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Outside Edge by Robert Reid

From the people who gave us the Dome, are we about to witness another fiasco?

With the FSA waiting for the final go signal that carries the mathematical-styled acronym of N2 (or should it have been N+2?), let us look at the facts. N2 was to be in aut-umn 1999, then it was April 2000, October 2000, April 2001 and now it is more likely to be January 2002.

Given that time is of the essence, the move to alter the very market shape that current rules were set to govern by scrapping polarisation makes me wonder if N2 will ever happen, especially if the Equitable affair causes those in power to consider the effectiveness of one body regulating both products and advice (Catmarked or otherwise).

In addition to this, we have a general election in the offing and perhaps Skandia&#39s call for a moratorium on change until the effect of stakeholder is known has the most merit of all the submissions on the subject of polarisation.

Last week, Jeff Prestridge of The Mail on Sunday asked me to look over some documents to do with non-regulated products, in particular term insurance.

Quite apart from the targeting of those who could not master FPC3, the concept of avoiding compliance while selling a product to the client inferior to many currently available in the regulated sector stinks.

But this is just the tip of the iceberg as what we have with this regulated/non-regulated split are clients being forced to check when and where the protections apply.

This is still to be the case post-N2 but surely any sensible Treasury official can see that all products must be regulated, that is, if a private individual purchases a financial product (deposit accounts and mortgages too) they have the same protection as the person who buys a pension plan.

It must be better to spend the limited time and resources on extending regulation to non-regulated products rather than to Catmark every regulated product, especially when someone buying an unsuitable Catmarked product is an obvious by-product of this Catmark approach, where form triumphs over substance.

The current situation is no better than a US-based code of ethics, where the planner can opt out of the ethical code part way through a presentation. This leaves clients confused and they are likely to make mistakes in their selection and prioritisation.

Where is all this leading to, I hear you ask. Well, it is that simple clarity has to be the key objective of any regulated market. To get there, we need to action several points:

l All financial products from deposits to mortgages to the most complex product available to the private individual should be regulated.

l The FSA should recognise that the monitoring of IFAs is different to the monitoring of providers and expecting one team of inspectors to cope with both simply preserves the tickbox culture.

l The Treasury should ens-ure that adequate status disclosure is properly policed as and when multi-ties are generally available.

l Recognition from the Government that professional advice has a definite value by allowing tax relief on fees charged for advice.

In closing, I can do no better than to repeat the words of the man at Equitable: “With hindsight, we would have done something different.”

I suspect that all of us would welcome access to a Tardis or a magic boomerang at one time or another. Let us just hope that the regulator has access to foresight now because, after polarisation has been swept away, the repolarisation of the market is not a realistic option, no matter how much consumer choice has been reduced.

Robert Reid is a director of Syndaxi Financial Planning

Providers and advisers alike should take a realistic approach to communication of investment risk.

Definitions may differ but everyone is familiar with the concept of risk in real life. In an attempt to win a frame of snooker, for example, a player may attempt what is regarded as a risky pot.

Sports such as skydiving or rock-climbing are commonly accepted as high-risk activities. However, when it comes to investment risk, the concept of risk often becomes more nebulous. As an industry, we should work towards a clearer definition of risk for the benefit of us all.

Of course, consumer understanding of risk is central to the high-profile spat between the Consumers&#39 Association and the life industry over the suitability or otherwise of with-profits investment.

With-profits have long been touted as the ideal investment for those investors wanting to achieve moderate growth for the future without risking the value of their capital and the transparency of this form of investment has been called into question. The question is, how many investors are fully aware of the actual level of risk, whether high or low, inherent in any type of investment?

In the future, providers and IFAs should strive to ensure better communication of risk across the entire spectrum of investments, which can only improve relations with clients.

One of the most difficult and potentially costly decisions relating to investment is this assessment of appropriate risk level. Too low and the client may miss out on potential lucrative growth, too high and capital might dwindle.

This applies equally to decisions made by IFAs relating to an individual&#39s investment portfolio as much as to the multi-million-pound decisions that face pension fund trustees.

As you would expect, at this advanced level, the definitions of risk tend to be more precise but there is no reason why individual consumers should not deserve the same quality of information.

Risk management techniques also vary between the UK&#39s many different asset management organisations. Some institutions are happy to allow their fund managers a free rein in the way they carry out the stockpicking process to build up a portfolio. At the other end of the spectrum, some asset management firms are turning risk control into a quantitative science, held back only by the limit of computer power and available software.

On the corporate side, it is interesting to note the increasing importance of risk-related issues affecting pension funds, which can be witnessed by the welter of new services now on offer to concerned trustees. In addition to third-party risk analysis services, several asset management organisations are as active in promoting their risk management team as they are in promoting their star fund managers.

Poor investment performance from various asset managers over the last couple of years has been blamed on the inability of those managers to apply suitably rigorous risk controls within their portfolios. However, in many ways, the risk management debate is as much a question of effective communication between fund manager and client as it is performance. The adviser and client relationship should be seen in a similar light.

Advisers should ensure their clients are fully aware of the level of risk and the associated potential rewards.

Equally important is for the adviser to monitor the risk inherent in a client&#39s investment portfolio as, in times of bull or bear markets, the risk profile of the original portfolio can become unbalanced. Advisers who keep their clients in touch with underlying risk and reward will build strong and trusting client relationships.

Peter Dornan is director of group businesses at Aegon UK

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