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Make compliance self-regulated under criminal law

What on earth is wrong with the financial services business (never mistake it for a profession)?

It has taken the FSA 20 years to make little ground and we still have dear old Ken Davy arguing the toss about best advice being independent and “newcomer’ Jeremy Forty suggesting that tied or multi-tied advice can be as good.

In fact, good advice has to stem from ethical, knowledgeable advisers who are not product sales-motivated, so neither of those commission-related operations can be relied upon to produce impartial best advice.

However, advisers just switching to fees is not the answer either as the quality of advice may be lacking, in addition to which, many such advisers have an inflated opinion of what their advice is worth. Many advisers seem to have based the value of their time on the previous inflated commission scales they used to receive.

The pretence that all IFAs research the whole of the marketplace also has to stop.

As I have said previously, isn’t the role of an IFA not only to provide best impartial advice but also (if a product is recommended) to inform the client from where the best value can be obtained, even if it is from a discount broker?

How can it be right for the market to flog, for example, investment bonds with inconsistent value – the more astute client perhaps paying no initial commission but accepting trail – so long as the investment is proactively reviewed and advised upon – and the less well informed sometime paying 5 per cent or more initial commission plus trail?

Of course, this is the real world and we all know that many advisers are quite content to sit back and accept trail commission (as if it were renewal commission) while doing nothing further after helping the client select the initial investment spread.

But all insurers should face up to it – there are no perpetually well managed insurance funds. Why else would fund of funds have become so popular? It is because insurance companies cannot deliver consistently good investment performance and fund of funds is an easy concept to sell. It lets many advisers off the investment hook of providing a regular monitoring service.

While talking about insurance companies’ poor investment expertise, I noticed that Nic Cicutti’s report about Prudential’s seizure of the inherited estate from the with-profits policyholders mentions their “continued superior investment performance”.

At best, Prudential has only been an average fund manager and it seems that some advisers have confused high bonus payouts on their with-profits bonds with underlying investment performance. One just needs to refer back to the investment performance of Vanbrugh Life (the Pru’s former unit-linked company‚ to prove this.

A further example of ill-time investment management by Prudential was when they bought chains of estate agents at the peak of that market and later sold them at a substantial loss.

All self-respecting impartial advisers (tied or independent) will recall that the death knell for endowment policies actually occurred on March 13, 1984, after which life assurance premium relief was no longer available for new policies. Yet, by 1986, shedloads of such policies were being sold. The premium relief had indirectly funded the commission but its disappearance did not concern the insurance companies and they, together with bancassurers, ratcheted up the sales machine.

Money Marketing reports that Peter McGahan wrote negatively about with-profits funds over 11 years ago.Well, my former colleague Ron Koisten (a founder of Albany Life) wrote about how illogical with-profits funds were in 1978 – 30 years ago. It was plain common sense.

Amanda Davidson is rightly concerned about the Treasury select committee’s report on the seizure of with-profits funds and fears that policyholders may over-react by surrendering their policies. I presume she is referring to those that hold with-profits bonds as some of those may benefit from independent advice. If she is referring to all Prudential with-profits policies, including endowments, I am afraid that no adviser knows what is best.

She also says that shareholders should bear all the responsibility for misselling compensation claims but does not make it clear how such responsibility should be apportioned. If she means that insurance company directors should be personally liable, then I agree but it can never be justifiable for policyholders’ funds to be used for this purposes or to pay the staff pensions or to milk the fund in other ingenious ways.

Nic Cicutti’s article reminds us of the solvency problems that faced the industry five years ago, referring to Standard Life’s forced sell-off of £7.5bn of shares from their with-profits fund. This just proves that even they cannot second-guess the stockmarket.

It seems to me that such equity sell-offs from with-profits funds alters the risk profile of the policy from low/medium to risk-averse. If so, does this not place such insurers in breach of contract and/or trust?

Here is a radical thought on the FSA/Financial Ombudsman Service – instead of creating an ever expanding financial burden on the investment/insurance industry and their poor clients, why not take a leaf out of the Inland Revenue’s self-assessment book and make compliance self-regulated with penalties for non-compliance being clearly defined at the outset and falling under criminal law?

Peter Amott
Aerobenefits Wokingham,
Berkshire

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