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So what if FSA consumer detriment figures are wrong?

Over the past 15 to 20 years, there has been a growing tendency on the part of many organisations and businesses to try to quantify the benefits of particular decisions they want to make in their chosen spheres of activity.

For example, we are increasingly told that if the state spends ABC on something – anything from extra schoolbooks to more wheelchairs – the advantage of doing so will be XYZ. Or that the future price of not doing something will be far greater than the immediate cost of taking action now.

This ledger-book approach to corporate and political action is undoubtedly a necessary evil. The old approach of spending money on a whim, or with no idea of what the precise costs and benefits of a particular course of action might be, can lead to disaster.

At the same time, all of us, in whatever sphere of life we operate, have faced situations where, increasingly, the tendency to try to justify decisions by reference to cost-benefit analysis has led to some pretty ropey figures being bandied about.

Last week, in an article on the Money Marketing website, Money Marketing editor Paul McMillan drew our attention to a letter from FSA chief executive Hector Sants, addressed to the Treasury select committee just before Christmas, in which he explains the cost of consumer detriment that the proposed RDR changes are trying to address.

Let me say at the outset that I have no idea if these figures from the FSA are correct. My experience of the FSA – and of the Treasury for that matter– is it often sucks figures out of its thumb to validate decisions it wants to make.

In this instance, as Paul has pointed out, the estimate of consumer detriment in Sants’ letter ranges between £400m and £600m a year and is based on a series of assumptions that are almost impossible to verify without a far more detailed understanding of how charges on sales of financial products are being applied, or what the breakdown of misselling between different distribution channels actually is.

But it is also true, as Sants points out, that there has been a massive reputational damage to the financial services industry as a result of its inability to get its act together.

In his letter to MPs on the committee, Sants mentions personal pension and endowment misselling. As it happens, a few years ago, I worked on a story looking at the effect that stockmarket movements were having on the topped-up personal pensions of people compensated by the pension review.

You may not remember this, or wish to, but of 1.1 million people who received compensation, the vast majority’s missing contributions could not be reinstated, so the industry offered to top up their personal pensions by an amount likely to deliver the same returns as they might expect to receive from their former company schemes.

The top-ups were carefully calibrated on the basis of extremely complex actuarial calculations which took into account a person’s age, years to retirement, expected wage increases, future rates of inflation and – crucially – an assumed rate of return to maturity.

It is about the industry acknowledging that, at long last, consumers have a right to expect minimum standards from their advisers

Unfortunately for those who were compensated, most received those top-ups just before the stockmarket crash between 2000 and 2003. After five years of further growth, markets then plummeted again as a result of the more recent financial crisis, before rebounding in the recent months back to the level they were at back in late 2007.

Over the past 10 years, it is almost certain that many people’s personal pensions will not have delivered the returns expected of them when the levels of compensation were set back in the late 1990s and the first year or two of the Noughties. For every year that markets undershoot these targets, those pensions are less and less likely to deliver what they might have expected at retirement.

The endowment situation is very similar. Millions of people sold products that were not suitable and are almost certain not to pay off the mortgages it was assumed they would. Those whose policies did so, in my own case back in 2008, are in a tiny minority.

Almost every misselling scandal of the past two decades has led to successive cohorts of people who listened to advice, took it and are now much worse off.
As a result, there are millions of families out there whose hopes and dreams have been badly dented, if not shattered. Were anyone to suggest to them the reforms now being proposed should be delayed because there has been no study into a possible detriment caused by a decline in the availability of advice they would receive a hollow laugh.

If you were to ask me the exact amount of consumer detriment the RDR will avoid once introduced, I would have to tell you I haven’t a clue. More to the point, I suspect the FSA does not have a clue either.

But this isn’t simply about pounds and pence and ledgerbook calculations. It is about the industry acknowledging that, at long last, consumers have a right to expect minimum standards from their advisers.

Delaying the process further in the name of “pragmatism” and “flexibility” ignores those who have suffered – and continue to suffer – the consequences of unprofessional behaviour. Enough is enough.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 54 comments at the moment, we would love to hear your opinion too.

