Nic Cicutti: What are the most important challenges Aifa is facing at the moment?
Chris Cummings: The regulatory architecture is up for grabs. With the FSA potentially coming together more with the OFT that will create a different regulatory culture and we are going to see more than a brass plaque change at the FSA.
We have always viewed regulation as being a game of two halves: prudential regulation and conduct of business regulation.
It’s always been debatable how effective conduct of business regulation could be anyway. My own personal view of the FSA is that it has taken conduct of business regulation to mean point-of-sale regulation and has applied it vigorously to the intermediary community and not very vigorously to the banking community. I think the FSA has got 16 people regulating Barclays, slightly more than that regulating the IFA community, and more people work in Barclays than they do in the IFA community.
NC: Sixteen? That not widely known is it? Or have I missed something?
CC: I sometimes forget what is widely known and what isn’t…
NC: how many people regulate the IFA sector?
CC: Somewhere between 300 or 400, depending on how the numbers get sliced and diced. The reason I’m being vague is that about this time last year the FSA employed 2,400 people. They now employ 3,700 so trying to keep track of where everybody’s gone is difficult at the moment.
NC: Is there an argument for a slimmed-down FSA?
CC: We are challenging yet again this year’s FSA fees of £458m. Not the number per se: it could be exactly [how much] a regulator of this stature should cost. What we are challenging is the fact that our membership accounts for 20.2 per cent of the FSA’s annual budget, so £1 in every £5 raised by the FSA comes out of the intermediary community. That figure is just too large.
It’s been driven by the historic nature of how regulation has been applied in this country, so the focus on conduct of business regulation and point-of-sale regulation as a regulatory philosophy is: “Stop people buying bad things, stop bad thing being sold to people.”
What we are saying is the FSA needs to intervene earlier, not only in the sense of how firms are authorised but the type of products that are defined and invented. I’m not talking about something like banning self-cert mortgages or something like that but of product composition and governance.
NC: When you talk to the FSA, do they accept that their regulatory style is partly a historic legacy?
CC: It’s part of what they say.
NC: But if they do say that, there must be at least a token understanding that some things have to change….
CC: In my off-the-record conversation many people in senior positions in the FSA are looking for the next regulatory lever, what comes next after conduct-of-business regulation. Because if conduct-of-business isn’t the be-all and end-all, what’s the thing that comes next? They kind of tried it with Treating Customers Fairly but it was still conduct-of-business-based.
NC: If the regulatory side is groping to a more equitable solution for the intermediary sector, is there good news round the corner for IFAs?
CC: Absolutely. I think there is a general acceptance that conduct-of-business regulation isn’t the answer any more. Disclosure doesn’t work [either]: the more paper you deliver unto people the less they read. So regulators, consumer groups and behavioural psychologists will tell you that disclosure doesn’t cut the mustard.
NC: To go back to TCF just for a second, there was opposition in the trade press to TCF from the IFA rank-and-file…
CC: I think it was entirely right to apply TCF in certain instances because in large financial groups people do lose track of who the customer is. I think it was applied to the IFA community partly as a drive for regulatory purity. We went on record saying what we needed was less evangelism and more concrete proposals from the FSA.
NC: I got the feeling TCF was never really never gained traction one way or the other.
CC: Well, the FSA’s own data confirmed what everybody thought, they occasionally came across the odd bad guy but they would have done that through the non-supervision activities anyway.
NC: In terms of where the new regulatory focus is going, it could be accommodated easily within the Conservative’s own proposals. But where does that then leave the retail distribution review?
CC: I’ll tell you what most politicians are telling me: there are no votes in stopping the RDR, no votes for standing off from commission-based remuneration and no votes for standing up for people being less qualified.
So whoever comes to power no one is going to roll up their shirt sleeves and say “abolish the RDR”. I just don’t see that happening.
NC: On the qualification side, a lot of IFAs see the FSA’s proposals as disruptive or destructive of their side of the industry. Is that your view?
CC: We started the RDR “process” as the best, most well-qualified part of the so-called distribution chain. I was talking to Fay Goddard recently and she was telling me that the pass rates at the banks now getting so high that I am a lot less certain I can make that claim.
We need to be mindful of the fact that IFAs are seen as the consumers’ champion. We can’t maintain that position of trust if we are also arguing that we don’t need to be as well-qualified as somebody in a bank; that position doesn’t wash.
But also, because all this stuff is expensive – firms should have been offered regulatory dividends as an incentive. So the company spends some money it knows that part of the cost will be offset by a lower regulatory fee. It’s where we were before the banking crisis hit, but has [since] been taken off the table. We are now trying to re-negotiate it back on.
NC: Is it partly off the table now because regulatory dividends are not actually broken down between different distribution sectors?
CC: At the moment the FSA risk approach is a broad brush approach based on size of firm and you would be hard pressed to find a more blunt instrument. We are working with them on a new more sophisticated risk model for individual firms.
NC: A lot of IFAs are staggered by how they’ve been clobbered by bills from the FSCS and also what both regulators and FSCS are saying about their liabilities….
CC: This is something we have taken incredibly seriously. We have been negotiating for almost five months, not only on Keydata but also the Continental and Square Mile failures. We met with the FSCS board and we presented our legal view and new evidence on Keydata saying that we felt it was deeply unfair.
NC: Were they correctly assessed as being in the investment intermediation category?
CC: The difficulty is that yes, on a strict reading of the compensation scheme rules we are where we are because that’s what the rules say…
NC: But were they properly assessed in the first place in terms of the category?
