While the actions of the FSA tend to concentrate the minds of IFAs and legislators alike, there is a far wider source of potential regulation sitting in Brussels. The danger for IFAs is the chasm between the way financial services are retailed in continental Europe and the current UK market.
Typically, the wholesalers control the retailing of financial products in most of Europe and the independence that retailers can demonstrate is very limited. This is not only caused by the traditional relationships accepted by both parties but also by the small numbers of wholesalers. It is difficult to be independent if you only have a handful of meaningful providers.
The prevalence of multi-tied arrangements is well known and until a few years ago European IFAs were an eccentric minority who made little difference to the operation of their home markets concentrating on the truly high net worth individual by offering them offshore arrangements.
The UK, Ireland and the Netherlands have always traditionally had strong independent sectors while the rest of Europe has conformed to a far more restricted model where national governments either own or heavily influence their providers, which allow themselves to become tools of government policy. In return, providers are allowed to construct the retailing of financial services products in any way they see fit.
At the EU, the default position is nearly always the multi-tied, highly capitalised, provider/bank-dominated model and most draft regulation is initially written to satisfy the French and German markets. The challenge that faces the UK, Dutch and Irish trade associations is to reform each directive into something that can be applied to their markets while facing considerable opposition from wholesalers outside those countries who do not want their stranglehold on their home markets released by EU directives.
There is also a problem with nomenclature. For a start, the sales of life, pensions and insurance-based investment products are deemed by the EU to be insurance not investment. This means that they are subject to different forms of directive, different director general's departments and different government departments.
The original Financial Services Act straddled both investment and what Europe would deem to be insurance and in doing so caused total confusion in Europe with civil servants from the DTI and the Treasury attending the same meeting and speaking on different issues. This was resolved by the Treasury taking over the DTI's functions, passing many of them to the FSA over time. This has not been to the benefit of the UK insurance industry that has lost its voice in favour of the banks.
The drive behind the EU is to create a single European market in which citizens can buy anywhere and have the same rights and privileges. This may be all right for cars or light bulbs but is almost impossible for financial services retailers given the diverse law, regulatory language and taxation regimes. Very few retailers with the exception of those who satisfy the expatriate market, have attempted to export themselves around Europe
Thus, directives to create a single market are often creating a cure for which there is no disease, creating more regulation to satisfy a theoretical market, which will never happen.
The UK IFAs face two directives, which will impact on their capital adequacy and PI requirements. The Insurance Mediation Directive and Investment Services Directive currently have diverse views. One believes in a PI requirement higher than current UK levels with a lower level of adequacy with the other in a higher level of adequacy and no PI mandatory requirement.
The danger for UK IFAs is that the argument could either be resolved by the FSA introducing the worst of both worlds or by it involving itself in such a level of detail that it completely surrounds the IFA in more impossible bureaucracy. Given that the FSA has issued 198 consultative papers in 22 months – I am not confident.
Garry Heath is chairman of Impartial