  1. Forget about the cost or effect just do it anyway!

    Nic what about the FSA regulating those who primarily cause the issue – The Banks

    Banks are too big to fail, too important to regulated and too powerful to have their bonuses controlled

    Anyone wishing to initiate change needs to prove that their change will deliver benefits – over above pandering to the whims of the press

    Garry Heath

  2. Nic

    Let’s not forget that FSA figures (which we know are never wrong) show that only 11% of requests for a review and 11% of compensation paid was down to IFAs. The remainder being banks, buildings soxcieties and insurers.

    Also, IFA’s hold 80% of the pension market.

    If there is/was consumer detriment shouldn’t any balanced regulator focus on those responsible as opposed to those who are conveniently able to take the blame.

  3. Nic

    I appreciate the thrust of your argument in that a higher level of competence is long overdue but I feel the arbitrarily arrived at deadline has just not given enough time for IFAs to be fully qualified by 2013. I’m all for proving competance by examination but does it have to have been shoved through over a short space of time? I appreciate we could have sat exams over the last few years but a lot haven’t and, therefore, to go down the R route to achieve fit to practice without the need to gap fill, demand a level of dedication which I just don’t think is necessary and therefore the deadline for qualification should be extended to a more realistic date.

  4. If Nic wants to look at reputational damage should he not be looking at some of his colleagues on other newspapers or even the behaviour of some MPs that are currently going or likely to go to prison.

    I have no problem with IFAs being accountable under RDR – my problem is why should it only be IFAs.

    Accountability is sadly lacking in the whole of our society but this especially includes the banks. But what about the wider world where whole tranches of Government including much of the actuivity of local authorities and possibly too of the FSA operate with little or no accountability.

    IFAs will always have massive gripes until rules are applied universally and it is not one rules for us and another for everyone else.

  5. I think Nic needs to look at the far wider picture.

    Remember it was the FSA the forced some insurers who had “with profit” funds to reduce risk at a time when shares were rising and there are undoubtedly many other such situations which may well have affected future fund performance as a result of “regulation” and nothing to do with any “advice”. Also what about the massive cost of regulation which itself must have reduced people investments further as it is ultimately paid for by the consumer.

    No one knows what these effects would have had but lets not put it all down to “poor advice” by advisers, the FSA has a massive responsibility here which seems to have been overlooked by all. Compensation paid out for poor advice is relatively small compared to the poor returns of the whole market in the last decade. If regulation worked then people would be confident to invest for their future.

    Regulation has in my view not done anyone any favours, it has just manipulated the system the way the FSA wanted it, some won but many lost.

    The whole system of regulation seems to have reduced risk in the name of consumer protection. Are we really better off as a result, personally I don’t think so and that for me is the real test.

    With most final salary pensions having closed to new members and many pensions and investments under performing since the FSA came into power it does not exactly make a good case that regulation has given everyone a better deal.

    Sure there were problems but I believe there were magnified by regulation not reduced.

    Regulation is now a massive business and so it does to some extent have a vested interest to keep itself fed !!

  6. What if some of us have actually provided a service above & beyond what is expected Nic? Not because we have to take exams but because we’ve got integrity! What about the IFAs who have always charged a maximum initial commission of 3% plus provided their clients with excellent service.

    Some of us don’t need RDR & the riducluous gap filling waste of time exams.

    What about the costs that RDR is going to add to the bills consumers will pay eventually.

    THAT is the reason our fees will have to go up…not because were commission hungry! but the flipping costs of trying to make a living up North in the sticks!

  7. Jennifer Nicholls 17th January 2011 at 1:54 pm

    I agree with you Steve. I nHoe to get chartered status and carry on studying. we already take exams every year. But what RDR is doing is disqualifying us from working until we pass these exams. i support three children ( two at university)and try to run my business and a home on my own. If I can’t work our world will crash down around us and four of us will be claiming unemployemnt benefit. Is that what they want, I think so.

