Written evidence submitted by Highclere
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
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
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
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
||IFA complaints|| 2.0%
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.
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
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
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.
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
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
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!
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
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 levelledbarristers, solicitors, doctors, dentists,
politicians, regulators, civil engineers, architects, builders,
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
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