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Tom Baigrie: Wheatley’s chance to end 25 years of bad regulation

As Financial Conduct Authority managing director Martin Wheatley lays out his vision of how consumers will be protected by the future FCA, I hope he reflects on the root causes of the utter mess savings, investment and protection is in today.

Any objective analysis would surely find the consumer has been awfully served by regulated financial services since 1987. The four statutory objectives of regulation have patently not been achieved these last 25 years.

Rather, the ordinary person’s desire to save and insure has been catastrophically eroded, indebtedness has soared and, unlike 1986, the average person now has no viable plan for remaining independent of the state when their earnings cease through retirement or ill health. The nation is sleepwalking towards personal poverty as a result.

We have all failed, from Chancellors to bank clerks and all points in between but it is those who have had power who must be chiefly to blame and it is their successors that must turn the thing round.

The reason it is the rule-makers not the rule-breakers who are chiefly to blame is because the Treasury and regulator have been unable to resist increasing their responsibilities to the point where no body in a free society can adequately discharge them. Rather than confining themselves to weeding out conmen and fraudsters, they have set out to ensure there is no way a consumer can strike a bad financial services deal.

In that effort, they must always fail but along the way the worthy desire has caused them to gather up all sorts of powers and levy all sorts of charges and taxes. But at every step, as always happens when one overreaches one’s ability, using those has caused unintended consequences far, far worse than the evils they looked to eradicate.

Perhaps the best example of this is that, in order to rein in a few fraudulent employers, they destroyed the entire private sector defined-benefit pension scheme model. It was the world’s finest method of placing long-term investment risk where it could best be locally borne. When they added to that the destruction of with-profits risk-sharing because it could never be perfectly fair to all and to stop a few providers overstating potential returns, they left consumers at the mercy of volatile markets and the resulting shocks meant the ordinary person simply stopped investing.

There is an endless litany of similar collateral damage and cost far exceeding the beneficial effects, culminating in the latest Financial Services Compensation Scheme and FSA budget increases, all falling ever more damagingly on the relatively few of the regulated who survive.

Of course, it is various misbehaviours within the industry that have continuously given the regulator reasons to take power but at every step the regulator has wielded power with such clumsiness that the innocent consumer has been unwittingly crucified.

Martin Wheatley needs to urgently consider how best he can stop that continuing and use his powers to best protect consumers against their impending poverty.

Tom Baigrie is chief executive of Lifesearch


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There are 26 comments at the moment, we would love to hear your opinion too.

  1. A well-considered piece. Not sure about with-profits but that’s an aside.

  2. Couldn’t have put it better myself, good article.

  3. Quite correct but I fear the powers that be will only ever move in ever decreasing circles. However, let’s hope not. Very good article and I agree completely.

  4. Asking one of the new mandarins to rectify the almighty cock ups that the FSA made and to bring in a better system of regulation, while at the same time continuing with the RDR is assigning this gentlemen too much in the way of intelligence and comprehension of what is really going on in our industry.

    The destruction of the commission method of remuneration, the insistence on fee based charges directly from the clients pockets or as an upfront loaded cost, added to the way the new qualifications are being enforced and the threat to advisers ability to trade post 2012 if for some reason, academic non achievement or just timescales which impinge on the ability to combine the necessary study hours with our need to maintain solvency and earn a living, all go towards another “unintended consequence” which will result in consumer detriment.

    IFA services will soon no longer be affordable for the majority of the working population and we will see many more Life and investment firms go to the wall or “amalgamate” ( a misnomer if there ever was one) so that further consumer choice is eroded.

    In a recent survey the public seems to believe that £150 per hour for independent financial advice is too high. The public are going to get a serious lesson in reality post RDR and what is the FSA doing to warn them, NOTHING!!

    In the USA selling is a profession, sales persons are highly valued for their communication and empathic skills in assisting consumers to save for their retirement, their childrens education, protect their assets with Life Assurance etc etc. I

    n the UK the opposite is deemed by the FSA to be required, allowing advisers to sell financial products based on advice and suitability is no longer going to be permitted, IFAs are going to become a dying breed, available only to the better off members of society and the ordinary working family will be left at the mercy of the banks and direct providers and no longer can rely on the most trusted advice sector of the industry to help them achieve their objectives as it will be too costly.

    When RDR comes in, I am going to write to all my clients and explain how they are now going to be served and why their normal cost effective method of paying for advice is no longer available.

    I wonder how many will be able to afford the required level of fees, sufficient to maintain this failed regulator, FOS, FSCS and any other ludicrous waste of money these people can dream up to scam off us.

    Angry ?

    You bet I am, downright fuming at the sheer incompetence of the current regulator, which is going to be staffed by the outgoing regulators current staff.

