21st December 2010
IFA letter of the week
I aim to start 2011 as I did 2010 and that is by being an RDR bore, so here goes.
I find it revealing that when the FSA seeks to use research date in support of its proposals it conveniently ignores the alternative interpretations that are frequently placed on the same data by the researchers.
One example is the lack of trust in the industry that Callum McCarthy and others have frequently alluded to. In 2008 the FSA with BMRB produced Consumer Research 65a. This confirmed that accountants, solicitors and bank managers were the most trustworthy occupations with financial advisers not being far behind.
Consumer Research 76, also from 2008, established that between 67% and 92% of consumers considered advisers as worthy of high or medium trust. Then, in September 2010, the FSA published its annual research on consumer confidence. This disclosed that 98% of those questioned believed their adviser had treated them fairly, banks scored 83%.
FSA Occasional Paper series 32, in April 2009, confirmed "Charles River Associates (2004) finds limited evidence of commission bias in the market for UK retail investment products." This is not new but it's nice to see the FSA confirming it.
The 65a research was particularly pertinent as it actually asked consumers what they considered important when purchasing a product. The three areas highlighted were product information, whether the adviser is independent or not and whether the adviser meets regulatory requirements. The least important? How fees or commission is calculated.
Charles River Associates carried out further FSA research in January 2009 and this included the following statement. "It is often argued that providers offering higher commission will 'buy' market share. We did not find evidence to support this."
Hector Sants recently suggested that annual consumer detriment due to mis-selling is running at between £250m/£500m, a guess that has since been uplifted to £400,/£600m in his letter to the TSC. In reply to a recent FOIA request the FSA advised, "The figure given to the Treasury Select Committee was 'around £250m'. The precise figure is £223m". Notwithstanding that the figure provided to the Treasury Select Committee was overstated by 12.1%, or 124.2% if we look at the £500m suggestion, one wonders how impressed the TDC will be at receiving misleading information?
Within PS10/6 suggested consumer detriment is broken down into four sections. To my knowledge these assumptions have never been scrutinised yet they veer towards the absurd and must be challenged.
One of the accusations levelled by Charles River Associates is that advisers place investors into unit trusts instead of equity ISA's and suggested £70m as the resulting detriment due to losing tax efficiency. A true equity ISA only benefits from CGT relief over and above the basic unit trust and most investors do not exceed their annual CGT allowance so the detriment figure appears implausible. Notwithstanding this I question why any adviser would fail to make use of the full ISA allowance before using an OEIC or unit trust. Does this sound a likely scenario? There is no commission differential so the only reasons would be stupidity or laziness.
Another area related to advisers recommending distribution or with profit bonds instead of equity ISA's. The Charles Rivers research in 2002 allocated £49.5m p.a. of consumer detriment to this on the basis that each sale lost the consumer up to 0.50% p.a. In June 2009 Oxera calculated that the commission on bonds has been reducing year on year, falling from 5.25% in 2005 to 4.32% in 2007. Additionally, back in 2002, the total sales of such bonds was 433,000 a figure which fell to 71,439 for the year ending September 2010. IFAs were only responsible for 45.6% of these sales.
All other things being equal the detriment figure should be zero if we also take into account Charles Rivers observation that the RIY on bonds is sufficiently lower than ISA's that after 10 years the detriment disappears.
I wonder how many of the other FSA assumptions are built on hills of sand?
Alan Lakey
Comments (3)
I attended this event in which Alan played a significant part. I guess that my views are possibly becoming as boring as Alan’s. To say that I came away with a host of emotions is not exaggerating. Frustration, irritation annoyance and even disgust.
Let me start by saying I am no admirer of the FSA nor do I think the RDR is a great idea. I too can whinge with the best of you, but that event was the usual illogical, disingenuous, hypocritical cant.
The two biggest issues for the ‘worried 20%’ always seem to be the same – Exams and commission.
So let’s take these in turn.
Exams.
Why should experienced advisers take them? It is ‘unfair’ to have this cliff edge in December 2012/January 2013.