  8. Raising competent levels through exams does not lead to better advice, it only increases cost. When costs increase then the end user (the client/investor) gets LESS
    Paying “compensation” in advance for mis-selling rarely worked because the bonuses and returns on investment have been arithmetical reduced, so the end user will not get an enhanced payout at maturity. The compensation will have been reclaimed during the intervening years!
    Advisers are in general suitably qualified already to offer advice but being at the sharp end of the advice process we are the easiest one to blame and kick.
    Think of advisers as mechanics. We can build a portfolio from the chassis and bolt on components but the end result is only as good as the components? If they are faulty then the end product is faulty, yet advisers get the blame. Being highly skilled is one thing but assembling a product from poor components will never overcome that.
    Remember our industry is all about providing a return on money. Fining the industry and imposing increased costs is futile. The FSA needs to find a way to regulate this industry from the top that is effective but does NOT use money or cost as a regulatory weapon because that course of action hurts the people we all desperately want to help.

  9. Nic,

    Do you really, truly believe that the two areas of “mis-selling” you highlight above are down to IFAs alone?

    More pertinently, do you believe that the IFAs who today stand between consumers and a rapacious financial services industry have survived thus far by pure luck?

    You suffer from the same disease as the regulator – blinkered hind sight, exacerbated by blatant self interest.

  10. Not one of your best pieces Nic, back to being a lazy antagonist again.

    I doubt you actually believe the nonsense you have written as it directly contradicts a lot of your previous articles.

    No one is saying standards shouldn’t improve, the IFA community generally never has. It is the bank bias and double standards which infuriate most.

    Personal accountability and supervision is the way to clear out poor advisors, not wasting circa £600m of other peoples money on a hunch.

    I have just sepnt £1500 on course work for RDR and frankly it pisses me off people like you make such comments without actually being affected.

  11. typical Nic Cicutti, why use one word when 400 will do.

  12. John Hutton-Attenborough 17th January 2011 at 2:04 pm

    Nic,
    As above it is the sales driven market where the main problem lies either by “Big IFAdom” or the bank/ direct sales organisations which have chased the commission against client benefit.
    When are the “press” (financial or otherwise) ever going to challenge this?

  13. Further to my previous comments I think if you asked most consumers if the FSA should be protected from their own mistakes I suspect they would say no.

    We have to pay for ours and I am sure consumers are happy about that but given the massive financial crisis we are all in and the massive cost of regulation that is supposed to stop such situations I don’t believe the consumers want any regulator that fails to do it’s job to be protected from any wrong doing by statute as FSMA 2000 does for the FSA.

    So I challenge the FSA to do some research and ask consumers if they think they should be protected from their own failures.

    The FSA affects so much of our lives now we have to decide if this is the best way to protect ourselves or if there are better less costly ways to do so.

    The recent increase in compensation limits announced by the FSA will of course make it look in years to come like the FSA is better value. The FSA costs alone are over £400 this year alone and will no doubt rise again soon. Add our costs of obeying all the FSA rules and regulations and you can probably add another 3-4 times that yet the amount paid out to consumers in compensation by the FSCS in 2009/10 was £798 million or so.

  14. I was working for a direct sales big insurer in 1988, through to 1995. I can tell you their managers were telling the sales force to get out and sell PPPs and even get people to opt out of company schemes. There was no guidence on whether it would be detrimental to the client, at all. Thankfully I didn’t fall into the trap, but it was only because I, personally, didn’t like the idea. The company were very gung ho about it all.

    Of course LAUTRO were also to blame, as they were with the REAL charges on endowments not appearing in illustrations.

    I would not have any idea about how many bad sales were done by IFAs, at the time, but I suspect it was mostly the life companies and banks.

    Of course the media is also very responsible for giving the industry a bad name. I have no objection to exposing bad practice but they often fail to give a balanced view, as they are mostly interested ina good story (the scandalous parts). I have lost count of members of the public that have told me they think pensions are a rubbish way of saving because of what they have seen and read. Very sad.

  15. Whenever RDR is discussed everyone seems to focus on exams. There is of course another area to deal with – fees.
    I can see most of my clients having a big problem with fees instead of commisison – this is equally as big a problem when it comes to availability of advice as exams. I deal mainly in the middle and low income bracket and I have yet to have a client opt for a fee instead of commission whn offered. Some advisers may go out of business, not because they aren’t qualified (I’m nearly there) but because their clients will struggle with fees – however they may be dressed up.

