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Tom Baigrie: The regulator finally gets it right

Perhaps for the first time since polarisation (the high point of regulatory common sense, now sadly 20 odd years old, so not many of you will even know what it almost achieved) I have found an FSA paper uplifting. Imagine!

The paper in question is its guidance consultation, Risks To Customers From Financial Incentives.

Despite its title page’s awful punctuation, it’s a model of clarity and common sense. One doesnot know what will become of it once the lobbyists get to work but it seems to me to be a very decent start to the Wheatley era. And happily it is one that the IFP community and all others now operating on a fee only basis will find unlikely to trouble their core business models. Thanks be.

It tackles an issue that is most prevalent in institutional salesforces and those giving tied and restricted advice although every consumer-facing financial services business needs to have a good read of it and make sure the way they incentivise their revenue generators is properly defensible against the accusations of bad practice it makes so powerfully.

Of course iis an issue that the regulator should have tackled way back, certainly before, or at least as part of, the RDR but I suspect the Guidance Consultation’s origins lie in that vast work stream, so one has to say better late than never and well done on getting to a root cause of bad practice in the end.

To explain, the FSA is tackling the way salesforces routinely still get incentivised to flog the wrong products to their customers. For years it has been common knowledge that many institutional retail financial services salesforces have been focused on selling what makes the most profit for their employer. But until I read the report I had no idea of the sheer range of grubby techniques used to encourage foul sales behaviour.

The examples given make one’s toes curl. These include: “No bonus would be paid unless sales staff sold PPI to at least 50 per cent of all customers” and in a cracking example of how to let salespeople claim not to be on commission: “A firm reviewed staff salaries every quarter, and moved staff between salary bands depending on how much they sold. The highest salary band earned more than three times the lower salary band.” Strewth

One of the areas highlighted as a scheme that increases the risk of mis-selling is one where the salesperson’s pay is 100 per cent dependent on monthly performance.

Those of us who were advising in the 80s can testify that the FSA has got that right and while I had not thought there were any salesforces of that ilk left, except in claims management, there are many franchise style operations, where the effect is worse as costs have to be covered by the salesperson before they can even start to earn. That is pressure.

So it is not just the big boys who need to pay attention, very small firms will naturally fall foul of the 100 per cent variable earnings factor.

Those drafting the resulting rules will need to accept that the acid test should be whether any consumer detriment is being caused at a firm. Management does need to be allowed to incentivise activity and reward success through good practice.

There is no reason why a well supervised top adviser (or even seller) should be a bad one after all.

But after years and years of the RDR, it is great to see a root cause of consumer detriment being tackled and attention being focused on where the real big business management dirt lies.

Tom Baigrie is chief executive of Lifesearch


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Thanks Tom and yes I agree. We are in a people business. Rules are one thing but the answer to long-term success is encouraging and regulating the right behaviours.

  2. The FSA keep talking about consumer detriment but have not of cause dealt with the major ones like sales incentives. The big one which they obviously not considered are the number of clients who will not have an adviser after 01/1/2013. According to statistics there are 22,000 advisers not going to have their SPS by then and LLoyds, Barclays and other banks are stopping giving advice to the massess(in the case of LLoyds TSB only those with £100,000 to invest) I would have thought this was a major consumer detriment/outcome problem

  3. Glass houses? Perhaps you should check your article for grammar and spelling before criticising others. Apart from that, spot on. 😎

  4. Only twenty years late. Still, I suppose we must applaud Martin Wheatley for grasping the nettle from which all his predecessors seem to have shied away.

  5. For as long as I’ve had anything to do with the world of financial advice and financial advisers (and that’s a long time) it has seemed to me that the single biggest cause of confusion, misunderstanding, conflict and consumer detriment has been the failure to distinguish clearly between “selling” and “advising.”

    Both are entirely valid and indeed necessary activities, but they are very, very different from each other – not least in the way that practitioners are usually remunerated – and should be interpreted very differently by people who are on the receiving end of them.

    At the moment, the regulator seems to be tackling this key source of confusion by doing as much as possible to outlaw selling, and leave advising as the only available option. This seems to me a pretty draconian solution – I would much prefer a regime in which selling and advising could co-exist, each clearly identified, side by side – but ultimately, when push comes to shove, I suppose I think that any solution is better than none.

  6. Advice by its very nature must involve an element of selling the solution to a problem, based on an advisers knowledge and expertise in relation to the relevant product and market, which in turn will involve some form of financial transaction, occasioning some form of remuneration to the adviser.

    Selling is not bad, selling rubbish products which can never achieve or meet clients expectations is bad.

    The cost of fee based advice is perceived to be around a minimum of £150 per hour in the recent MoS article by Jeff Prestridge, which he considers too expensive for the ordinary consumer.

    The costs of regulation,PI Insurance, Solvency requirements, FSCS levies and FOS costs, plus the now much lamented and totally inadequate MAS have increased the costs to consumers, because before the adviser actually gets their share of the income / turnover, all these other hangers on get paid first.

    Trying to make a profit so that you can pay your taxes and have a life is increasingly difficult for most small IFAs and many thousands will leave this industry in the next year or two, leaving a hard core of tenacious advisers clinging on to the cliff in desperation, fearful of the next regulatory changes.

    Maybe it is time all small IFA firms were closed down and all advisers to be employed on a salary by the FSA/FCA or MAS only, without incentives so that a more transparent cost to the consumer could be detailed.

    There can be no distinction between advising and selling as they are inextricably linked and symbiotic.

    IF advisers had no products to offer clients to fulfill their needs then our existence is irrelevant.

    The difference between charging a % fee of say 3% for a bond recommendation or taking a 3% commission is in fact academic, they are, with the exception of how the commission is perceived as an incentive, one and the same cost to the consumer, the real difference is how they are applied, up front and loaded (reducing initial investment capital) or forming part of a charging structure within the product.

    Ah well, what will be will be.

  7. Yes, it is rare that the FSA says or does anything that resonates with the chime of commonsense.

    Applaud them we must…as long as they are able to distinguish between the target-based activities of banks and building societies which have customers and the majority of advisers who have clients

  8. the question that needs answering 2nd October 2012 at 4:48 pm

    the difficulty is that we have two conflicts going on, namely capitalism and behavioural finance. These can be equated into one question

    “Is it okay for an adviser to recommend a product or service which isn’t the best but is the best he or she can offer, and if this has been “loaded” in any way does this make the answe any different ?

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