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This week in Regulation

After three weeks in sunny Cuba smoking dodgy cigars, sipping mojitos and eating bad communist food you can imagine my delight when the FSA’s quality of advice TCF mystery shopping report landed on my desk on my first day back. Oh what sweet joy.

Before opening the report, hands clammy with excitement, I recalled FSA chief executive John Tiner’s recent warning to the financial advice sector to brace itself for yet another set of ‘disappointing revelations’.

For those consumer lobbyists waiting in the wings to bash IFAs, the contents did not disappoint. According to the report, one third of advisers which claim to be independent do not offer a genuine fee option – confirming long-held fears that advisers would be reluctant to ditch the independent tag but would be equally resistant to the more exacting demands of depolarisation. It also seems that less than a third of advisers from the 50 firms surveyed were prepared to advise their clients on non-commission earning advice such as recommending debt repayment before recommending other investment products.

And it gets worse. The FSA says while almost all firms claim to offer a full advice service, only a third of firms undertook a full review of customers’ needs and objectives. Two thirds of firms are also failing to provide adequate explanations of risk to customers.

Inevitably, consumer lobbyists pounced on the mystery shopping report. The financial services consumer panel, which announced plans to table an alternative payment system to commission next year, said the results confirmed its fears about the level of commission bias in the financial advice sector. Which? went straight on the offensive, branding the lack of progress made by some firms embedding TCF in their businesses as ‘shameful’, and calling on the FSA to name and shame the culprits.

But Aifa director general Chris Cummings jumped to the defence of IFAs, rubbishing the report as being ‘blatantly biased’ and launched an astonishing attack on the FSA’s motives towards the advice sector.

He criticised the report for failing to distinguish between different categories of advice. He claimed that his conversations with the author of the report had made it perfectly clear that single tied firms and banks were the main culprits, and he was ‘shocked and disappointed’ that IFAs were being tarred with the same brush.

The Financial Services Practitioner Panel weighed in on the offensive for good measure, condemning the regulator’s mystery shopping and thematic exercises as not being worth the paper they are written on. It argued that the small sample sizes used by the regulator – (50 firms for the quality of advice survey, 23 firms for the recent equity release survey) – means there is precious little one can deduce from the findings, despite the FSA placing such great emphasis on the results.

Predictably, the FSA’s response to the criticism of its methodology has been wonderfully unenlightening, with one helpful press officer saying ‘we’ve done it the way we’ve done it’. Another more chatty press officer explained that it would be difficult and unhelpful to break the results down into categories because the high level principles of the TCF regime are applied differently to tied firms than they are to IFAs and banks.

That is as may be. But the argument does not hold water. When the survey clearly states that a third of firms did not actively monitor the quality of advice their advisers were giving, we are not talking about high level principles but a breaches of the most basic standards of advice.

Surely it would be helpful to know the main culprits are tied advisers, IFAs, banks – or whether they are all as guilty as each other.

In one sense, the FSA’s approach to mystery shopping is indicative of its baffling tendency post-depolarisation to refuse to recognise the divisions that it introduced in the first place. Just as the FSA has failed to monitor the numbers of multi-ties, whole of market advisers and IFAs in the market since – the regulator is failing to break down its thematic exercies into categories of advice.

Having created a depolarised, flexible market, commentators argue it cannot then lump the financial advice sector into one homogenous mass. One has to question whether the FSA is slightly nervous that multi-tied firms, for example, are not performing quite so well as IFAs and not proving as beneficial for customers as they had hoped. But this, of course, is merely speculation.

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