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The view from here

One of the first lessons all journalists learn at the start of their careers is that any official report can be interpreted in diametrically opposite ways, depending on the person reading it.

A year or so ago, the Penrose report into the collapse of Equitable Life unveiled a series of catastrophic regulatory failures that ultimately allowed the company to go under. The Government, on the other hand, saw the report as a clean bill of health for its activities in the years prior to Equitable’s demise.

A sense of d諠 vu came to me last week, when I read the various responses to the FSA report entitled Quality of the Advice Process in Firms Offering Financial Advice.

The report seemed to be fairly unexceptional. The FSA carried out a mystery shopping exercise in which it looked how a range of advisory firms of different sizes related to their clients. It came as no big surprise that it found a wide variation in terms of firms’ activities. Roughly half had reassessed clients’ needs in the wake of tax or other legislative changes or the launch of new products. Almost half were keen to explain the potential limitations were of the advice they were giving and what risks there were if that advice were to be followed. So far, so good.

At the same time, the FSA found that these reassessments only took place for one in five of all their customers. Only a third of firms carried out a full review of their clients’ needs and one-third of firms claiming to be independent did not offer a genuine fee option to their clients. Half of firms offering a fee option discouraged their clients from going down that route.

Frankly, there was little in that report that most IFAs and their representatives would not already have known, either in terms of their own practice or, if they themselves were on the side of the angels, about the activities of other businesses.

The anecdotal evidence I hear from IFA clients is that they are often gently – and sometimes not so gently – steered away from a fee-paying relationship towards a commission-rebating one at best or a much looser quasi-commission system at worst.

IFAs I have spoken to will often quietly admit this to me and justify it on a variety of grounds, some of them genuine, others less so. The real question was how the various organisations with a stake in the subsequent debate on the issue would react to the FSA’s report.

Probably the most interesting response came from Aifa. Director general Chris Cummings issued a statement making the very valid point that it would have been more helpful if the FSA had spelt out much more clearly whether those involved were banks, tied advisers or genuine IFAs.

I have a lot of sympathy with that view. One of the interesting things about the old persistency figures published by the PIA, one of the FSA’s predecessors, was that they revealed IFAs to be streets ahead of banks, tied agents and direct salespeople in terms of surrenders by their clients, across all product types. The failure on the FSA’s part to commission or, if it did so, publish such research is a major weakness in the report.

But it is one thing to make that point and another to claim, as Chris did in his comments to Money Marketing, that the mystery shopping exercise shows “blatant bias” against IFAs who are being “tarred with the same brush” as other advisory channels.

The brutal reality, as Chris knows only too well, is that the practices for which advisers are being criticised by the FSA are also rife among his members.

It may be the case that they are not as “guilty” as, say, bank salespeople. However, is there really a level of shoddy behaviour that is acceptable among IFAs? What if instead of 50 per cent of all advisers discouraging their clients from a fee option, the proportion of IFAs doing so was a “mere” 25 per cent? Incidentally, I believe that total to be far higher. Or if full reviews of clients’ needs were carried out by a “massive” 75 per cent of IFAs instead of the one-third the FSA found was the case among all advisory channels? What about the other 25 per cent?

Instead of an uncritical defence of the entire IFA sector, Chris ought to temper his comments by committing himself to trying to ensure that best industry practice is applied by all IFAs towards their clients. Otherwise, he risks further media cynicism both about his members’ activities and, ultimately, about his organisation. As financial advisers or product providers, we have a moral obligation to persuade the public that efficient financial planning means that money works harder and goes further.

I looked with interest at the Axa comparative research study on similar families where some have the benefit of a financial adviser and some do not. Excuse me? Is this not like looking at a group of ill people where some consult a doctor and some do not, then seeing who is in a better state of health? It is no great surprise that there are immediate cost savings after a financial adviser’s consultation.

The last few weeks have brought further reminders of the UK’s unstoppable appetite to invest in property. The Council of Mortgage Lenders has just calculated that 200,000 interest-only borrowers have no repayment vehicle. You try living in a desirable area with the associated costs of buying a new place. The FSA says it wants to establish the repayment intentions of consumers and identify the characteristics of those people. It can include me in its analysis of those “naughty” people but at least I know what the risks are.

Having advised hundreds of people on red mortgage endowment letters – when I did not advise them to set up their plans in the first place, I may add – I know that holistic financial planning will repay the loan more effective in future years than religiously piling money into an underperforming with-profit fund or the like, particularly for those clients suffering from income strain when buying a home but with the prospect of future income rises or inheritances.

UK mortgage debt hit the 1tn figure for the first time this month. Meanwhile, the Halifax has changed its retention strategy, with up to 49bn being protected by the wider HBOS group. Get out the flags, I say for the UK’s biggest lender, which will for the first time make the same mortgages available to existing as well as new customers. How annoying has this been for clients historically when they could not secure the headlines rates shown in the glossy adverts?

The Government has also been active in proposing that minor household developments such as applications for home extensions will be assessed on impact rather than size. Many will welcome this simplifying of the process for homeowners wishing to upgrade their homes.

Friends of mine recently applied for permission to change the front door of their flat – a cheap MDF-style door with two bits of not very security-conscious glass. They were turned down due to the need to keep all front doors the same in their block of expensive flats. But if the “head of style” had popped round to have a look, they would have demanded its replacement for a more fit for purpose and attractive door.

Anyway, enough about everyday strains and stresses that could be avoided with a little common sense. I have had the lovely task of reading parts of the Finance Act. Why would I do this instead of reading Heat magazine? The Finance (No 2) Act 2006 received Royal Assent on July 20. Part 4 of this act introduces a UK real estate investment trust. Specific regulations and guidance governing the details of the UK Reit regime will be finalised and publish during the autumn, in time for the Reit legislation to come into force on January 1, 2007.

This, in my mind, is good news for advisers. IPD performance data shows that, as an asset class, commercial property has outperformed the other asset classes over 10 years. Let us see if the FSA thinks a Reit is a sensible investment alongside an interest-only mortgage. If they had existed, on average, over the last 10 years, they would have been the perfect mortgage repayment vehicle.

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