Whenever I have a few drinks with IFAs, I am always struck by their loss of memory – nowhere more so than in current discussions over the recent decision by the FSA to scrap the payment menu and initial disclosure document.
The regulator’s stated reason is that there were concerns from the European Commission that they would not be allowed as an add-on to Mifid. My own gut feeling is that there is more to it than that, as I will explain.
But what was interesting, in the immediate aftermath of that announcement was the reaction of some IFAs to the news. Falcon Group chief executive Allen Rosengren was quoted in this paper as saying: “I think it is a step in the right direction.” Highclere Financial Services partner Alan Lakey added: “Thank God for that. What an absolute waste of time and energy.”
Byrne Williams managing director Tony Byrne blamed the regulator for the debacle. “This is FSA classic ineptitude. It is a complete joke. Sack the whole lot of them. The FSA should be closed down. It is pathetic.”
What Messrs Rosengren, Lakey and Byrne – and many others – completely fail to remember is that the menu system, when it was first mooted by, among others, Aifa and other sections of the industry was seen as a precious achievement.
To understand that, you need to go back to CP121, the original FSA paper that proposed depolarisation of the industry in January 2002.
At the time, the FSA was quite clear on how it wanted the see the advisory sector develop. In order to retain their independent status, IFAs would have to operate a “direct payment system” (DPS), in other words, charge fees. If they wanted to retain a commission-based remuneration option, they would henceforth be called authorised financial advisers or AFAs.
It was the fear of creating this additional advisory tier, which could potentially have led to a decimation of the supposedly “true” independent advisory channel – as well as compounding the existing confusion among consumers as to what independence truly meant – that led to the development of the menu option.
Again, it is worth repeating that the menu system put forward by Aifa’s then director-general Paul Smee as well as IFA Promotion and IFA-focused life offices was designed to preserve the status quo as much as possible. In so doing, they succeeded in seeing off the AFA threat, .
The problem is that even five years ago there were two potentially divergent assumptions about the true role of the menu system. Aifa was promising a greater degree of up-front transparency in return for keeping things as they had always been on the IFA remuneration front.
The FSA, meanwhile, hoped that the menu would lead to more consumers choosing fees as the way forward.
Today, as even the FSA admits, it has not achieved this. In truth, that was always a naive assumption. Any seasoned observer could have told the regulator that the menu would only be seen as yet another unwieldy hurdle to be overcome in order to retain commission as a preferred payment option.
Back then, journalists like myself who were following closely developments within the IFA community argued two things. First, that albeit messy and bureaucratic, the menu option was the only compromise option available. Second, that it was fundamentally a stop-gap solution and would almost certainly be revisited in a few years. IFAs needed to redefine how they worked to survive.
I wrote at the time: “IFAs appear to have won a reprieve. The challenge is what they do with it. It is not enough to sit back and think that having won on this particular issue, if victory is indeed the result, they carry on as before. The debate over DPS and alternatives to it must now be used as the start of a process that takes IFAs from a disparate group of essentially semi-skilled salespeople to true professionals.
“There is a need for a ‘vision thang’ from Aifa, a statement of where IFAs should be placing themselves 10, maybe even 20 years from today and how they will move there.”
The sad fact is that, as always, Aifa has – despite all its fine words about “new thinking” and not wanting “yesterday’s answers to yesterday’s questions” – has failed to develop an alternative strategy to the menu or to prepare a radical reinterpretation of what it means to be a professional IFA in the 21st century.
As always, any decisions as to how IFAs will be allowed to operate in the years ahead will be made by others.
Sack the FSA? Maybe advisers should be looking closer to home.
Nic Cicutti is the editor of moneysupermarket. com. He can be contacted at: email@example.com