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The review from here

In the second of two articles on regulation, Harry Katz of Norwest Consultants, turns his attention to the FSA’s retail distribution review.

Normally, we have been used to one major change per year but 2007 could herald an avalanche.

The FSA is undertaking a retail distribution review that it seems to be pursuing with what could be considered unseemly haste.

One wonders if this could possibly be a legacy exercise. After all, a baronetcy is nice, but a peerage is so much better on one’s CV if you want a decent non-executive directorship.

The whole thrust of this review appears to revolve around one subject – the vexed question of adviser remuneration. It is not as if the subject has never been tackled before and for many of us the whole topic is becoming boring but there are wider issues.

Under the PIA, we had commission disclosure, which was supposed to solve the problem. Meanwhile, the consultancy firms have been growing fat on the research commission they have received from interested parties.

The second point that troubles me is that, bearing in mind all the soulsearching and hard work that went into the menu, it now seems this is not satisfactory. Otherwise, why would we be revisiting the subject? In which case, whose head is forfeit for a system that does not work?

Naturally, I fully expect any proposed solution to involve reams of paperwork which will no doubt contribute to continued deforestation.

As far as transparency of remuneration is concerned, how difficult is it for an adviser to put in his recommendation – “for buying this product I will receive this much immediately and this much periodically”.

Looking back (never a particularly smart thing to do) only a few years, I am reminded of the encouragement to advisers to wean themselves off initial commission and work towards a more level playing field, particularly where fund based renewals were concerned. Under this review, it now seems that the regulator is no longer satisfied with this, which is a little perplexing as I am sure many of you have told clients that they will not be charged an up-front fee but will be paying you on a basis of funds under management.

Then one wonders what happens to all trail commission that has built up? No doubt we could be hammered under the treating customers fairly initiative.

Are you getting depressed yet? Well, there is worse to come if you are a small intermediary.

As a smaller player, you are by now used to the idea that the regulator finds you an enormous inconvenience, is extremely suspicious about your capabilities and has grave doubts concerning your solvency and the ability to pay compensation.

No matter how hard you have tried to ensure that you are compliant and have advised on the right products you can rely on the regulator to find a reason why sooner or later you will have to compensate your customers.

One wonders why this is good regulation at all. Let us take a hypothetical example.

I do not for one moment suggest that these figures are entirely accurate or that they are robust from an accountancy or actuarial perspective, but what I hope they will do is to demonstrate the point I am trying to make.

Let us assume you have a big firm with maybe 500,000 customers. You have a product that you have decided to put on the market. Your aim is to sell 100,000 of these products at, let us say, 20,000 per investment.

The target is therefore 2,000m. If the profit margin is 5 per cent, that is 100m.

You now decide that you are probably going to get a 10 per cent complaint ratio – that means you are going to hand back 200m worth of investment with a 5 per cent loss of profit (which is 10m) and, say, 5,000 compensation per head, which works out at another 50m.

This compensation comes out of shareholder funds, so the missales have cost you 60m, which means you are making around 40m profit.

You have to deduct the 200m that you have paid back off the 2,000m that you will have sold, leaving you with about 1,800m under management at, say, a management charge of 1.3 per cent, earning you about 23.4m a year.

I am sure you have got the point by now. Is this what the regulator wants? Is this good compliance? Is it treating customers fairly? Perhaps not, but the regulator can deal with one big company that it knows it can fine.

But how much is a 1m fine compared with these figures? Peanuts. Look at the fine levied on Lloyds TSB compared with its annual profits, compared to its turnover. Why can’t we have equivalence? If we did, they could fine me 4p any time they like. It wouldn’t really hurt a lot, would it?

I hope it does not come as a surprise to the regulators if I say that a great many of us really want to work together with them, understand exactly what it is that they require of us and hope that these requirements are achievable and reasonable.

I am sure I am not alone in getting the impression that they expect us to beaver away for the minimum reward while at the same time ensuring that our capital adequacy is sufficient, generating reams of paper that the client is not interested in and treating him in such a way that they regard as fair, irrespective of what we or the clients believe.

Why does it seem that the Treasury and the regulator assume that the only people we deal with are the intellectually incapable and the educationally sub-prime?

The UK relies ever more heavily on its financial services sector. According to recent research by Price Waterhouse Coopers, London is scheduled to be the fourth-biggest city in the world by GDP by 2020, based mainly on the financial services industry. London is already considered to be the pre-eminent world city for finance.

Presumably, this will all be at the cost of the smaller adviser to the advantage of the bigger one.

Sadly, it seems that the forthcoming selection of replacements at the top of the FSA is going to be overseen by Treasury placemen appointed by none other than our dear friend Gordon Brown and his henchman, the lovable Ed Balls.

For many of us, the regulator’s much vaunted independence has for a long while now seemed a complete sham.

Wouldn’t it be nice if we could see the FSA at least comment on Government non-compliance with ombudsman rulings?

Or hear a word concerning the Department for Work and Pensions’ errors of continuing to accept class 3 contributions and the delays in repaying money owed?

Or perhaps some words on the fact that automatic enrolment and default funds for the NPSS may be a disaster waiting to happen and that our state pension is the lowest as a percentage of national average earnings in the developed world?

All this may not be within its remit but is certainly within its ambit. But as it is, the regulator seems to be independent when it suits the Government, so that when things go wrong Westminster can point and say “It ain’t us guv.”

But on the other hand, all too often, it seems the regulator does the Government’s bidding.

True independence, like that of the Bank of England, has to be demonstrated if it is to be believed.

I suppose I really should end on an optimistic note. Therefore, let us hope that the less prescriptive regime will definitely concentrate more on outcomes than son box-ticking.

I think it is incumbent on the regulator to show us that our hopes are justified and our fears misplaced.


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