, had the MCA remained in place, the negative perception of commission and the consequent attitude of the regulator would not have developed, and we would not now be faced with this upheaval.

    And before tha NMA warriors jump in, if the MCA had remained in place, that would not have stood in the way of a fee based Adviser developing an alternantive client proposition.

  6. Quite right, Gerry. Word count didn’t allow but this is a major point.

    Much of the RDR theory rests on the nebulous foundation of product/commission bias. This theory was laid to rest by the two Charles River Associates research papers. To get around this inconvenient truth the FSA then stated that it was the perception of bias that they wanted to combat!

    If a maximum commission agreement existed then even this ‘perception’ would be removed. I asked Hector Sants why the FSA had not considered this far cheaper and much less destructive route, he replied that the FSA does not have a mandate to set commission levels. I suggested that 0% was a level of sorts, a response that draw frowns.

    The financial services regulation system has been set up to be as conoluted and internecine as possible. Whilst the FSA appears to rule the roost the OFT exerts a surprising amount of power. They forced the end of the previous maximum commission agreement on the basis that it was anti-competitive. They are also the only body able to ask the competition commission to look into the anti-competitive consequences of the RDR – and they refuse on the basis that until it is in place there is nothing to investigate!

  7. It seems to me that much of this debate and no little hysteria has to do with the abolition of commission.

    The main argument being that the less well-off won’t be able to afford advice. I hesitate to define ‘the less well off’, but as I have so often repeated we run businesses – we are not social workers and if you can’t afford the price of a BMW don’t go into the showroom. Nor is it our mandate to ensure that ‘the public’ retain the inalienable right to obtain Independent Financial Advice.

    I have to say I really do wonder if the proponents of commission actually tell the client how much they are taking in commission.

    Taking a ‘typical’ less well-off customer (who I presume falls within the social consciences of the proponents) age 41 NB Smoker. 20 Year term with WOP. Then for a sum assured of £75,000 the commission looks a fairly reasonable £300 approx. for a monthly premium of around £15.50 – until that is you realise that the commission is 1.6 times the annual premium. Then of course we have the position whereby the client could be advised to take out CIC with the life cover. (A perfectly sensible suggestion). In which case the premium jumps to around £87 and the commission rockets to around £1,650.
    Now how chuffed would the client be to see his adviser trousering this amount? How much more work is involved between the LTA and the CIC? Surely not 450% more work! And what if the client is rated – why should the adviser receive even more commission in that case?

    I have absolutely nothing against anyone earning a decent income. It’s just that I simply do not believe that in these sorts of scenarios the advisers are being as open and transparent as they might otherwise be if a fee is charged. In the type of case illustrated, what makes it even worse is that those who are the least well off pay proportionately more for advice (true – whether commission or fees) than the better off. But with commission I would contend that the costs to the customer are that much higher. If you must trawl in shallow water you have to accept that margins are thinner.

    Yes – I’m sure that some of you will be absolutely open and honest about remuneration, but hand on heart can you say that others do likewise – particularly the banks and the tied agents.

    And yes I also know that his type of product slips under the RDR wire – and in my view is one of the biggest faults of the RDR. The rules should apply across the board – with no exceptions.

  8. No mention of commission in this article, Harry. You must be confusing it with something you read elsewhere.

    My article concerns the diminution of the term ‘independent’ – a fiasco mandated by the FSA and something that flies in the face of its supposed consumer protection/education remit.

  9. @ editorial: I’m reading this article now at 1322 GMT and see comments posted timed 1331 and 1341 – have you reset your clocks lately?

  10. Alan

    I was referring to the two posts above mine – the last of which was yours and both referred to commission.

    However I am completely in agreement with you concerning the nonsense of the new divisions. I can foresee a title such as “Your completely independent, whole of market pensions adviser (restricted to pensions).”
    The other rules (which I won’t waste space regurgitating them all) are just as stupid and nonsensical. If you are not remunerated by the provider, but by the client, then you are acting in the interest of that client independent of any outside influence.

    Just as an example. If you employ a specialist RI then this jeopardises your independent status, but if he is taken on as (say) a non-RI Paraplanner – then that’s OK. Moreover as an independent you can refer to an outside specialist and still retain your independence. Lewis Carroll would have had trouble making this up.
    All that the Canaries have done is to hand a rosette to the likes of SJP and of course confuse the public.

  11. RBS, Northern Rock, Lloyds TSB all came close to failing catastrophically, saved only by being bailed out at the last minute with tens of billions of pounds of tax payers’ money. Obviously, this was the fault of all those commission-hungry cowboy IFA’s, so we [the FSA] must step up our regulatory procedures against them to ensure no such calamity arises ever again.

    KeyData, ArchCru ~ once again, very obviously the fault of the plainly delinquent IFA community. It’s quite obvious that what’s needed is a more interventionist, bureauratic and expensive regulatory sytem.

    The recent Which? mystery shopper exercise reveals rubbish advice from most bank sales people ~ once again, this is obviously the fault of IFA’s, so we must impose a more stringent and aggressive regulatory framework.

    And just look at the complaints data ~ a whopping 1.5% attributable to IFA’s, so how can anyone argue that the IFA sector shouldn’t be the target of much increased regulatory firepower?

    Everything points to the IFA sector being the root cause of everything that’s wrong in UK financial services and clearly lots more power and money are required to tackle it. We also need much more power and influence on the European regulatory scene to ensure we have a free hand to inflict whatever action may be required to cure this dreadful blight on society.

    But we remain resolute in our mission objectives and, with God’s blessing, we’ll surely triumph.

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