My thanks to all of you who have written, often at great length, along with apologies to the many I have not replied to. A busy work schedule last week meant I did not get the chance to set aside the time necessary to do this.
Among my emails, a few came from readers who believe this subject is boring and has been worked to death. Reading between the lines, one gets the impression that what they want is to be left alone to do what they have always done. For them, the current situation is about as good, or bad, as it is likely to be.
The problem with this view is not simply that it does not correspond with reality but, far more important, that it is not how things are perceived by those who have the power to change things, namely the FSA.
A brief article by Paul McMillan in last week’s Money Marketing reported that the FSA’s retail distribution review committee on professionalism and reputation (phew, what a mouthful) met for the first time to “thrash out fundamental questions on the future of the advice sector.”
Just before Christmas, Paul wrote in a little more detail about the areas that this group will look at. He concluded: “With growing acknowledgement that depolarisation has not been a success and dramatic suggestions expected from the retail distribution review, the regulatory environment could be looking at more major upheaval rather than simply tweaking.”
Wise words. Even so, it is clearly hard in an article just shy of 400 words, published at a time when most financial advisers’ concerns over retail distribution were focused more on last-minute Yuletide shopping than the financial services industry, to explain quite how critical its conclusions might be.
So let us start again. As Paul wrote last week, the aim of the review is to look at the entire future of the sector, such as what will happen to the IFA designation, remuneration, training and competence. The eight-person committee includes Thinc Group corporate and strategy director Roderic Rennison, Chartered Insurance Institute director-general Sandy Scott and Institute of Financial Planning chief executive Nick Cann, plus Aifa representatives.
Under normal circumstances, a cynic like me might be forgiven for thinking that a bunch of industry bods re-examining issues that have bedevilled the sector since the year zero might lead to a dampsquib report notable only for its blandness.
That may still happen but I would not bet on it. To understand why, you only have to read recent analyses of the IFA market – and by default the entire industry – by FSA chairman Callum McCarthy as well as Clive Briault, FSA managing director of retail markets.
In a speech in September, in which the review was announced, McCarthy did not mince his words. He said: “The present remuneration model… suffers from product bias, provider bias and churn. Consumers are not always advised on transactions which fail to remunerate the adviser or which offer little by way of commission to the adviser.
“Provider bias is clear. I am struck by the prevalence of examples of providers managing demand – up or down – by adjusting commission, which can lead to less suitable or even unsuitable sales.
“The present system, with its in-built encouragement to churn and its product and provider bias, is not one which is naturally robust to claims for misselling and the associated compensation liabilities.
“We have at present a business model which is based on incentives which produce results which are unattractive to reputable providers, unattractive to their customers and whose benefits to intermediaries are questionable. What are we going to do to change it?”
In November, Briault added to these criticisms. He said: “We are concerned about the constant failure of firms in a sector simply because the business model is not sustainable. This is unlikely to be consistent with the fair treatment of customers or with efforts to reduce calls on the compensation scheme.
“Our recent work to assess the quality of advice shows that large parts of the investment market lack the basic competence to deliver advice in a way that builds – rather than undermines – the sector’s reputation.”
Briault’s examples included the fact that over half the firms visited by the FSA did not obtain customer information before making a recommendation, suitability letters issued were insufficient and lacked “clear and concise information about the key risks and reasons for the recommendation” and almost all firms held themselves out as offering a full-advice service but only a third undertook a full review of customers’ needs and objectives.
Given these perceptions of the industry by the UK’s leading regulators, it is hard to imagine that the committee’s report, due in July, can recommend anything other than root-and-branch reforms of the entire system.
Boring? Perhaps to those who have so little remaining stake in the industry’s future that they show no interest in how it is reconstructed and made fit for purpose over the next five to 10 years. For the rest of us, the times ahead look rather interesting. Watch this space.