CC: Keydata presented themselves to the market as a provider, as an investment manager. So either the permissions were wrong or the firm were wrong for positioning themselves in a misleading way. If you read the marketing literature the firm does make clear it is an intermediary service, but the overall perception they were allowed to create was as an investment manager.
The FSA shouldn’t have authorised this firm in the way it did and it should not have allowed the firm to portray itself to the market in the way it did. So my root cause analysis this more a regulatory failing rather than a compensatory scheme issue.
NC: What does the FSA say?
CC: The FSA points to the fact they have now changed their authorisation process. Having spent two years telling the FSA their authorisation process wasn’t strong enough and getting a nice letter back saying “Thank you, but we think it is,” then a few weeks later announcing they were going to change it (laughs) is quite funny.
NC: So the message from the FSA is in the meantime you will have to take this one on the chin.
CC: We are currently looking to see if there is any other way we can get out of it and negotiating to ameliorate the bill for IFAs.
NC: And what might they be?
CC: One is the “guiding light principle”: Keydata were involved in the product design process so people couldn’t have lost money if Keydata hadn’t designed the products the way they did, so they were the guiding light behind it all.
The FSCS says it can’t look at that because it’s not a regulatory issue. So what we are trying to do is persuade the compensation scheme to look at the value chain in the way the FSA is now saying it is doing.
The legal position is straightforward, so our chances of winning this have never been high. But sometimes you have to fight battles even if you don’t expect to win them all.
The other issue is that of a complete funding review: what kind of compensation scheme do we need? How is it going to be funded? Who should fund it? Is this the time to look at a product tax? If so, we need to look at a compensation scheme from first principles.
NC: What was interesting about the FSCS discussion was the conspicuous silence on part of IFA Defence Union and Alan Lakey’s Adviser Alliance, both of whom have always been on “extremist” side…
CC: [interjects] I like the term “passionate”…
NC: …. on the “passionate” end of the community. Is that new realism on his part?
CC: You’d have to ask Alan that.
NC: You must chat to him.
CC: We devote most of our time talking to members and what we try and explain is that if we are going to persuade a public body to change its mind you can only do that through closed door conversations and off-the-record discussions.
Public bodies can’t be seen to give in to industry pressure. So sometimes the more noise that is created the more entrenched positions public bodies assume. I sometimes think that some people forget that.
NC: So you’re not worried, challenged or feel pushed by some of the noises off-stage – or are they useful, in the sense that you sometimes need outside pressure on you?
CC: Believe me, the membership is very good at telling me what the issues are and I try and spend a couple of days a week talking to members. They phone me, email me write to me, so I don’t feel we need to look at other communication channels to know what is going on.
Another point is this: I’m a great believer in learning lessons from other people. Why were the Roman legions so successful? They stuck together, they had fantastic discipline. Similarly, the banking community has been a textbook example of how – when the world is against you – you [form] a line, you stay in [that] line, and you defend your corner. I wish we could have more of that spirit
NC: So would you prefer Alan inside the Aifa tent?
CC: Absolutely. I would much rather people bring their passion into Aifa.
NC: Do you find that in some discussions with the regulator they use you to do what they want?
CC: It is not my job to deliver my membership onto the regulator. It’s my job to understand what they want to achieve and find a way for them to meet their objectives and for us to at least protect or get a better outcome for our membership.
So I’m in there pitching my ideas, the banking community are pitching theirs and so are the ABI. Sometimes the world looks great from a banking perspective but if that idea was applied to us it would be terrible.
NC: In terms of regulatory options over the next few years, is it preferable to have the FSA as it is, with an RDR potentially ameliorated by your intervention or to have a shake-up of the system such as that proposed by the Conservatives?
CC: I think we have suffered because we have had a single regulator during the banking crisis. Because we had a single regulator that “we must be tough” message spread across all the divisions in the FSA.
If we’d had a banking regulator and an “everything else” regulator in the aftermath of the financial crash the ratchet would probably have notched up a point or two in our part of the forest – but nowhere near as much as it has done by having a single regulator.
NC: Some people have predicted that when RDR comes into force the IFA sector will be decimated. Do you share that view?
CC: In our research, the polls we carried out started off with 30-odd per cent of IFA individuals saying they would do something else. The last time we ran it, it was 17 per cent. From a more recent poll it’s looking like 9 to 11 per cent. We normally lose about 5 per cent of the IFA population a year, so this suggests it will get to a V-shape and then grow again.
[Butt] there is a big transition for firms to get through.
NC: Do you see yourself more as a capable negotiator or as a rhetorical leader in the “Bob Crow RMT” mould?
CC: I actually have a lot of time for Bob Crow, he’s a really interesting chap. I resent any implication that we would put appeasement over principle. I do this job because I care passionately about people getting access to advice.
There are times when Aifa has taken things to the wire, but we have done it behind closed doors and said: “If this continues it really is a judicial review and we will go all the way on this one.” That is our nuclear option and we deploy it very occasionally. Because it is occasional it is enough to get people to change their minds.
NC: So you’re not a Garry Heath-type of leader…
CC: I’m a value-based leader actually (laughs). I’m lucky Aifa is granted permission to lead by its membership, unlike Biba and the ABI, who have to achieve things through negotiations between bigger firms. Our members look to us to steer them the right way.
NC: Presumably it sometimes means you have to say unpalatable things to members. How do they take it?
CC: I’m still here….