  16. @ Chris 22

    So what do you do when the commission that you are going to get for a particular transaction does not cover the cost of the work that you have done?
    You have to get out of this mindset that the client wants you to be paid commision. Value the work that you deserve for your “professional” qualities and if they can’t pay for it then are they really a client you want to advise?

  17. Nic, you have admitted publically that you do not particularly like IFA’s. I can say that I feel the same about journalists and therefore think they should be more heavily regulated. If it means that increased costs will force guys like you out of the industry, so be it.

  18. “But it is also true, as Sants points out, that there has been a massive reputational damage to the financial services industry as a result of its inability to get its act together.”

    Exactly so. And the chief symptom of the industry failing to get its act together? Er… the FSA’s failure to regulate the activity of the banks, which failure assisted the credit crunch enormously.

    As we of the Oline Claque once again point out the superficiality of our favourite journalist’s efforts, I urge our hero to go out and find some 60+ IFAs holding only level 3 qualifications and with unblemished records over 20 years plus (there are plenty of them); sit down with them and explain how wonderful the industry will become overnight without them and why if they wish to continue in an industry they have graced they should spend their later years scurrying into an exam room or alternatively falling on their sword for the greater good (as you perceive it).

    Do let us know how you get on.

  19. Oh dear, the self-styled shock journo is at it again.

    I believe counselling is available for those who take delight in stirring to gain attention for themselves. I am not giving you attention Nick because I have been roused by your rhetoric but because I have a genuine desire to help people who are obviously unhappy.

  20. Sorry meant to say the FSA costs this year alone were £400 MILLION not £400 !! Oh i wish.

  21. So what if FSA consumer detriment figures are wrong?

    Well if you grant such powers to a unelected, unaccountable, quasi judicial regulator with the power to legislate then it matters even more than if the FSA was accountable. Once again Nic I would expect a little more from a member of the free and independent press.

    Or do you belong to the Vladimir Putin school of Journalism?

  22. Paul Standerwick 17th January 2011 at 3:01 pm

    Your articles are so boring, I cannot remember finishing one……same old, same old, please MM can you not replace this guy with someone interesting?

  23. Its a wind up right Nic ?

    You are such a wag Nic you really are !

  24. kevin Archer | 17 Jan 2011 1:56 pm wrote:

    “Think of advisers as mechanics. We can build a portfolio from the chassis and bolt on components but the end result is only as good as the components? If they are faulty then the end product is faulty, yet advisers get the blame. Being highly skilled is one thing but assembling a product from poor components will never overcome that.”

    Agreed. And the point is that you get paid to be a competent enough mechanic to know good components from poor ones and select accordingly…

  25. @John Hutton

    Its not a question of not valuing the work I do, but abandoning clients of long years standing because they are of no value will do them no good at all.

    This just endorses the notion that accessability to advice will diminish – you think thats a good thing?

  26. Hi guys. I don’t want to intrude on your little party, but I would just like to ask Toddy: when did I ever publicly admit that I don’t like IFAs?

  27. So what if FSA consumer detriment figures are wrong?

    Quite simply Nic, if the FSA cannot get it right then it is hardly in a position to correct or regulate others.

  28. Nic, I am sorry if I did not quote you correctly. I think your exact words were that you were not particularly fond of IFAs.

  29. Yet another ‘wise after the event pundit’ I sold many endownments during a career in financial services, and each and everyone was sold according to the ‘book’ firmly believing that is was in the clients best interest. I have no doubt that if successive governments had acted as responsibly many people would not have found/or will find that their investment returns were less than expected. The fact that endowments are failing so many people is not because of ‘miss selling’ years ago, but decisions made by government, not poor advice by insurers.

    Anybody who makes an investment faces risk, and where no deception is involved must face the consequences of their own actions. Compensation is rarely deserved.

