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Money to burn?

By the time you read this you will no doubt be digesting the implications, for better or worse, of the Sandler report.

Sandler will be the most talked about document of the second half of the year – at least until the FSA publishes its draft rules on depolarisation – but for the last six months this accolade would certainly have to go to Reforming Polarisation: Making the Market Work for Consumers – aka CP121.

Earlier in the year, my organisation was delighted to assist Aifa by providing it with a cost-benefit analysis of the technology implications of CP121. This summary, which was provided to the FSA as part of Aifa&#39s overall response to CP121, has now been published and carried some significant messages for anyone who has an interest in the financial advice process. Even with the release of Sandler, CP121 can still be expected to have a significant effect on all our futures.

This work was sponsored by three organisations whose core business is the delivery of technology to assist financial advisers – 1st Software, Exchange and Synaptic Systems. These companies were also involved in the project work, contributing their considerable understanding of the issues and costs involved in effective distribution technology.

The work involved looking at the overall costs of implementing the technology that would be needed to support the advice and compliance processes in a multi-channel distribution environment. It identified the level of costs that the current segments of distribution, as defined by CP121 – such as IFAs, bank salesforces, provider direct salesforces and appointed representatives – can expect to incur.

In reviewing this document, it has to be understood that CP121 could be seen as technology-neutral, given that no technology is mandated by the proposals. The reality is, however, that even for the smallest IFA business the introduction of a defined-payment regime will involve the need for some additional accounting software at the very least.

For any sizeable organisation, the practical implications of operating multi-channel distribution will require a considerable investment in systems to achieve integrated distribution. The alternative, to operate multiple parallel channels in a paper-based environment, must be virtually unthinkable.

The bottom-line estimate for the cost of implementing technology to meet the needs of a depolarised world is a staggering £1bn in the first year. To put this into context, the entire life and pension industry IT budget is estimated to be about £1.5bn a year.

The spend in support of CP121 reduces to around £500m in year two onwards. This against a background of an industry that has had to make an estimated £200m investment to be able to support stakeholder – only to find that the public is not at all interested.

It is important to understand that this is largely money that most organisations would have spent anyway to improve their overall technology base. But, without depolarisation, the investment would have been spread over a period of around 10 years and companies could have chosen the optimal time to make such investments.

A rapid move to depolarisation undermines this flexibility and will put a considerable burden on the already considerably strained balance sheets of financial services companies, both large and small. My own view is that there are many things within the depolarisation proposals that have merit but there is a real danger that undue haste in implementing the changes could seriously undermine their success.

Included with the study is a version of our model for integrated multi-channel distribution in a depolarised world. This is effectively a blueprint of the various technology systems that will be needed by a big institutional organisation seeking to support multiple levels of advice. The aim is to create a structure that can operate a mixture of adviser types, with different levels of experience, servicing consumers with diverse levels of income and to do so in a consistently profitable manner.

The emergence of multichannel distribution will trigger a land grab for market share. We are already seeing the first indications of this with the steady procession of deals where providers are investing in advisers or even buying them outright.

Once the draft rules are published, I believe the next stage will be aggressive moves by providers to establish multi-ties. An important part of any multi-tie proposition must be the quality of technology support it will provide. If it does not allow sufficient time for new systems to be put in place, the FSA risks damaging the very fabric of the UK life and pension industry.

If one looks back to the 80s and 90s, there is a frightening correlation between the number of life offices, primarily in the direct-sales sector, that within a year or so of the failure of a major distribution technology project found it necessary to close and merge with another provider.

I am encouraged by the fact that there are indications of a longer lead time to the introduction of depolarisation than previously indicated. The latest remarks seem to suggest draft rules by the end of this year with changes taking place in the second half of next year.

I still feel strongly, however, that there is a case for taking just a little longer. What the industry cannot afford is to absorb a further £1bn in costs to implement depolarisation only to then have to change systems again to meet the requirement of the single Euro- pean market in personal finance products that Brussels has made it clear it wants to establish by 2005.

If, as the FSA states, the current market works but needs a little bit of tweaking, would it not be so much better to delay these changes until they can be brought into effect simultaneously with the European changes? There is also the small matter of any sys-tems costs that might just be incurred as a result of the euro.

All the above does not take any account of the financial implications of any changes that Sandler may have proposed. I suspect I know what I will be spending the next couple of weeks looking at.

The report, Technology Implications of CP121 – A Cost-Benefit Analysis, can be obtained on the internet at or

Ian McKenna is a consultant and director of the Financial Technology Research Centre, which works for a wide range of industry organisations, life offices and technology companies, including Microsoft and The Exchange. He can be contacted by email at

Tel: 020 7935 2599


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