The financial services world is becoming increasingly surreal. Gone is the old image of a staid and sober industry with commonly held views, which encouraged thrift and temperance and created a world in which wealth creation was real, if a little slow. In its stead is a fashion industry in which views change almost on a weekly basis with the minimum of thought, let alone intellectual vigour.
In CP121, the regulator invents a number of “market failings” as its reasons for executing its political masters' wishes. In one breath, it claims that “too few consumers are making adequate financial provision for their financial future” and in the next that “remuneration systems give advisers an incentive to sell”.
Wait a minute, we have underinvesting consumers on one hand and nasty, filthy salesmen on the other. Apparently, the regulator does not want its industry to be a commercial venture but wants the investor to mystically invest without anyone, except perhaps the FSA, explaining to them why it might be a good idea. We should get Sir Howard on one of those cookery programmes and he could show Ainsley how to cook omelettes without breaking eggs.
While the regulator fiddles with the ticklish problem of encouraging people with no money to invest their way into a poverty trap, may I point out to the industry's fire brigade that there is a hell of a fire in the city which might need their attention. Money is flooding out of product providers.
First, we have the ticklish problem of with-profits, with much of the debate concentrated on its lack of transparency. Frankly, I do not care whether a with-profits policy achieves its results with the help of witchcraft and a coven of Trappist monks as long as it achieves. The real question is whether it still works in a market of continued poor investment returns.
Many product providers have been overdeclaring on bonuses for some time and the phrase “glide path” is whispered at actuarial gatherings. The providers are on actuarial methadone, slowing down bonus declarations until the bonuses match the reality of the returns. Funding the gap is expensive.
Second, the cost of the pension review has not been properly appreciated, with £11bn of redress and a total bill upwards of £16bn. These are massive numbers and do not include much of the administrative time spent.
Third, we have stakeholder pensions, which must be proof positive that magic mushrooms are served in industry boardrooms. The most enthusiastic provider claims that stakeholder will become profitable to them in seven years, with many companies opting beyond 12. I am sorry but who in business creates a product that will not show a profit for a decade? Thank God it has been a flop.
Finally, there is the problem of profitable new sales. There are few providers which are making a profit on new sales. This will increase with the introduction of multi-ties.
Anyone who lives in the real world must believe that multi-tied clients will be offered products from providers which have been selected on the basis of the highest possible income to the multi-tied firm. Increased costs for the same business. They do not teach you that at Harvard, fortunately.
Time for a reality check. Shouldn't regulation be about consumer protection rather than social engineering?
Shouldn't providers be creating products that work rather than pandering to a civil servant's fantasies?
Shouldn't we give more thought to market stability and prudential regulation? And shouldn't we all admit that we are in commerce and stop pretending that we are financial social workers?
Garry Heath is chairman of Impartial