  30. Toddy: and when, exactly, did I say that?

  31. This article epitomises is what is wrong, who cares about big figures? They are too complicated to understand so it does not matter if they are right, nearly right or just pulled from the air to sound important.
    This is Blair’s legacy to us all. It is this attitude that now pervades and is one where corruption feeds on it self and we have seen it in the stupidity of MPs claiming for cat food and duck houses and got very upset but talk big figures and people glaze over and accept as it beyond their comprehension.
    So what ?

  32. Has any journalist ever made the point about endowments being sold to consumers who couldn’t afford their dream house via conventional means, i.e. through a repayment mortgage?

    Not many press inches have been utilised explaining how the same people claiming compensation because their dream denting endowment performance didn’t cut it, enjoyed a quadrupling in the value of the houses that they would otherwise have not been able to afford.

    I guess a story which has consumers who knew exactly what they were doing and why wouldn’t make good copy.

  33. Steven Farrall (Adviser Alliance) 18th January 2011 at 10:04 am

    The point about the RDR is that it will fail. Such detailed planning by a centralised bureaucracy always fails, because the bureaucracy can never know enough information to make a cogent plan. Information in society is highly diverse and largely unknown by economic agents. No bureaucrat can ever find it out.

    Then there’s the freedom argument. The State has no right to take away freedoms from us – the people, not just IFA’s – to carry on our lives as we think fit.

    Cicutti then relies on specious agruments about ‘mis-selling’ – another set of weasel words and non-concept. Mis-selling was constructed with hindsight judgements. English Common Law recognises caveat emptor and professional responsibility. If you move to caveat vendor you exponentially increase moral hazard. Oh, and the ‘loss’ calculations for the endowment nonsense were as spurious as the RDR ‘detriment’ calculations.

    Cicutti is ignorant, but writes well.

  34. @nic

    MM 24/2/2010

  35. Nic – I can agree with your conclusion.

    Alan Lakey – what you say is also spot on.

    As for the crux of this, together with the two “misselling” examples, what if advisers who sold personal pensions and endowments were qualified enough to understand the underlying science and risks such vehicles possessed?

    Their advice would be different. It would not matter what the “book” said, they would simply realise that most of these are cons designed to make money for providers.

    Is it any wonder that those who gain more knowledge and understanding are moving away from products and providers and focussing on financial planning which is where the real value is.

    May RDR flush out those who are too experienced to bother doing exams, to acquire rightful qualifications and be able to provide genuine financial strategy….as opposed to being sheep and recommending the in-stuff and best past performer.

  36. The endowment ‘mis-selling’ argument is very dear to my heart.

    The entire argument was based on misinformation and this was caused by the regulator. The regulator in question was LAUTRO which allowed or enabled thirty or so insurers to use fictitious charges when setting the premium levels yet then use a different much higher charge figure in reality.

    The FSA has consistently refused to name these companies, although we all know who they are.

    Why is this important? The higher charges reduced the fund values, surrender values and projections. These caused plans to be off-course from day one through no fault of the adviser who innocently trustedthat the illustrations were correct.

    Low values = complaints. What’s more when the complaint is upheld by the FOS the compensation is based on the same lower values thus the adviser pays for the purposeful deceit of the insurer and the roguelator.

    The FSA has refused to censure these companies who through their marketing tactics caused millions of endowments and pensions to be mis-sold.

    Justice in financial services, now there’s a laugh.

  37. It appears that the FSA has been able to identify and crack down on some consumer detrimemt. The fine on Barclays added to the one last week on RBS/NatWest is long overdue. Were the FSA to trot along to another couple of high street banks I am sure the £400m of “consumer detriment” would be handsomely curtailed.

    Why, however, did the FSA delay publication of the Barclays action until after the TSC submission? Now that stinks.

  38. Yes, life companies and Lautro were in an unholy alliance to flog endowments on the basis oif fictitious charging structures.

    But to suggest that IFAs were innocent victims is rubbish. Money Management was supplying own charge illustrations years before the regulators eventually got round to it. Any adviser who wanted to had access to this information.

    Moreover, the issue with endowments was not just that of performance and charges (or of scandalous initial charging structures) but of suitability. That’s precisely why so many policies were surrendered within a few years of being taken out and why people lost out so heavily as a result. IFAs were just as guilty as life insurance salespeople of flogging thes products inapproriately. The right level of training, as well as tighter regulation would have helped immeasurably.

