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Tom Kean: Complex regulation is another crash in the making

This won’t be the first time I have campaigned for the easement of rules being emitted from Canary Wharf and it will not be the last. After 25 years in the business, I have grown tired of the constant change and a disheartened at the prospect of a new regulator.

I believe complex rules allow the unscrupulous to thrive and the Financial Conduct Authority seems to be saying nothing that placates me.

The cynic in me fears the FSA is merely rolling over into a new body to avoid any future blame. The FCA can more easily say any problems did not occur on its watch, as happened with previous incarnations. It has been suggested that none of the current staff should be allowed to roll over en masse but the alternative clean-slate approach would seem impractical.

The grouch in me goes even further and fears a conspiracy. In the knowledge that it is effectively impossible to regulate such a disparate body of retail outlets, rolling over entities on a regular basis is essential given the utter shambles we find ourselves in.

The frustrating thing is that we never seem to learn from past mistakes, with the Arch cru debacle turning into another mess before our very eyes.

How can it be right to ask investors to complain about their advice – experience tells us people are perfectly willing to lie to gain an advantage?

To a large extent, pensions and endowments were a victim of their time. An investment world that saw unprecedented change conspired to work against the adviser and consumer alike in equal measures. Add to that widely disparate moral standards and it was a crash waiting to happen.

As much as we like to think we have the benefit of foresight, we do not. The current swathe of pension rules serves as a reminder of exactly what is wrong with this profession.

Take the lifetime allowance. What other sectors ask their participants to guess what the future holds? Not one of the people I have asked can follow the logic of capping both input and output.

It is an outrage that we are forced to work in a climate of complex guesswork and speculation. It can only lead to a loss of consumer confidence, less investment and greater risk of future problems.

If you had asked me to come up with a set of rules designed to confound your average pensions investor, it would look something like what we have now. It is possible to get things right – pension simplification taught us that – but capping money in and money out is yet another crash in the making.

My message to the FSA and anyone else who might be listening is easy – simplify, simplify, simplify, in everything you say and do. There is nothing to lose and everything to gain. Less truly is more and it will make your lives immeasurably easier in the future.

Tom Kean is director of Thameside Wealth Management


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Derek Bradley ceo PanaceaIFA 16th May 2012 at 5:18 pm

    As a country the UK has moved away from the manufacture of goods and products and has moved toward the manufacture and provision of intangible goods and services.

    It is a fact that any business that “designs and manufactures” products has done so because it has identified a consumer need and in doing so then needs to create awareness and find a way of getting it distributed- that means finding a sales force.

    Financial services are often referred to as an industry, seldom linked to a Profession, until the RDR arrived. The FS industry is made up of many different provider “manufacturers” large and small. They have all designed often very similar intangible products to address a vast array of perceived financial needs for both personal and corporate consumption. And yes, they need somebody to sell these products, and yes, like in any industry the sales process needs to be incentivised. That incentivisation was in the form of financial reward. The buyer had a choice based upon a myriad of factors to buy or not.

    This is not a difficult theory to understand and these same firms will need people to distribute (sell) products post RDR but with the added bonus or burden of not paying for the incentivisation.

    The FSA is intent on changing the face of financial services in terms of qualifications, standards, remuneration and creating a greater degree of perceived professionalism. In doing so it is removing the word sale and replacing it with advice. Many of the RDR thought processes are not without substance or benefit. After all to improve knowledge demonstrated by exam, standards and create an aura IFA professionalism is laudable.

    But, by doing so in the way suggested blurs the lines between the wish to create the “Professional IFA” and the distribution of FS products as part of the offering and that is where I believe the whole RDR process starts to go “wobbly”. A definition of a profession is a vocation founded upon specialised educational training, the purpose of which is to supply ‘disinterested counsel’ and services to others, for a direct and definite compensation (reward) and wholly apart from expectation of other business gain.

    In other words the “Professional” provides the advice but does not “dirty their hands” with arranging the purchases of products or goods that may attach to that process of ‘disinterested counsel’. This “Professional” status historically applied to divinity, medicine and the law. Although most professions enjoy high status and public prestige, not all professionals earn high salaries, and even within specific professions there exist significant inequalities of compensation.

    Today the spectrum of professions is broad indeed from Architects and Accountants to Teachers to Social Workers and shortly when the FSA wish is granted, Financial Advisers will be added to the list.

    So, if we examine more deeply the view that the “purpose of a profession is to supply disinterested counsel and service to others” we note that the word “product” is missing and that is why we have the RDR conundrum. Why? Because by putting the distribution of products into the same place as creating a fee based profession means a conflict of interest. Where “counsel” or advice sits alongside the distribution of a product, tangible or intangible you have a problem. Solicitors, accountants, surgeons, and many other professions that the FSA would like to see financial advisers compared to do not deal in product.

    Their expertise is by way of applying analysis to a set of problems and coming up with an intellectually based solution or plan, often of their own unique bespoke design, as a result of qualification, experience and training then putting that solution or plan in place. They will not normally get involved in the execution or influencing of purchasing product as an integral part of that process.

