At a recent conference of IFAs, a poll was taken of the 600 delegates to find out how many of them believed their businesses would survive. Fifty per cent said they would need additional capital to withstand the impact of the Sandler and FSA proposals.
But what is it about these reports that is so damaging? The proposal to have more products with flat 1 per cent (or a little more) charging structures is vastly overplayed. Many products along these lines are already on the market so the products will not be particularly new. Neither is Sandler proposing that regulators dictate what charges and features a product can have – or what commission the product provider pays.
Sandler could have gone much further. The US, for example, is wrongly regarded by some as a bastion of free market capitalism where regulation is kept to a minimum. You would not get these ridiculous regulations over there.
Wrong. In the US, regulators do not even allow life insurers to design their own products. Or, for that matter, to price them. Instead, they have a system of “rate and form” regulation. That means the rate (the premiums) and the form (the features of the product) have to be agreed and approved before sale by the regulators. US regulation is so prescriptive it makes the European Commission look laissez-faire. Someone recently pointed out to me that in insurance regulation alone there are some 50 full-time regulators in the UK. In the US, there are more than 10,000.
So is it the FSA's proposals on the meaning of independence that are going to crush IFAs? Surveys repeatedly show the public prefers independent financial advice to other kinds of advice but it is not clear that the public understands what it means. Does it mean the IFA gets paid the same no matter what the customer buys? No. Does it mean the IFA is not owned by a product provider so there is no undue influence? No. Will customers walk away from financial advisers if they are forced discreetly to remove the adjective from their business cards? Not if you have given them good service.
Surely more damaging are the longer-term trends that have transformed financial advice from the lucrative business it once was to the struggle it now can prove to be.
Readers will know this area better than I do, but these days it seems to have become more than ever before a simple question of where the money is coming from.
The sale of financial products took off in the 1980s for a number of very specific reasons. One was that the Institute of Actuaries started to look more kindly on charging structures for financial products that allowed commission to be paid – and recouped – at the front end of the contract. That meant product providers could afford to pay thousands of pounds in commission for selling products where the customer might only be saving £100 a month. The second factor was the stockmarket. In the 1980s and 1990s, returns were such that it not only seemed a shame but positively negligent to shy away from investing in investment products. And third, the Government laid on specific subsidies which made products much more attractive. These factors meant that more financial advisers then ever before were able to make a living selling low-ticket business to ordinary customers. Now most of those factors have disappeared.
With the advent of low-charging products it is simply harder for IFAs to make a living because there are fewer products paying up-front commission. Other changes, such as the decline of the stockmarket and the withdrawal of some of the tax breaks have taken their toll. Regulation only plays a small part here in that it is harder for IFAs to justify selling a higher-charging product when a lower-charging one would do.
Have the last few years really been so bad for the financial services sector? Or is that the 80s and 90s were extraordinarily good? On the stockmarket, there is an increasingly vocal group which says this bear market is simply taking us back to the normal order of things after two decades of excess. The historic trend of price-earnings ratios suggests that, far from being under-priced now, shares have been overpriced for a long time, perhaps since the mid-1980s. The same can be said for the financial services sector.
Andrew Verity is personal finance correspondent at the BBC