    What waste of money!

  5. I don’t know anything about Martin Wheatley, though I doubt he was chosen to succeed Hector Sants on the basis of a radical new broom agenda, least of all any sort of pledge that from now on the FSA will adhere to the provisions of the Statutory Code of Practice For Regulators. So what’s set to change (for the better)?

  6. A good article that picks up a central problem, namely, the regulator is imposing its own desires on the industry rather than stopping the undesirable. I believe this comes from a fundamentally flawed thought process, namely that everything should be correct. This is reflected in the output from both media and MPS to such an extent that people start to believe it as a genuine expectation.
    But that expectation does not occur in any other walk of life so why is it likely to be viable solely in finance. We don’t have the police telling what to do and how to do it; we don’t have the DWP telling business how to run themselves properly (thought we do have them telling pension schemes how to run themselves and now that is a disaster). Regulation runs best when it concentrates on controlling bad practices and encouraging good practices. Can anyone ever remember the FSA say “Well Done” at any time.
    What we have are “Big Ideas”. Martin Wheatley has now come up with the next Big Idea “People are Irrational”, apparently a full reversal of the previous guiding Big Idea of rationality.
    A couple of questions arise. We know that the regime before Saint Hector was useless – he told us so. But that regime came up with RDR. So by implication RDR should be useless – yet the FSA drive it on. Is that rational or irrational?
    Now we are told by the new CEO that the rational assumption of the previous regime was wrong, so presumably its policies were flawed. So RDR should be questioned. I can hear the pantomime response ” Oh no it shouldn’t”. So why is RDR not flawed if the fundamental thinking of the past two regimes has been flawed?
    Well perhaps Martin Wheatley has already given the answer to that. He says that consumers cannot be relied upon to make rational choices. By extension he is saying that people cannot be relied upon to make rational choices. If his conjecture is true then it is reasonable to say that regulators cannot be relied upon to make rational choices – unless he wishes to say that regulators are neither people nor consumers. So he has already put himself in an untenable position. There must be an automatic assumption that Regulator Policy is likely to be irrational.
    The fact that they are driving through RDR though the previous two regimes have now been heavily criticised would appear to confirm his (extended) conjecture that the FSA cannot be relied upon to make rational choices. Would a rational approach not be to examine carefully such a major structural change if there is a question about the fundamental approach of the previous regime?
    Is it not time for Parliament to wake up to the fact that any Regulator needs to be safeguarded from its own irrationality before it also starts to believe in its own infallibility. I fear that such safeguards are already too late, and would, in any case, be too weak to stop the juggernaut.

  7. Nigel Barker-Smith 21st February 2012 at 9:57 am

    If clients cannot afford fees they cannot afford commission!!

    There is no difference between the two except the client sees one and usually not the other.

    @Ned Taylor

    What’s a “normal cost effective method of paying for advice”?

    and why do you feel this is no longer available?

  8. Ned Naylor: your comment on the USA is perceptive. The Yanks have always taken pride in selling – it is what commerce needs in order to grow, and they do like their industry to grow. Consequently they have built on good practices and treat salesman with respect. That helps to re-enforce good practices. Simple psychology.
    In this country selling is considered barbaric, so sellers see no problem in being barbaric. Simple psychology. [I accept that there are always exceptions.]
    So far, so simple. What is not so simple is trying to unpick a thought process that is now probably ingrained in the British psychology, namely that service is a higher calling than selling. If there is any question on that look at the massive success of Downton Abbey, and before that, Upstairs, Downstairs. In both cases there is a central theme of the nobility of service. Because of their own, short history there is no such cultural aspect in the USA.
    As a practitioner you will be aware that for all the service you provide certain aspects have to be sold. A concept that a quasi Civil SERVICE depart will have great difficulty appreciating. What we have is a major battle with two conflicting styles of thought and culture And since the FSA have both the power and the ignorance it is likely that the sales process will be in utter disarray in 3 or 4 years time when the perfection the FSA dream of is shown to be irrational.

  9. Well done Tom, there have been so many things I would’ve liked to say and share in recent years but I decided to maintain a dignified silence. This is about as good as it gets and so very , very true!

  10. Great article and could not agree more, however it just is not going to happen. This is because it will mean that virtually everything that Mr Sants and Co have worked for in the RDR will show it to be the sham it is and that will affect his chance at the new job in B of E and in time becoming the Govoner. Mr Wheatley’s appointment did not happen because he said he was going to undo all that had been done or even look at ammending/postponing it. Ladies & Gentlemen it pains me to say it but the RDR is a done deal in its current format. The regulators just wont listen to reasoned arguements from the induistry leaders and those with the experience. IFA’s offices in the future will simply read R I P

  11. David Trenner - Intelligent Pensions 21st February 2012 at 10:28 am

    This is an interesting discussion. The fundamental question to be asked is ‘Is the consumer better off than he was before 1987?’ Then comes the secondary question: ‘Could he be even better off with better regulation?

