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The good, the bad and the ugly

The cost of the Investors&#39 Com pensation Scheme levy and professional indemnity insurance is rocketing as our regulator puts more and more financial advisers out of business. Inevitably, this creates an even bigger ICS levy and PI insurance problem for those remaining which, in turn, forces even more financial advisers to the wall.

Round and round we go. However, basic mathematics are now screaming at us that this financial nonsense cannot be allowed to continue. Of course, you could also say that these costs are exploding due to the actions of a minority of financial advisers – if you could call them that – within our profession. You would be absolutely correct and that is precisely what I am concerned about.

How are these costs being allocated or levied across the financial services industry? Are the right people and companies paying the appropriate costs? Is the current cost allocation system helping to create a trustworthy and ethical profession?

Currently, due to the way that the regulator administers the ICS, the financial damage that is being wrought across some very respectable financial adviser practices is substantial, random and totally out of control. In short, the good guys are paying for the bad guys and it really does not have to be that way.

To understand the root of the problem, we have to ask the industry some unpleasant questions. Coincidentally, these questions have got to be put to some of the most powerful institutions in the country. I am sorry to have to tell you this but many of them will lie.

Q: Who designed and marketed the products?

A: The insurance industry.

Q: Who flogged the products?

A: The bad guys.

Q: Who encouraged them to flog the products?

A: The insurance industry.

Q: Who encouraged all of the above to do it in the first place?

A: The Government and the insurance industry.

Q: Who stood by and did nothing about it?

A: The regulators.

Q: Who is paying for it with their reputations, their businesses, their careers and in one or two recently reported cases, their lives?

A: The good guys.

As a group, we financial advisers are the most fragmented, and the least well organised within the industry. Our views are, therefore, the least cohesive and the least persuasive. However, our ability to run a professional and ethical business practice while making a profit, especially in the face of these random penal measures, should not be the yardstick by which we are forced to pay for other people&#39s misdemeanours.

On the one hand, the professional financial adviser is paying for the lack of competence of others through the ICS and his PI insurance although they might never have had a complaint aga inst them nor even one pension review case. In many inst ances, they have never even sold an end owment, let alone missold one.

On the other hand, the insurance companies are abundantly aware of who the bad guys are because they have accepted business from them over the years. After all, the insurance companies know where the transfer pensions are coming from, they know the pol-icyholder&#39s date of birth when he writes his endowment to the age of 75 and they know when an ann ual-premium pension would probably be better costed as a single-premium contract.

The regulator must also face up to its responsibilities in much the same way as they used to tell the financial adviser to in the late 1980s. The regulator can easily quantify the complaints that they have received and, more important, they can also qualify precisely where those complaints are emanating from.

Obviously, some companies will receive more complaints than others and, equally obviously, some will be upheld and the company concerned will have to meet any financial redress. It is a simple matter for the regulator to tally the complaints received against particular companies and levy the ICS in exact proportion.

If you want to be pedantic, it is probably even possible to tally the amount of financial redress paid out by such errant companies and then levy the ICS in proportion to that.

The regulator already has these figures to hand because if they were not already keeping a complaints&#39 tally in this manner, there would be something very seriously wrong indeed.

By adopting this straightforward system of proportional blame, the bad guys will then be paying for the bad guys. The system would become self-purifying as errant companies would be forced to shoulder the precise financial burden they have created. If they are forced to stop trading, then their sister companies which have operated similar attitudes will be obliged to pick up the tab in proportion to their own bad practices.

A further advantage to this system would be that professional indemnity insurers would be able to gauge commercially a company&#39s risk simply by asking how much they paid to the ICS in the preceding year. The ICS payment would be a direct reflection of the numbers of complaints received and the precise liability that a particular company represents.

PI insurers would no longer have to wrestle with the many concepts and designs of all the different types and natures of financial advisers that exist in this country. They would simply charge risk premium in proportion to those who incur the biggest ICS liabilities in the year.

Specific companies would be highlighted as miscreants and would be financially penalised in direct proportion to their guilt.

Most important of all, they will immediately be financially motivated to do something constructive about themselves. The guilty will change or they will be automatically eliminated from the profession.

The real poetry in this system is that the guilty will not be adjudicated by the regulator, nor will the system be warped by commercial muscle. It is an automatic system of “you do, you pay”. This is self-regulation as it was always intended to be. At the moment, political and commercial strength is making up the law and the rest of us are being hung for it.

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