  39. Sorry Nic, you are way out on this.

    The endowment providers used fictitious charges to set the premium level which was not allowed.

    Whilst all projections looked identical in terms of maturity values it was the incorrect premiums that caused much of the detriment.

    One Scottish provider confirmed thatby using the incorrect charges the plan needed to achieve 8.40% instead of 7.50% to hit the mortgage target.

    When I locked horns with them they opted to correspond with me via their solicitors.

    The Money Management tables related to pure endowments with a £50 per month premium. Not only did this make figures difficult to compare but ignores the fact that all of these providers breached the rules.

    Don’t believe me? The FSA itself agreed that the companies breached their contracts but have never fined a single one!

  40. Part of the problem when people ditched their endowments was in fact they did not realise this was part of the mortgage package and they thought they could save a few bob, especially when interest rates went to double figures. They never converted to a repayment mortgage and paid interest only, probably with a bit of term cover. Had they been on a repayment mortgage unless there was no other way the lenders would not have allowed them to go on interest only. Years later when it was pointed out that their repayments had to go up considerably, shock horror. I have spoken also to a lot of people who advised me they knew what they were doing with an endowment but when the chance of getting a bit of compo they suddenly forgot that and jumped on the bandwagon. Did they pay the compo off the mortgage, did they heck as like, a new car or holidays came into the picture. I also bet iff every Life Insurance Company, Bank, IFA compared the complaints letters, they would be virtually word for word the same, encourgaged by some reporters and ambulance chasing organisation. watch the same with PPI complaints.

  41. The argument that adviser have with RDR is not about not raising standards – that is welcomed. The argument is about the FSA hitting everyone over the head with a bureaucratic mallet and imposing a business model that has more chance of failing than succeeding.
    The fact that the FSA cannot get its figures right, or more to the point, hasn’t a clue how to get them right indicates that other parts of its process are probably badly flawed, and the rush to get everything in place at one go is based more on desperation than reason.
    If the FSA were to work with the industry rather than against it all their aims would be met, probably with a significantly lower cost, and over a timescale that would not be much longer.
    And I suspect it would provide a far better outcome for clients who should be the main reason for the reforms.
    There is more in the RDR that is directed to creating a industry that is easier to regulate than there is to provide a better outcome for clients. And the worst part of the outcome I believe is that far fewer people will have access to decent advice.

  42. Just read Nic Cicutti’s comment on the Money Management figures on endowments.
    Firstly, the Money Management figures were a significant reason for the Endowment scandal, for many companies were fiddling the figures to ensure they came at the top of the pile, so more IFAs would recommend them. With Profits is still a black art.
    Secondly, there were serious flaws in the figures that I pointed out to Money Management many, many years ago. The response was a not so polite – Push Off, so serious errors were not corrected By money Management.

    Yes many advisers did recommend Endowments, but very many stopped recommending them in the early 1990s. Up to 1985 they generally represented good value for money. By 1990 they were a dinosaur – but remember that IFAs and regulation was then only at the start of the long march. To start resurrecting that “scandal” is a little like accusing the Heath Government for our present problems.
    Things have moved on – perhaps you should too.

  43. Nic, I have looked long and hard to locate your comment I quoted and I will have to eat my words because I cannot find it. I apologise most sincerely and withdraw my statement that you have said this publically.

    However, my impression of your articles in MM is that you do not particularly like the IFA sector or at best that you may appear a little one-sided in your written views. Am I wrong? I did find your comment here on 17th January where you refer to ‘our little party’ very condescending and may support my views.

    You must consider the IFA’s frustration over a regulator that appears to favour one side of who they are regulating more than the other. The latest example may be that the providers did not like that they had to register every adviser and there may be clear evidence this may be the right thing to do as it cold improve standards. The IFA sector accepted this, and as far as I am aware, a large proportion of the IFAs are individually registered anyway. It is being argued that this could possibly curb some of the misselling amongst the providers’ advisers (the high number of complaints e.g. latest Barclays’ misselling). However, the FSA has decided not to go ahead with this, at least for the time being. Why??