    I would answer ‘yes’ to both questions, although many of you will not agree.

    My late grandfather set up as an insurance broker, but he was in fact a multi-tied agent. Following his death my late grandmother took over the business, and after she died my father, a practising solicitor, took over. When the Insurance Brokers Registration Act was passed the company changed its name to ‘…Insurance Services’.

    My grandparents were honest, and over the years got better at the job. My father did endowments as a favour to his mortgage clients. Frankly they were amateurs.

    Other less scrupulous amateurs include the adviser in Bradford who sold endowments written to age 65 as collateral for a 3 year loan. (I was with the insurer that happily accepted the business – and paid 83% of the first year’s premiums in commission.) And also the former store manager who sold pension transfers to his former staff after the store was closed in 1987. And so on and so on.

    Yes it would be nice if the regulator could have prevented some of the modern day scams, but for every Keydata there was a Barlow Clowes and for every Ark there was a Hill Kestrel.

    I believe we are more professional than we were 30 years ago, and I believe that that has to be a good thing for consumers.

    If Mr Wheatley creates incremental improvements I will be happy. Anything more will be a bonus.

  12. I am also forlorn for there is little chance of an end to bad regulation, or bad advice for that matter.

    The first thing they do when they create a ‘new regulator’ is think about a rulebook, to save time they take a look at what the ‘previous regulator’ had created and use that as a template.

    When I say ‘they’ I mean the same regulators who drew up the previous rulebook, and the one before that.

    Mr Wheatley is a former UK regulator who spent 5 years in Hong Kong and is a busy bee, on all sorts of committees.

    Is this like skiing in treacle?

  13. Nigel Barker-Smith: It’s dead simple Nige. Either pay a fee say £1000 upfront or do it on the never never over the next 5, 10 or 20 years. Which one will you really, really notice if your net salary is £1500 per month (like one of my baby architect clients for example).

    But take a similar baby architect I SOLD a pension to 25 years ago who now has a very healthy SIPP used for his own practice premises and who basically is not concerned about his retirement because I hustled him (his words not mine) to start a pension. Is he p*ssed off – absolutely not.

    Have we both done well out of the business relations ship – yes. Could he have more in his pension if commission wasn’t paid – absolutely. The bigger question is though…. would he actually have had a pension in the first place? That would, by his own admission, would be a resounding NO

  14. Well said Tom,we need a more professional market not more regulation.The FSA have become as much a part of the problem and not a transparent regulator.The law of diminishing returns has never been so well manifested as with the history of regulation.But we arent all that good at standing firm when we need to and there are too many ‘Yes’ men who won’t speak up and too many large players who are more concerned with the next buck to cause any ripples.Don’t forget, WE PAY THEM.

  15. Anon @ 10.46 am

    Couldn’t have put it better myself. I too have numerous examples of what could now be considered HNW clients as you describe. They are only in that position as a result of being ‘hustled into it’ as you describe. Funny how they keep coming back though even though they have the choice of a fee based ‘Wealth’ Manager. Thats the ridiculous part of RDR – if indeed fees for all do work why are all our clients beating a path to their door ?? They exist already after all.

    And that is precisely why we have the largest savings/pension gap in living memory.

  16. The miss-management of financial services by the FSA has directly contributed to the Financial Problems we, this country / the world is in. If they has kept their eyes on the Banks rather than micro managing small IFAs, they could have (although I doubt they had the expertise) stopped the banks (their friends) from making the fundamential mistakes they did. However on a micro basis, the FSA have decimated the IFA (the plankton of financial services on which all financial services feeds). The footnote will read “The operation was a success (RDR) but the patient (IFAs) died!

  17. I do hope that Ned Naylor is using his “cut and paste” function when making his comments Whatever the subject, Ned seems to have half a dozen paragraphs to say, decrying the RDR!

    Obviously, the arguing is well over now, and its coming in December regardless. But I do hope Ned is saving lots of time by using “cut and paste” rather than writing out, in full, the same thing each and every time!

  18. The trouble is the FSA have viewed the regulation of our profession in the same way as one would view the moon, most of the time only parts are visable and at best you only see 50%. This is precisely why RDR will fail !!! I see on no account that the FSA have viewed the issues from all sides and although the FCA have the oppertunity to alter the future path of our profession, I fear nothing will change.

    The real losers ?

    I dont think it will be IFA’s, the bomb damage will fall mostly on the clients heads.