    Professions do not operate in mass markets with a view to assisting manufacturers in the distribution of their product. Professions do not normally sell or arrange the purchase of substantive goods or products. Because financial services institutions derive revenues and profit resulting from mass-market product distribution the idea of creating a profession that is involved directly or indirectly in financial services product distribution too is quite incompatible.

    So what of the RDR in light of this scenario?

    Regulation should be more about foresight and less about hindsight. It should separate advice and product. This may be a simplistic view that is at least worth a discussion, but KISS seems a pretty relevant acronym to use for an RDR route map today?

  2. Yes of course it is !!

    A whole NON industry (compliance) has grown up around ridiculously complex regulation to such an extent that we are close to having a bigger compliance (NON) industry than we have actual FS industry truly bloody ridiculous !!

    Sadly it is not in the interests of the regulator to make things simpler because by doing so they put themselves out of a job !!!!

    I was the first to use the annalogy of ‘the emporer’s new clothes’ I still cannot think of anything better to describe the state of affairs this once stroing industry finds itself in – an industry slowly drowning under the weight of largely unnecessary regulation and going rapidly down a blackhole.

  3. Soren Lorenson 17th May 2012 at 9:55 am

    Having read Dereks excellent contribution to this interesting article I propose a new breed of adviser – the IFR – Independent Financial Retailer.

    An IFR is paid by the provider for the sale of a product, just like any other retailer. He will offer basic advice around the product being purchased and will select a suitable provider. He will factfind those parts of a clients situation necessary to ensure that the product fits their circumstances.

    The IFR doesn’t provide advice (go to an IFA if you want a financial plan but most people don’t need complex planning). But can provide the one to one service that big companies always fail at.

    Simple and low cost product access for the mass market.

  4. Julian Stevens 17th May 2012 at 10:21 am

    To be fair to the FSA, simplification of what it’s charged with trying to regulate can, to a very large extent, only come from the government.

    There can be no better example of this than Pensions, with which 25 years of needless and unhelpful meddling has resulted in an almost total loss of public confidence. Amongst the Conservative party’s pre-election manifesto pledges was a promise to undo all this damage and thereby restore public confidence in long term saving ~ to “reignite the UK’s savings culture”. What a hollow and mendacious soundbite that’s turned out to be.

    Since taking office, all this government has done tp pensions is make things even worse, particularly for high earners (who, in many ways, contribute most to the health of the economy), and pressed ahead with NEST. What about the self employed and all the employees of very small businesses? What about reform of retirement income options and the annuity (rate) trap?

    What about reform and simplification of the personal tax system?

    What about regulation of (primarily capping) unsecured borrowing on credit and store cards?

    As one noted financial services lawyer has opined elsewhere, the FSA’s rule book is so massive (10,000 pages!), so labrynthine and, in many places, so open to varying interpretations (not least on the part of the very people charged with enforcing it), that it’s all but impossible for any regulated firm the length and breadth of the land not to be in breach of some part of it or other.

    As the seemingly endless succession of motorway pile-ups and hindsight reviews dismally testify, not even the FSA itself appears to be capable of doing what it’s supposed to, at least not halfway competently. Yet the FSA et al costs the industry an ever-escalating king’s ransom, year on year, and everybody else is forced to pay for the failures of the system on top of the cost of the system itself. Meanwhile, public confidence in financial services generally takes yet more damaging knocks. Is it any wonder that the savings gap isn’t reducing?

    Yes, the FSA needs to get its act together and be held to account when it (so often) fails to do so, but the solution to all this excessive complexity must surely rest with the government.

    In the words of Henry Thoreau: Our lives are frittered away in detail. Simplify, simplify!

    Dearly we would love to, but the people who could help to make it happen just aren’t doing so not least, I strongly suspect, because true simplification on all sorts of fronts would mean a lot of redundancies in the public sector, not least in the world of regulation.

    Meanwhile, increasing numbers of financial services intermediaries ~ whose services the long suffering public need more than ever ~ are buckling under this unprecedented burden and either going to the wall or voluntarily throwing in the towel in favourt of a better life doing something else. And that’s progress?

  5. Derek Bradley ceo PanaceaIFA 18th May 2012 at 2:08 pm

    @Soren,IFR, a very interesting and simple idea. This could solve the problem.

  6. All the Preservatives are going to do with their election promise is get us into a bigger jam.

    One of the many things that annoys this grumpy old sod is that when FIMBRA became PIA the lot at Budgerigar Street refused to port across ANY regulated firms. They made us all re-apply and made it clear that we might not get in. Sauce for the goose? I very much doubt it.

    It’s going to be same old thing and still Parliament won’t be able to bring them to book.

  7. Julian Stevens 21st May 2012 at 5:05 pm

    As a colleague elsewhere put it with admirable succinctness, the mantra of the FSA appears to be There’s nothing so simple that it cannot be mucked up (with apologies for the typo).

    A classic example of this is the FSA’s unyielding stance on commission from legacy products ~ look what a bugger’s muddle that is.

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