Sometimes a report comes along that challenges traditional thinking and forces the industry to take a long hard look at itself. Think Ned Cazalet’s Polly Put the Kettle On, a piece of research which clearly and insightfully articulated how the life and pensions market was tearing itself apart in its desire to win new business at all costs.
And then there are reports like the one published this morning by the Government-backed quango Consumer Focus on pension “churning”. A report so lacking in quality analysis, so deficient in statistical evidence and so eager to jump to screaming headline conclusions based on the flimsiest of arguments that, as a journalist, you are loathed to offer it even the smallest sliver of publicity.
But, I think it is important to highlight when a taxpayer-funded body attempts to lead policy debate in such a ridiculous way, especially when it manages to garner such a large number of headlines in the consumer press (a quick search on google news makes for depressing reading).
Consumer Focus’s report, Is it advisable?, is a truly shocking piece of industry research. It adds nothing new to the important subject of pension charges, trail commission and switching behaviour. Instead, it pieces together previously published research from the FSA from 2008 and 2010 alongside the extrapolation of a tiny sample of IFA client cases to make grand speculative claims about the behaviour of a whole industry.
The central conclusion of the report is that IFAs and the trail commission they receive are responsible an unacceptable level of pension churning which leads their clients into high charging funds, a problem that will continue post-RDR.
To reach such a definitive view on the standards of a profession that numbers around 30,000 you would expect a pretty comprehensive and rigorous piece of research to have taken place. Well, no. Consumer Focus looked at 31 examples of client correspondence emanating from two IFA networks over a 10 year period. What planet are these people living on?
The report rehashes the findings of the FSA’s report into pension switching in 2008 and follow-up work in 2010. The 2008 report found that 16 per cent of files from 500 cases involving 30 firms, including IFAs, multi-tied and tied firms, showed poor advice. We know this 16 per cent figure was skewed upwards by the inclusion of at least one poor performing high-street bank. For some reason the Consumer Focus report only focuses on the behaviour of IFAs and leaves the false impression the FSA work was only referring to IFAs.
The Consumer Focus report suggests that since this work was conducted “it is far from clear that the situation has improved”. Reading on, the basis of this statement appears to be the already mentioned research of 31 pieces of business conducted by IFAs between 2000 and 2010. Hardly compelling evidence.
Later in the report, Consumer Focus uses the FSA’s RMAR figures to suggest IFAs received £2.7bn of gross revenue in 2009. A footnote alongside the research reads “The FSA’s RMAR uses the category ‘financial adviser’ which we assume roughly corresponds to IFA”. A quick phone call to the FSA confirms that this is a very wrong assumption to make as this category takes into account tied and multi-tied advisers. Consumer Focus really should not be making such basic mistakes.
Another headline conclusion of the report is that levels of trail commission are increasing in the run-up to RDR as firms look to take advantage of the last few years before commission is abolished. The FSA has raised concerns about a so-called commission “closing down” sale and it is right that these worries are taken seriously.
It is important that any market manipulation in the run-up to 2013 at the expense of clients is stamped out. However, Consumer Focus provides not a single piece of evidence that this is actually taking place. It just presumes it is with the statement: “We think many of the worries voiced by the FSA are already in evidence in parts of the market”.
It repeats a statistic that pension companies pay IFAs between £200m and £800m of commission a year, of which it estimates a quarter is trail. This appears to be the “hard evidence” that levels of trail commission are increasing. There is no attempt to put this figure into historical perspective or offer any statistics about how levels of trail commission are actually going up. It only produces a table further on in the report, based on information from eight pension companies, which shows levels of trail commission increasing by a small amount between 2007 and 2009, which you would expect as advisers have steadily moved away from models based on initial commission.
Another loud and unsupported assertion is Consumer Focus’s view that a significant and harmful bias will remain post-RDR as fee-based advisers who charge an hourly rate will be incentivised to flog products because this can then be translated into the chargeable man-hours associated with the products. Again, there is absolutely no evidence to back up this view which shows both a lack of understanding about the way most advisers are likely to base their new remuneration strategies and the fee-based environment many advisers already work in.
Consumer Focus does make a very fair point around consumer confusion about the purpose and function of trail commission, a problem the industry has allowed to continue over the years which will be finally addressed by the RDR. CF’s view that Nest should be able to accept transfers in is also sensible . However, any good points made in the report are easily drowned out by the raft of unsubstantiated views.
The most concerning aspect of this type of research is that we need a strong and brave consumer lobby, willing to hold the financial services industry and all its vested interests to account and prepared to make a song and dance when they believe unacceptable behaviour is taking place. Unfortunately reports like this add nothing to the debate and, ultimately, let consumers down.
Paul McMillan is editor of Money Marketing- follow him on twitter here