The FSA is proving to be a rather unreliable witness in the trial of financial advisers in which it is also, unfortunately, the judge, jury and executioner.
Listening to the various FSA chiefs and lieutenants talking about the retail distribution review and capital adequacy papers, it is almost impossible to gauge exactly what they mean. This also means it is difficult for advisers to lobby against the changes.
There is one unifying theme of both papers and indeed what the FSA officials have been saying – that it is industry-led. It is not.
The most surprising bit of FSA chaos theory, as applied to financial services, came from outgoing chief executive John Tiner. He made a speech – mostly looking at all the hard work the FSA has done – on how its workload had increased and how it had successfully extinguished most of the blazes it was called on to firefight by politicians.
Given the sheer scale of the task, Tiner has done pretty well but one has to wonder what he was doing wading into the retail review in his last two weeks in the job?
This was not some embarrassing leaving speech made after a few ales in the Canary Wharf Pitcher and Piano – it was a speech to something grandly known as the Chancellor’s High Level City Group.
The key passage ran as follows: “I very much hope the FSA has the fortitude to follow through the proposition that the cost of the product and the cost of the service should be clearly separated and negotiated and that the term IFA should only be used by those who select from the whole of the market and are remunerated by fee.”
He added: “On reflection, I wish we had stuck to our guns in 2002, when we made a similar proposal in the infamous CP121 on depolarisation.”
But herein lies the main reason why Tiner should have remained silent – CP121 failed because it would not have encouraged much of a move to fees but instead pump-primed multi-ties.
In 2002, the FSA did not seem to wish to see most of the independent market tied up. It did not want to see the broker channel restricted or annexed by life offices. That is why CP121 was replaced by the payment menu – admittedly something the FSA implemented badly, before, Money Marketing understands, Brussels abolished it.
The RDR floats the idea that all manner of payment, if accompanied by customer agreement and better qualifications, adds up to independence, thus holding out the prospect of the independent multi-tie.
The regulator also seems to be advocating a limited product sales channel through primary advisers. One might assume that these are multi-tied bank advisers with lower suitability requirements.
In doing so, the FSA could easily be accused of allowing limited misselling – at least as defined in today’s terms by the ombudsman. It also seeks to encourage financial planning with as yet unspecified regulatory dividends but the qualification bar is set very high.
The official and somewhat sheepish FSA line is that Mr Tiner was speaking in a personal capacity.
In certain ways, his cursory, instead of active, involvement is a great shame as he is very capable. A paper written by a hands-on Tiner grappling with all the issues, including tax benefits and the FSA influence itself on retail markets, would be worth reading. Selected musings are not.
The detail can scupper any reform and a bad reform can scupper any market – a regulatory chief who has been quite good at regulating should understand that.
A change in how a sector is paid is a massive change. Changing what a sector must hold in cash to allow it to exist is also a massive change. And it does not matter if this comes in the form of a clause, principle, rule or edict.
Turning now to Tiner’s partner in regulation , chairman Sir Callum McCarthy, we get the thesis that the market is broken.
This came from a speech at Gleneagles but, I would argue, he floundered when he got to advisers. It was adviser groups, not advisers, that were suffering, and only the badly run ones.
It is certainly unfair to use two groups, BBB and Millfield, to prove a systemic failure without explaining the why’s and how’s and indeed who’s of what went wrong.
Equitable Life and AMP do not tell the story of Norwich Union or Prudential. Exeter tells one nothing about F&C. BBB certainly does not tell the story of Hargreaves Lansdown, nor for BestInvest, Sesame, Tenet, Alan Steel and Harry Katz, wherever they stand in this argument.
McCarthy, to his credit, did mention the FSA’s own behaviour and noted policy issues, such as taxation changes and how they might affect things. but the thrust of his speech makes grim, if contradictory, reading.
Try this for a piece of classic regulator-speak: “As Clive observed this morning, we have been reassured by the support we have received from the market that these issues do need to be addressed and that you are keen to do so.
“I disagree strongly with those practitioners, not all of whom are close to the retail sector, who criticise the FSA for our work on the retail distribution review, and our related work on, for example, the responsibilities of producers towards distributors or the prudential – that is, capital – requirements for advisers. The time is ripe for review of all these issues.”
This is McCarthy claiming that the market agrees with the FSA’s analysis – then warning off the opposition – although one wonders who those people not close to the retail sector are.
But it is grim for those in the retail sector – advisers – particularly on the capital adequacy paper. Of course the “market” does not agree. If it did there would be no reason to prejudge “discussion” papers.
So what does industry-led mean?
The FSA convened five working groups, populated mostly by bankers but also by some advisers, with others as observers, such as Aifa’s Fay Goddard. The regulator then picked and chose from these groups’ ideas for its paper.
The final paper obviously only wants to discuss two types of advisers – primary and professional.
It is as if the main part of the market that the FSA is currently regulating is an afterthought. Amanda Bowe, the head of the RDR, at least acknowledged to Money Marketing that this might even be a temporary category.
This has now been backed by the FSA’s director of small firms Stephen Bland, who links the acceptance of the contentious view that capital adequacy and professional indemnity can be used as tools against misselling to the continuance of gen-eral financial advice category – that is, that the bit where most advisers curr-ently lie might be scrapped. Bland also argues that no one is trying to force advisers to change. But this is coercion by anyone’s definition.
It is significant that a few days after the review, the chair of the “professionalism and reputation” group and one of the few advisers in a position of influence within the RDR, Thinc’s Roderic Rennison, said he foresaw two main groups of advisers with two simple names, financial planners and financial advisers.
Rennison used diplomatic language but this would appear to be the “market” disagreeing even from within the RDR – not exactly industry-led.
There are other pronouncements. Director of retail policy Dan Waters suggested the independent tag is important to advisers, not consumers. Obviously, one might suggest that Mr Waters knocks on Mr Tiner’s door while he is still there to discuss this matter.
But it is the prudential requirements paper that is the regulatory coup de grace. It is the stick that will be used to beat the IFA market but we do not know how big a stick. It has few numbers in it – just a lot of unproven and untested assertions about misselling.
The market must be in agreement, says the FSA. How can it not be?
All this is very clever stuff, full of feints and weaving and nasty little jabs that are difficult to defend against.
Advisers are left boxing shadows as they try to lobby against an “industry-led solution”.
Suggesting that the industry wants this reform, emphasising the new channels but not talking about the existing dominant one, tying up all the trade bodies for months and demanding they keep quiet about the review, launching it at the start of the summer, claiming not to be forcing advisers to change while threatening to change the whole regulatory basis of their business, dividing and conquering in trying to split off the traditional industry leaders who have often changed model already – if Machiavelli were alive today he would probably title his masterwork the Regulator not the Prince.
The problem is that while the FSA and those who lead it are honest in their intentions, the way the review has been conducted leaves little confidence in the process.
Reading compliance consultant Adam Samuel’s honest answers to both papers, listed on the Money Marketing website, underlines the fact that the papers twist and turn logic on its head. It has to be doubted that the result will be any sort of logical reform but by then it may be too late to change course.