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Who&#39s to blame?

Those of you who have run the gauntlet of renewing professional indemnity cover will be only too aware that the environment in which IFAs operate has changed dramatically.

A report published in December 2002 by the Actuaries working party found that the UK pays out far more in compensation claims than other European countries, running up a bill of around £10bn a year. Although the report did not split out the cost of claims against financial advisers, one can deduce that it formed a fair chunk of the overall bill.

Discussions on this subject inevitably centre on the arrival of a blame culture from the US. But the explanation may not be as simple as that.

There is no doubt that the Financial Services Act 1986 and its big brother, the Financial Services and Markets Act 2000, have been necessary to create a robust legislative framework that will prevent consumers being exploited. But the emphasis on legislation has encouraged the FSA to focus on investor protection, rather than another of its stated goals – the promotion of financial awareness. As an industry we have seen a massive escalation in the former and precious little of the latter. It is questionable whether the split between the two has been balanced enough.

With a Government that has expended huge amounts of energy trying to persuade all and sundry that financial products and advice can be simplified, does the public need anything other than the knowledge that, in the event of an investment not performing as one might wish, they stand a better than level chance that they will be compensated? One only has to look at the FSA&#39s website to see that greater effort is being spent on telling the public how to complain rather than in educating them how to understand more about how their needs might be met.

The existence of the Financial Ombudsman Service seems to add fuel to the claims&#39 fire. An increasing number of people are now wise to the fact that any ombudsman claim requires the firm alleged to have acted improperly to pay a case fee of £360 to the ombudsman.

This has led to the situation where regulated firms often find it cheaper and easier to settle even the most thinly supported and mischievous claims. I know of one adviser who paid £100 to a complainant to stop referral to the FOS. The complaint was that the adviser had failed to return his call at the requested time.

In theory, the ombudsman has the ability to refund the £360 case fee where they find in favour of the IFA, yet I know of few who have received such a refund.

Over the last 15 years, the IFA has become much beleaguered. The reasons are many and well documented. A raft of consultation documents and proposals including the Sandler report and Pickering recommendations have added to the advisory burden.

Yet the FSA does not seem to appreciate that the first line of defence in advising the public is to have well informed IFAs who do not feel under pressure from all angles, wondering whether they can remain in business.

There is a certain degree of irony to the fact that the FSA conduct of business handbook heralded the dawn of the new regime but most IFAs have yet to get to grips with the changes that were introduced over a year ago.

Given some of its actions over the last year, the FSA obviously realises the handbook contains deficiencies which prevent IFAs being aware of their responsibilities – among them the obtuse language and convoluted wordings used to explain even the most simple requirements.

Over the coming months, we will see more IFAs having to decide whether to spend more of their time looking at the application of the handbook rules or seek external advice. Either way, there is additional time and expense.

Already, we have seen indications that some regulated global companies are viewing the UK as a more expensive base than elsewhere due to this additional layer of cost. There is plenty of scope for rationalising offices and support staff when the new regulatory cost burdens can be blamed.

At least the bigger regulated firms can look to the FSA for some feedback on how they are performing against set standards. Smaller IFAs do not have that luxury. The lack of a named monitoring contact at FSA for the vast percentage of IFAs deprives them of any sounding board for any areas of potential confusion within the rulebook and removes the crucial element of dialogue.

There is little logic in failing to provide IFAs with a point of contact who will help them maintain their compliance standards. If the primary function of the FSA is investor protection, then surely prevention is better than cure? It is astounding that even the likelihood of cures being applied has now diminished as compliance failings will take longer, in the absence of any external views, to come to light.

The FSA seems to have given up on having a preventative approach, which is a shame, seeing as the IFA is, and will hopefully remain, the primary distribution channel of quality financial products within the UK.

Anyone in any doubt of this should look at some of the blank cheques that are being waved around by the providers to IFAs at present to secure their allegiance post-polarisation and Sandler.

IFAs who feel beleaguered at present may well be tempted to move away from their pressured existence and look for shelter away from a complaint-encouraging environment.

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