Firstly I fully concur that exams are not the be all and end all and not necessarily a proof of competence. One only has to recall LTCM. However I found it odd that the Chairman of this event when introducing the first speaker – before anything else – listed the speaker’s many and impressive qualifications. Odd or what? For someone who evidently doesn’t have much truck with qualifications.
However back to point in question. As I have said till I’m blue in the face anyone who has been in this business for more that 10 years must surely have known (if they were actually sentient human beings) that exams were going to be on the agenda. Why do they think that the LIA, The CII, Sofa and everyone else was offering courses? (Not only to swell their coffers in those days).
Talk of the RDR has now been going on for 3 or 4 years – so why didn’t they hit the books? There is still 2 full years to go – so why not get on with it? “I’m too old to take exams”. In which case I would contend you are too old to advise clients.
“It isn’t fair”. Of course it isn’t fair. But we are all big boys and girls and should know by now that life isn’t fair – so stop moaning and get on with it.
We will lose 20% of advisers. Well Mr. Garnier thinks this is terrible. I agree it isn’t good, but when asked if he thought that a pass rate of 80% was not bad he demurred. I hope that in his capacity as an MP he achieves a consistent 80% success rate! Anyway the figures are guess work, unproven and sloppy. Of these 20% (if we are to agree the figure) how many are over 60? Wouldn’t this be just natural wastage in the form of retirement?
After all these people say they have been in the business for years. Therefore as good IFAs they have obviously practiced what they preached over all these years and have good pensions and savings with which to retire on. So this may leave the ‘real’ figure of those under 60 who will be chopped. How many will that be? Presuming of course that they don’t get their act together and take the qualifications. Oh, and remember the CII does NOT have a monopoly on these.
The real issue with qualifications and Grandfathering is that if IFAS get a Grandfathering dispensation, so will the banks. Then what differentiates you? The banks are even more hysterically afraid of the qualification hurdle than you are. Imaging getting several thousand little Wayne’s and Tracy’s through to level 4! By having the qualifications IFAs immediately put themselves on a different plain and create very clear water between themselves and the banks. (I will return to this later).
Commission
In this case we have (in my direct experience) what can only be described as obdurate and wilful misinterpretation. Merely as an illustration of my point: A member of the audience said he had many HNW clients, doctors etc – none of whom were willing to pay a fee. I would contend that this individual isn’t explaining things properly (and for a fee I will give him a short course). CAR is not that dissimilar. The fee is taken from the product – as in commission, but is agreed with the client up front. How hard is that? “Look Mr Client for arranging this, my fee is £500; commission would have been £1,000. You have a choice – either pay me by cheque or I will take the fee out of the product and you will have less invested”. If you think that this can’t work for regular premium business, then you need a course in commerce and arithmetic.
Other factors
The most impressive speaker of the morning (in my opinion) was Richard Hobbs (unfortunately he spoilt his presentation by referring to ‘fairness’). He gave us a valuable history lesson. In essence the FSA and their predecessors have for many years been trying to achieve clarity of remuneration. Indeed I would contend that if the industry would have embraced CP 212 we probably would not have the RDR today. It is perhaps for this reason alone that the current regulator has ‘the bit between its teeth’ and will push this through come hell or high water.
History is always instructive and McCarthy maintained (rightly as it transpires) that firms are too often not profitable – and that this is not a good business model. (Indeed we now know that many make eye watering losses). I was fascinated to her that it was discovered that (at best) the big organisations make about a 2% return. I would contend that many small IFAs make more than 30% return. Indeed if you are not making at least 18% you should pack up – you aren’t running a business.
This of course brings me neatly to the other mantra – “Look how many poorer clients will be disenfranchised as a result of all these IFAS dropping out”
This is taking disingenuousness to new heights.
I don’t defend it, but only state the blindingly obvious. Regulation costs money and the amount of regulation we have to undertake costs a lot of money. Gone are the days when you could get into your Bentley and sign up all and sundry (including students) into expensive whole of life contracts that would lapse within 5 years and pay enormous amounts of up front commission.
