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Tom Baigrie on Protection

Let me, ever so briefly, explain how the regulation of protection will affect you. You see, regulation matures over four distinct phases and the real threat lies in phase three.

Phase one is the reasonable one when the regulator fully intends that its touch will be light, aiming only to “maintain consumer confidence in the UK&#39s financial system”.

Phase two is in full tilt just now. We all look at the new rules and develop new failsafe mechanisms so that we do not end up being found wanting in hindsight.

Phase three is when some example of bad advice is thought by those who judge us to be a regularly occurring thing. Then the very ugly word “misselling” appears and the regulator must be seen to act and a “scandal” ensues.

The unfortunate truth – that those who rule us and seek perfection ignore – is that “misselling” will always happen in any profession which involves predicting the unpredictable.

Financial services – even pure protection – especially pure protection, is all about doing exactly that. The future always leaves the old certainties out of date and wrong.

The difference that regulation makes is that the wrong must now be righted industrywide. In the protection market, I foresee a typical scenario where the widow whose policy payout is plainly inadequate to maintain her standard of living make a claim against the adviser that sold her late husband the inadequate policy without properly documenting the reasons for the choice of sum assured.

If that sounds too far fetched, remember that it is always far-fetched to start with.

Now if the industry has phase two well enough sorted out, then you may think that phase three can be avoided this time because we now have far more experience of making things watertight.

But you do not really think there is any barrier that is proof against the forces of our age? One cannot (and one shouldn&#39t really try to, after all) beat consumerism, a watchdog press and the lawyers, legislators and regulators. They are all forces aiming to do good but they work in hindsight and thus always leave us, who must make predictions, looking stupid, bad and sometimes wrong.

It is this obvious truth that means we predictors must always fail.

And when phase three happens, then phase four must follow – it is the collapse in consumer confidence and the steady decline of business levels. We have seen it in pensions, retail investments and savings.

People stop doing what they know they should do, because it seems that everything turns out wrong in the end. That is nonsense, of course, but nature decrees that some things go wrong, and the turning of those into a scandal destroys the reputation of the good along with the bad.

Now, there could be a phase five – recovery. The trouble is that by the time the Government starts to realise the damage and turn things round, the industry is diminished and building business levels back to the pre-regulation peak is a long haul.

So there is only one true safeguard against the certainty of phase three and that is not to give advice. Ironically, it seems to me that regulation in the end, despite the best intentions of all, serves the least acceptable corner of the market best – execution-only.

Now, many of us will strive daily to prove this prognosis wrong but in truth it is only when the regulator and Treasury agree with it that the tide will turn. Good luck.

Tom Baigrie is managing director of Lifesearch


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