    IFA’s are pretty defenceless and not much in charge of what is happening other than watch from the sideline that their livelihood is being eroded bit by bit while the prospects for the providers will be quite enhanced by the RDR, for example.

    I would like to challenge you, and possibly readdressing the balance a little, and explore the possible con side of the RDR. I am not talking about professional standards and skills as this could be a good thing (but possibly some grandfathering system would be desirable if done in the correct format) but how fee payments could affect access to independent advise for lower and middle class consumers. I would look forward to reading that.

  44. @Toddy

    MM 24/02/2010

  45. @ Simon Kershaw: The statement in that article was actually a comment about what the IFA community feel is my attitude towards them, not what I actually believe is the case. Not for the first time you’ve traduced me – carry on at this rate and people might think it’s a habit of yours.

  46. I do apologise Nic – I had forgotten your delightful, gentle irony vis-a-vis your relationship with IFAs.

  47. I have re-read Mr Ciccuti’s little rant and I was struck by an extremely sanctimonious attitude, support by that greatest of all analytical tools, hindsight.
    It is very easy to get on one’s high horse after the event; it is very easy to point out apparent flaws after the event.
    What is significantly more difficult is to arrive at a realistic analysis of the weaknesses of any process, especially when most problems in the finance industry are coloured by human emotion, and vitriol, when money is lost. And when finance is a probability puzzle to which we still do not have the key.
    As Mr Cicutti says he “worked on a story” which suggests that the project wasn’t underpinned by thorough research, but was merely an exercise to arrive at a conclusion that would gain journalistic headlines. This may be unkind to the work actually put in, but, as the comment demonstrates it is quite easy to belittle items without too much difficulty.
    Mr Ciccutti’s remarks on the pension misselling scandal are directed at only one area, the fall in stockmarket values over a relatively short period (in stockmarket terms). The research provided by Barclays Capital, going back to about 1910 indicates that equity investment, long term, and pension investment generally falls under that heading, is extremely good, being 8% plus per annum. That should have allowed most people to transfer with a level of excess. But something (or things) did go wrong
    It is quite possible to lay a major portion of the blame for the pension problem at the door of the Government.
    Firstly the Government commissioned a somewhat irresponsible advertising campaign eulogising the benefits of the personal pension. If that was not a battle cry for the finance industry to go out and sell personal pensions I don’t know what was. And, as with all areas of human activity, including regulation, some people took the process too far. Secondly, the Government decided to bring inflation under control. This had the “unanticipated” effect of reducing interest rates, and therefore annuity rates. Thirdly, the Government had the cheek to improve medical services, thereby extending life expectancy, that led to a further decline in annuity rates.
    Thus all the assumptions on which the transfers were completed were shot to pieces.
    Based on the increased knowledge that advisers are now asked to attained I wonder if many advisers would have been able to put together the above scenario, ahead of time, and reasonably anticipate its consequences?
    Throughout the 1990s when most of this scandal was occurring the Stockmarket was delivering mouthwatering returns, so again the temptation to change from final salary schemes, that were starting to suffer from the “Maxwell Effect”, to something under one’s control, that appeared to perform well can be considered a logical choice.
    And during this time there were of course no Parliamentary, accountancy, legal, or corporate scandals at all! They are all forgotten. Just the financial industry failings are remembered because they affected “the pound in your pocket”. Remember at this time insurance companies sold directly as well, and were probably the larger part of the market. So it wasn’t just IFAs.
    The eventual level of the compensation bill was also influenced by the hard sell approach of the PIA/FSA. There were many people who were content with their change, and complained purely because of the incessant pressure to do so by the Regulator. It became a case of “why not, we can’t lose”. All the base calculations points had turned against the original advice; the standards of compliance were judged on then current standards, not those applicable at the time; and judgement was given.
    We have then suffered from a decade in which the Stockmarket has risen at a growth rate of 0.29% pa (FTSE All Share). The decade to Jan 2000 showed an annual growth rate of 10.18% (FTSE AllShare). Very different figures. What part of the learning syllabus would have helped adviser anticipate those figures.
    The pension misselling advice was triggered by the change to Personal Pensions and the advertising campaign. Would there have been such a massive scandal if the other, external factors, had not all changed in the “wrong” direction at the same time? I doubt it.
    That does not absolved the finance industry from the mistakes it made, but there does need to be a much clearer analyse what actually happened. There are lessons to be learnt; there are improvements to be made. I doubt that the real lessons and the real improvements have been understood because the debate has been little more than an uneducated, emotive rant, concentrating on the headlines, and ignoring the boring facts. Just like the latest financial crisis, a lot of the causes can be seen clearly in retrospect – except I do not believe we are seeing them at all because we are too wrapped up in the emotion of a blame culture – in both cases.
    I would accuse Mr Cicutti of continuing the emotive process 20 years after the pension scandal started. We really should be moving on to a proper analysis by now, and a realistic statement of expectations. The industry does need to improve, but it will never be perfect. So what is the balance between expectation, cost and the ability to give newspapers a reasonable level of headlines?