It is a fact of life that not everyone shops at Fortnum & Mason, not everyone can afford a BMW and not everyone can afford to go to Covent Garden. You need the price of the ticket. Unless you are Hargreaves Lansdown you can’t adopt the Tesco model – so you only have one place to go – to those who have the wherewithal. The figures presented showed clearly that there are plenty in this sector who are not engaging with IFAs – fertile ground indeed. As Richard Hobbs pointed out the Financial Market has upward sloping demand. So what is the problem? We are not social workers; we are supposed to be running a business.
In my view too many IFAs are salesmen. I ran a sales force (Outside financial services) and I made it very plain that it wasn’t an order at any price – it was quality business that made money and if you didn’t bring that in – don’t bother with the dregs. Perhaps too harsh terminology for Financial Services, but the message is substantially the same.
Then we come to the Longstop.
I will concede that this is a ‘nice to have’ and should be allowed. But again let’s be logical. If you retire at 60 or 65 and we have a 15 year long stop that means that your backside is hanging out until your are 75 or 80. How perfect is that?
I would contend that Run Off is available – so why not use that? If you can’t get it isn’t that a refection on the quality of your business?
Choosing one’s clients with care is probably the very best defence. The initial meeting should be a two way street, at which you are assessing the person’s suitability to be your client. It should not be a given that everyone who may want your service gets it.
Failing that what about your record keeping? If you are that worried does it indicate that either your record keeping isn’t all it should have been or that you have skeletons in your cupboard to which you are not admitting.
Talking of skeletons I’m a great believer in the concept of Know your Client – that is a continual garnering of information.
If all the above fail then your best defence against future eventualities is to ensure you know where your clients skeletons are buried. The best defence is often counter attack!
The of course we have ignored all those who have limited companies. That in itself is a pretty robust protection. There is also the obvious – why have everything in your name if you are married? And in the very end there is always the ticket to Brazil.
But as I said a Long Stop would be nice to have, but I don’t think it is worth busting a gut over.
Conclusion
There is a huge amount wrong with the FSA and the RDR and some of the points were succinctly put at the meeting. But the guns are trained on what I perceive to be the wrong targets.
Alan Lakey posed that IFAs shouldn’t be treated any differently from Banks. I could hardly believe my ears. OF COURSE we should be treated differently from Banks. If I go to Saville Row I don’t want to be treated as if I had walked into Top Shop. I thought we were all unanimous on one point – IFAs are better than banks.
Perhaps one thing amazes me more than anything else – the puppy like trust that so many IFAs have placed in certain members of parliament.
I was a little taken aback (a little only, as I never under estimate the depths to which politicians will stoop) when well meaning bodies such as AIFA (and others) are rubbished, merely to curry favour with the audience
We are all grown up. We have seen more than one government. The vast bulk of IFAs are what is regarded as Middle Class and we all know that irrespective of which party is in power the middle class always get shafted. That these MPS are now your friends isn’t really surprising, but I think so many of you have been naive. These MPs are the new intake. Before this ‘cause celebre’ they were unknown entities. You have now afforded them the opportunity to be front page news. This will do their Parliamentary careers no harm at all.
What I regard as the real issues are being sidelined. When Mr Garnier responded to the question about all the different divisions which are proposed (Simplified, Basic and Restricted) and how he thought this benefited the public his answer was a revelation. I don’t quote verbatim, but the gist was:
“We can’t interfere in everything that the Regulator does.” Really – then what was he doing at the meeting?
I worry that these supportive MPs are in fact the biggest Trojan Horses since Odysseus’s days. Fighting qualifications undoubtedly helps the banks more than it does IFAS and for me the clincher is this refusal to engage with these new fatuous divisions – let alone the nonsense of COBS and ICOBs.
There was nodding recognition of many of the other Regulatory failings – Unaccountability, profligacy, stubborn adherence to box ticking and so forth. But from what one reads this is all about to be repeated with the CPMA a AND we are going back to the bad old days of duality of Regulation. (Not that we ever got rid of it as FOS is in effect a second regulator).
