Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents


Written evidence submitted by Highclere Financial Services

  I wish to comment in both general and specific terms although this submission relates in its entirety to the regulation of the retail financial services industry. Evidence, backing up various comments, is appended in the annex.

  Since FSMA came into force in December 2001 a consequence of regulation by the FSA has been the following;

    (i) a reduction in consumer confidence;

    (ii) substantial increases to adviser fees due to the burgeoning cost of FSA operations (which are duly passed on to consumers);

    (iii) a massive culling of advisers due to the intended Retail Distribution Review;

    (iv) a planned reduction to consumer choice due to the removal of commission from savings and investments;

    (v) the ending of the simplicity of polarisation with consequent consumer confusion; and

    (vi) the summary removal of the IS-year longstop defence against stale claims.

A REDUCTION IN CONSUMER CONFIDENCE

  It is ironic that the FSA has not only failed in its statutory aim of increasing consumer confidence but has actually reduced confidence by its inept handling of the banking crisis and its failure to understand retail financial services.

  This latter point is highlighted by the Retail Distribution Review which itself was born of Sir Callum McCarthy's Gleaneagles address in September 2006 within which he suggested that the "model was broken". Subsequent proposals by the FSA, within the numerous RDR consultation papers, have served to promote changes that will reduce the consumer's access to independent financial advice.

INCREASES TO ADVISER FEES

  When regulation first surfaced via FIMBRA in 1988 the cost for my business was £300 pa it then escalated to over £6,000. The FSA itself has grown out of all proportion since its inception with their annual spending having risen from £58.3 million in 1998-99 to the latest advised figure of £391.7 million.

  The cost regulation lays heavily on IFAs which stands out by juxtaposition of the complaints statistics provided by the Financial Ombudsman Service and the new business distribution figures supplied by Datamonitor.
Pensions and Investments Total Business
IFA distribution48.3% IFA complaints  2.0%
Bank distribution36.2% Bank complaints61.0%


  The costs of regulation naturally pass on to the consumer, to his ultimate disadvantage. There must be a better means of reconciling regulation and cost and simultaneously ensuring that the sectors that maximise consumer deficit receive the greatest scrutiny and meet the requisite proportion of the regulatory costs.

CULLING OF ADVISERS DUE TO THE INTENDED RETAIL DISTRIBUTION REVIEW

  The point of regulation is to provide confidence for consumers, remove bad practice and ensure a suitable level of competence.

  The Retail Distribution Review has been described by John Redwood MP as "a sledgehammer to miss a nut". He has correctly divined that making higher qualifications retrospective and removing commission as an option within investment and pension plans will make it impossible for many advisers to continue within the industry.

  Advisers with 30 years experience and unblemished records are being driven out of the industry leaving millions of consumers without an adviser.

A PLANNED REDUCTION TO CONSUMER CHOICE

  Currently consumers have a choice regarding the payment of a fee, advice delivered via the commission route or a combination. This has worked for hundreds of years as it will continue to do in other sales oriented industries.

  Just as important is the impact that commission removal will have on the ability of advisers to prospect for new clients. It is well known that consumers do not readily make those sensible financial decisions but have to be prodded into insuring and providing for their retirement. Historically advisers have been able to prospect for new clients by contacting them and inviting them to meet to discuss the issues. This is possible because no fee has been levied for the meeting. If an invitation to meet was accompanied by the knowledge that the meeting would result in a fee then consumers already unwilling to do the right thing would be far less inclined to meet. The commission included within the plan costs served to spread the cost of the advice over a four year period to the consumers advantage.

  Let us not forget that commission spread over a term of years is not too different to house purchasers arranging a mortgage over an extended period because the cost of purchase is beyond their capability or preference. The same argument extends to hire purchase and personal loans.

  Regulation should not specify the means by which consumers interact with advisers. It should ensure they are not conned or disadvantaged but not dictate commercial terms.

THE ENDING OF THE SIMPLICITY OF POLARISATION

  Until 2004 the financial services industry was polarised. This meant that the adviser was either independent, and legally the agent of the client, or was tied to one provider and legally the agent of the insurer.

  This procedure worked without any downside. Unfortunately the FSA was prevailed upon by the banks and other interested parties to scrap this clear distinction and introduce in its place something called depolarisation.

  This was dressed up as offering greater consumer choice which was nonsensical. Depolarisation has caused massive consumer confusion where, instead of the previous black and white situation, the consumer is now confronted with advisers operating from the whole of the market, advisers using a selected panel of companies, advisers working on behalf of one company and advisers owned by insurers. Additionally there are firms offering both whole of market and tied advice.

  This situation is sufficiently farcical that when I asked the FSA to provide details regarding complaints about IFA firms it was unable because its records do not allow a distinction between the various types of advice!

THE SUMMARY REMOVAL OF THE I5-YEAR LONGSTOP DEFENCE

  Until FSMA 2000 the industry was treated identically to all other UK citizens in that a 15 year longstop defence was available. FSAM makes no reference to the longstop an omission that the FSA chooses to interpret as meaning that Parliament did not intend for the Financial Ombudsman Service to recognise the longstop defence.

  The Limitation Act 1980 has not been repealed. A scrutiny of Hansard confirms that the longstop was never discussed let alone debated. The removal of this legitimate defence has been applied despite Parliament not having debated, agreed or in any other way acceding to such a change.

  The impact of the removal of the longstop is to ensure that firms and individuals can never be free of the potential for a latent claim to chase them in retirement. There are already instances of sole traders and partners dying and the FOS chasing their widows for sums of money regarding ancient advice.

  This removal is considered by most legal advisers as in defiance of S6 of the Human Rights Act. Forgetting the legal arguments it is morally indefensible. The FSA arguments that the nature of financial advice may be long-term is dramatically weakened when one consider the other occupations to which such an argument can be levelled—barristers, solicitors, doctors, dentists, politicians, regulators, civil engineers, architects, builders, etc.

SUMMARY

  The previous Financial Services Act has impacted greatly on the industry's ability to interact with consumers and it is no surprise that the savings and protection gaps widen further each year.

  The future of financial services regulation within a new financial services act cannot be glossed over as an afterthought nor can it be left to the FSA or the new CPMA to decide what is best. Their history of over-regulation has shown an intrinsic inability to understand the adviser-client relationship and an unerring ability to distort the market to the consumers ultimate disadvantage.

October 2010





 
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