  48. The whole point of the IFA’s is that they are independent (although some of them may & will fall short ) as oppose to the banks who flog their own products and in many cases they have been highly unsuitable to their clients.

    A good journalist should also be factual and unbiased – independent – and this is why I have questioned some of (I cannot be 100% sure it applies to all) your articles in MM. My challenge still stand – Could you write an article where you would also explore the possible negative side of the RDR and I am particularly thinking how it could possibly affect the lower and middle income consumers access to independent advise?? And how do you think the FSA has taken this into account in their above mentioned calculations?

  49. @Nic

    Traduce? Please point out the malice or falsehood in providing a reference point to your own body of work. Failing that you could always apologise.

  50. Simon, your attempt to “prove” the “fact” that I don’t particularly like IFAs on behalf of someone who originally made that comment involved misleadingly using a comment I made in an article that actually suggested no such thing. As it happens, you are also rather malicious if not very clever. And don’t even bother venturing into “apology territory”: look where it got you the last time.

    Toddy, get real. I’m paid to write a column, not a “on the one hand and on the other hand” article. There’s a difference between the two. Unfortunately, to paraphrase the old 1960s Mod slogan, if I have to explain it to you, you probably won’t understand.

    Glen: my article for the FT was researched rather better than you infer and involved consulting with several actuaries before publication, all of whom were satisfied that my figures were correct. I do take on board your reference to extremely long-term findings of the Barclays Equity Gilt Study, whose figures actually date back to 1899 not 1910. It’s not quite clear to me that most fund managers have achieved those returns over the past 20 or 30 years. Still, I’ll be sure to pass on your comments about long-term investment returns to any 145-year-old pension policyholder still planning for retirement.

  51. Nic

    You once asked for evidence that Which? had been actively promoting mortgage endowments, and other things, as ‘Best Buys’, I provided you with most of the documentation their lawyers didn’t want me to publish.

    Which magazines were more influential than Money Management ‘own charges’ surveys, this remains the case. Almost everyone used Which? as a source of research, banks, IFAs, regulators… journalists… you get the drift? Well you haven’t mentioned this since the last time. the Which? surveys took into account these LAUTRO ‘assumed expenses’ yet still awarded ‘Best Buys’ to products such as low cost endowments, they said they were suitable for most people. As far as IFAs were concerned the regulators insisted they used flawed illustrations, in one case of mine Standard Life admitted to a built-in shortfall of 12% of the target amount.

    Until regulators, journos and yes, IFAs, get their act together we will never see a level playing field, the regulators talk about a disparity of knowledge between the advisers and the consumer, the LAUTRO debacle is an example of advisers not being allowed to have the information required, this is still the case.

    Sorry… must go…. more important things to do, the shopping.

  52. @nic

    I provided a reference to one of your previous articles without comment. I could just as easily have referenced your MM 8/7/2010 on which Evan is still awaiting a reply.

    Why don’t you do your job properly? Expose wrongdoing, injustice, malpractice. If you do not hate IFAs maybe you could prove it.

  53. I am getting very real. I am glad that not all journalists write articles in the favour of the highers bidders.

    I wonder who is sponsering the consumers (lower and middle income earners) in the RDR debate…

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