Just remember that IFAs may have the better complaints records, we might well have better persistency, and when people have actually used us they seem to think pretty highly of us. BUT when the public is canvassed ‘on the street’ about whom they will use – IFAS don’t come out in front of Banks.
I finish by quoting the old proverb:
Be careful what you wish for.
Happy Christmas and a successful 2011 – in every sense.
Harry Katz 22/12/2010 11:30
Mind you, his defence of the RDR only reached its current decibel level once he became part of the AIFA Council and I seem to recall that he and I shared a similar discontent with the 2007 RDR incarnation.
Harry remarks that long-term industry survivors knew that qualifications were coming so had plenty of time to prepare. A similar view would have involved Chamberlain chastising Churchill for not preparing a welcome party for the incoming Germans. After all, Churhcill had had over three years to prepare for the invasion, right?
When a despotic quango, particularly one paid for by us, dictates a future based around unfairness and deviant thinking then we have the choice of turning over, exiting the industry or fighting for what is right.
I have no problem with the banks benefitting from grandfathering. My reasoning is that whatever happens the banks will continue to provide sub par advice and examinations mean little if the sales-target model is adhered to. Far better to ensure that the regulator applies an appropriate scrutiny and issues heavy fines that really do hurt the P&L account. Also, the unnecessary loss of 20%-50% of the adviser population, seems to grate against the purported consumer outcomes.
The reason why examinations are unsuitable relates to the disparate nature of advice. Some advisers are generalist, others specialise on one or more areas. If this reality is ignored it means that advisers are being required to pass examinations on subjects and areas that they do not operate in.
The RDR is a dogs breakfast of bits and pieces that have been ill-thought out and badly pieced together with scant consideration given to the monumental downside or the fact that its aims cannot possibly be achieved with a depleted adviser-force and a nonplussed public who do not care about the machinations and base their decisions on trust.
Alan Lakey 23/12/2010 18:34
I was at the event too and found it a quite uplifting experience for a change, the quality of the presenters from Andrew Doyle through to Alan Lakey was first class.
I must take issue with you regarding some points you make.
You stated that “I found it odd that the Chairman of this event when introducing the first speaker – before anything else – listed the speaker’s many and impressive qualifications. Odd or what? For someone who evidently doesn’t have much truck with qualifications”.
The Chairman, Derek Bradley, was the founder of PanaceaIFA and I know him quite well. His views on the subject of qualifications are clear. He is frequently on record as stressing the importance of better qualifications but it is the unfairness of the intended implementation methodology and the unintended consequences that he objects to.
The longstop issue is one area that pretty much most IFAs seem united in their views. It was created to stop “stale claims” being made where the facts of a complaint are hard to prove due to the passing of time and lack of documentary evidence on the part of both sides of an argument.
The FOS adjudicates with the benefit of opinion and retrospection in areas that it should not, it fails to recognize as it should previous Ombudsman schemes rules and jurisdiction guidelines and has no right of reasonable appeal.
It is not right that the FOS can adjudicate upon an event that took place 15- 20 years ago simply on a “he said, she said” basis and no evidence to support the assertions made. A Court would not entertain such matters and that is the point, the FOS does.
The FOS is a pernicious organization that plays fast and loose with its operational mandate. It is no longer the Dispute Resolution channel it was intended to be and could reasonably be considered to act unlawfully in certain circumstances.
Going abroad is no protection as I know of some IFAs who have retired overseas have been actively sought out by the FOS.
Choosing clients with care is no protection and you cannot underestimate the sheer audacity of some who think that by making up a complaint, reward will surely follow.
Because of this any form of run off PI cover is rendered useless, if not impossible to obtain at any reasonable level of cover or excess.
For those new to the “game” the experience of those who have gone before shows the importance of meticulous record keeping relating to good advice given being retained way beyond the six-year or six plus three timescales that apply to most normal commercial arrangements.
cortesin 24/12/2010 11:17
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