    But hey what the heck, Hector will have be able to buy lots of brasso to polish his knights medal.

  19. Nigel Barker-Smith 21st February 2012 at 2:32 pm

    @Anonymous | 21 Feb 2012 10:46 am

    Why do you suggest the clients needs or wants to pay £1,000 upfront. Why not receive the fee as you describe on an on-going basis?

    This is my point about there being no difference. Whilst it makes more business sense to charge a fee for the work done and valued (by the client) at that point in time, if you want to take it on the drip equally fine. That’s your business decision.

    Where does it say you cannot do this post RDR?

  20. @ Nigel Barker-Smith 2.32pm. Your asking Anonymous @10.46 about why taking the fee up front is to do with the single most important thing in any business – Cashflow. Without this, no matter how good you are your firm will go bust. It is very simple economics.

  21. Tom – I agree with the sentiment of your article from the point of view that there seems to be an inordinate amount of regulation for regulation’s sake.

    In many respects this is a logical conclusion of the situation when you ask a regulator [*anyone*]to regulate [*do something*] and give them free rein to decide what they want to do – after all a regulator who decides to do nothing will a) be criticised for doing nothing and b) will effectively be voting himself out of a job.

    It is not however all the regulator’s fault and industry has to bear responsibility for some of the sharp and shoddy practices that have been allowed, and continue to be allowed, to exist. If the industry had been a little more forceful in self regulation, then the regulator’s conclusions may have been different once the free rein was granted.

    So, whilst I share some of your sentiment I think that the industry is reaping some of what it sowed – that it is reaping more than it sowed is, and always was, an inevitable consequence.

  22. @ Alan B
    Bad regulation is most definitely not the fault of the regulated. They have no say in how they are regulated.
    The blame lies firmly at the feet of the regulator.

  23. Tom, your comments on sleep walking into poverty are very true. People do not save, cannot or will not.

    Protection is often missing.

    The DB private pension sector is decimated, just deal with an employer who finds out that trustees in 1993 did not equalise benefits properly to reveal the horrors.

    That said many of the older charged contracts were very expensive and opaque. Regulation is needed but the manner of its operation to date is shoddy and careless.

  24. A brilliant article!

    The regulator perceives risk where there is none and fails to perceive it on too many occasions, then legislates retrospectively.

  25. [quote Ned Naylor] ”In the USA selling is a profession, sales persons are highly valued for their communication”

    You’re right that there’s nothing wrong in being an honest salesman, whether that’s selling double-glazing or investments. But you seem to be missing the point: the people who matter, the customers, don’t want to pay for salesmen. What they are willing to pay for is advice. The traditional response of salesmen has been to call themselves “consultants” or “advisers” but that is dishonest and eventually the customer cottons on.

    You and too many others want things to carry on just as before without change even though what you are offering is regarded by a better informed public with increasing suspicion.

    One thing in life we can be certain of is change. Many of today’s IFAs started life with a pushbike as ‘insurance-men’ going door to door collecting premiums and selling insurance. They got to hang up their bike clips and wear a pin-stripe but now it’s time for another change. If the FSA hadn’t brought the changes then the internet would.

    Using the internet, punters can now buy their investments cheaply and easily without paying you any commission and unless you provide some added-value and a reason to use your services that’s what they’ll increasingly do. Don’t blame the customer for not wanting to buy what you’re selling if you don’t offer what they want at the price they’re willing to pay. It’s the same for any business.

    IFAs had the chance to be proper advisers rather than salesmen and too many blew it. They earned well as salesmen for the product providers and it suited the providers that way too. Most will get another chance to be proper advisers and they shouldn’t waste it because unless they provide what the customer wants then if the RDR doesn’t get them, customer dissatisfaction and the lower cost alternatives eventually will. Don’t expect a free ride.

    [quote Ned Naylor] “I wonder how many will be able to afford the required level of fees”
    In just the same way as they afforded to pay commission I expect – provided the service justifies it.

  26. PeterD You obviously are not involved in advising clients or selling financial services, so I say to you – butt out! As you are an obvious buffoon, you do not realise that people don’t normally wake up and decide “today I must buy life assurance” or “I must invest for my future or retirement” (and if they do, it’s probably too late). The demise of financial advisers over the last 10 years has been to the detriment of ordinary people (who many of these IFAs served, earning a modest income), forcing them to be pushed into the money grabbing arms of the banks. IFAs have the best interest if their clients at heart and yes the do get paid for doing their job but the banks look at clients only as a ‘cash cow’. RDR sounds good (as all ‘sound bites’ do) but in reality, ordinary people will have no lifetime financial advice, the MAS will eventually have to be funded solely by banks or from tax revenue as there will be no IFAs to pay the levey

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