Second letter to the FSA from the editor

Amanda Bowe
Head Honcho
Retail Distribution Review
Canary Wharf

Dear Amanda

I know it is not long since I last wrote. But I feel prompted to write to you about the RDR yet again. I hope you appreciate that it can take its toll on an editor when he is expected to “walk with dinosaurs”, i.e., defend commission
charging advisers, “march to the defence of the churners”, a grim lot outside of the dairy industry, and “actively encourage the root of all evil”, not money what with you being at the financial services authority –
but commission. But try I must for I do not actually believe that they are dinosaurs or indeed that commission is the root of all evil at all.

But let’s talk about those dread words commissions, switching and churning.

My first warning is that these words mean different things to different people. Let us look at the matter in hand. The pessimist’s view is that all these policies moving around represent some sort of churner’s version of musical chairs.

You have identified, or at least an industry analyst has identified, that the insurance sector is engaged in corporate cannibalism. It involves embedded value and other silly concepts which means that when one life office is getting its arm chewed off by two or three rivals it is munching three or four others feet off or something like that. But the anaesthetic effect of fantastic new business figures means that many offices don’t even feel the pain until the others get to their vital organs. Talk about Tufty’s got no nuts. Anyway, enough of this grim analogy.

Ask – as I’m sure you have – a life office distribution head about this and he may have blamed advisers and will have muttered darkly about churn.

But it isn’t always churn. I would divide this market into at least three groups and they are not all churners.
Of course, some are. In these cases clients for whom a transfer is just plain wrong are getting dizzy given the number of GPPs, bonds, Sipps, with-profits bonds and offshore vehicles they have moved between. Now
correct me if I am wrong but there are already rules about this. You can stop them already. Maybe the question is, can you find them?

Then there is the second borderline group. These do little detriment but they may be wasting their time and their clients’ time moving people around when they should be giving proper advice. But they are not hurting anyone.
Some very big IFAs used to switch gpps every five years come rain or shine on performance and wasting everyone’s time. But this group’s notoriety transforms dependent on whether any commission is rebated back and they get close to whiter than white if the move is a rational one and if they pay
something back to the policy.

But ask a life office that is sore about these moves and certainly the more unreasonable may say they are churners. (They also sometimes confuse persistency with apathy though).

They say they don’t want the business. But why do they need your help? And if the “problem” advisers are actually switchers then they shouldn’t be telling you they are churners.

Now take a look at the context for the moment the rationale for switching. Take an easy one – poor performance in what is probably an overheated stock market – it is surely the time for asset allocations to adjust.

What of the worst skewed asset allocations – often enforced by the regulator – in with profits funds. Millions and millions of people might be better off if they are not in funds where equity holdings are restricted for any
significant period of time. Even if one expects a fall in equities and would rather the equity content was low, an investor must be better off in a fund where their investment is driven by the objectives of investment managers
rather than what the FSA says. Lots of these funds had their asset allocations pretty much frozen by regulatory intervention and missed a great deal of the bull run because of it. If only that enforcement had come years before Standard blew its billions and Equitable almost blew the lot instead of crystallising loses.

That brings into the mix the closed funds – some are getting better in how they are run able but most advice would surely be to switch if there were no penalties – or indeed if they actually returned advisers’ calls.

Consider the move to Sipps – some of this meets client demand driven by a wish for more control over assets.

This is a controversial subject none the less but the plans have not all been churned. What was simplification for anyway?

And look at wrap. Oh yes, I remember you are. But consider the sort of reorganisation of assets required when they move to a platform.

Finally so much is up for grabs in terms of what clients do at and post retirement – how they free funds and how they move funds around – it can’t all be churn.

In a nutshell, this is already a market in upheaval – some moves are good – some indifferent – some bad. Some changes are oiled by commission – some not. Remove commission as a way of remunerating advice and you may witness a shutting down of this good movement as well as a shutting down of churn.

This is where I have a great deal of sympathy for the task you face.

For example, how much do life offices turn on and off a tap on commission? What are the percentage changes? Does the money spill out later as if someone hammered a spiggot into the beer barrel too aggressively? Say an office offers more commission and sees a ten per cent shift upwards in
business. Does this mean that ninety per cent is definitely clean and a significant proportion of the extra ten per cent is from advisers who move their clients to take the extra commission and rebate it back to them. Is this wrong? I don’t envy you, having to assess such numbers and
the regulatory morality of it, but surely you have to if you are to make sense of this market. Can you tell where churn shades into switching and who the heroes and villains are?

It might be necessary to bring change to the advice market, but before advisers are forced to do so they would very much want to know if it is for the right reasons and based on the best research not just some slick lobbying by life offices or banks.

Imagine your fury if you had been doing your job to the best of your ability but you were told by edict you had to face a cut in pay for at least two or three years. The conversations with loved ones would not easy ones.

Finally, say you faced a regulatory enforced change to your business model and upfront commission was cut. You did the calculations, had that difficult conversation with the wife or husband, and decided to change model.

The promise was a better business in the future. And then suddenly you realised that the means for doing so was suffering a clampdown too. As you planned to adapt and move away from upfront, you saw trail badly hit too, either with increased paperwork and hoops to jump through or indeed a
client’s ability to withhold it.

Oh dear. Poor advisers. Can you see their point of view?

One can see in the genesis of this advice market – an uncomfortable mix of advisers on different models – some from direct sales of life insurers, some from unit trusts based businesses, some maybe even green field. It has
been a difficult road in which I would argue the regulator has been a force for good, but it has not always got it right. Advisers have also mostly been a force of good. One can see the problems when client and adviser interests are not aligning and high upfronts do not help. I agree the market needs a plan to move to better alignment of interests
with genuine transparency and though that includes ironing out problems with what the regulator and providers do too, advisers do need to change the way they work. We hope you help usher this reform. We also hope you don’t make
it happen too fast or force things by taking a blanket approach.

To overstate the problem of churn by confusing it with switching you risk calcifying the market at a time when it needs change and a lot of money needs to move from where it is languishing.

All the metaphors have been used too much but in the next few months the baby goes with the bathwater and down the sewers into the sea if you’re not careful. And if what you recommend is too harsh or too fast or indeed attacks upfront and trail simultaneously, you will stop switching as well
as churn. You may solve your own regulatory problems and trade them for something deeper.

Try telling ministers you did that and left a lot of investors in the dark. But perhaps after all that is the last thing you intend to do. I hope so.

Yours sincerely
John Lappin
Money Marketing

Read Editor’s letter to Amanda Bowe, head of the RDR
The Editor’s third and final letter to the FSA


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