Financial Conduct Authority - Treasury Contents


Written evidence submitted by Simon Webster, Facts and Figures: Chartered Financial Planners

MACRO

Historic

Financial Services became regulated in 1988; since then the UK has lost c 400,000 life and pensions financial services jobs; including the destruction of many major financial services businesses such as The Prudential who used to have c 1,000 agents on the road and Sun Life of Canada who had another 1,000—a company I personally worked-for for 12 years.

SLOC still makes money in N. America and the far East but it cannot make money in the UK because the regulatory costs are so high. The question for those who establish the regulatory framework is: "is this a price worth paying for a well regulated UK system?" It might be if regulation had actually worked; but in the words of one of the early RDR discussion papers "20 years of regulation have not brought about the desired results".

We now have RDR but we have already made the UK so regulated that few can afford to do business here. It also means that there are 400,000 less people involved in providing financial advice and helping people save money and protect their families. Clearly some were poor and effective regulation was required; but we have not had it and the attrition rate has been excessive.

Only recently Barclays pulled the plug on its K FS arm because it could not make any money out of it—due primarily to regulatory costs. While on one level few will shed tears over a bank in trouble, their captive client base should have given them an unassailable position but they could not make any money, so the UK loses yet more distribution.

It is worth underlining that those who do not by life and health insurance from the private sector will ultimately claim in the state at taxpayer expense.

Current

RDR demands higher qualifications this is no doubt a good thing but there are financial advisers with unblemished 20 plus years career who are being forced to go back to school and take complex exams. The absence of any grandfathering has put a huge and unnecessary cost on industry practitioners. In addition the FSA now requires advisers to be issued with a statement of professional standing annually. Another huge paper chase for what value? Those authorised to issue such certificates will doubtless make money.

The exact cost of qualification is hard to quantify (I had mine 10 years ago) but two or three months of exam study at say £150 per hour £6,000 plus the cost of the exams and study material, say £1,500 plus any courses another £500.

The cost of annual accreditation is as yet unknown as the requirements of those issuing the certificates are as yet unknown—but another couple of hours to collate the support data undoubtedly required so say £400 plus the certificate cost itself…

Capital Adequacy: The FSA has delayed the doubling of its capital adequacy requirements which means that firms have another couple of years to double the amount of dead money they are required to keep on their balance sheets. But there is an express cost to this one £10,000 in addition to the £10,000 we are already required to keep on deposit. The FSA claim that this proves that firms have enough money to meet their obligations. But it is a circular argument. If a firm uses the money to meet its obligations it is in breach. So it just becomes dead money. No other profession in the country has this ludicrous requirement. £10,000 plus another £10,000.

Liability

Caveat emptor has disappeared in financial services. If a client loses money their first thought is how can I get it back and the FSA has spawned a huge compensation culture where honest financial advisers are regularly having claims upheld against them on very tenuous grounds., Advisers also have open ended liability with no long stop… The excess on a claim is usually £5,000, but the cost of annual PI premiums is far higher than it should be due to the open ended nature of the liability.

MICRO LEVEL COSTS

In 1988 FS was straight forward—adviser were either tied agents or independent. The law of agency was clear: tied agents worked for their employers, typically banks or life companies, while independents worked on behalf of their clients. At the last rule rewrite c 2002—multi-tied advisers were introduced, they were neither one thing nor the other, although most multi-tied agents have consistently masqueraded themselves as independent—something the regulator has not done anything about, perhaps until now.

Now they want advisers to be independent or "restricted" so we are back to where we started but there remains, even at this late stage, considerable confusion in the profession about what is actually required of an independent firm. We now have a only year to decide how we are to trade, but we still do not know the rules. Of course for nearly 20 years we have proudly proclaimed ourselves as independent—it is the one thing most customers seem to want. But I am still not certain of the specific requirements and they have changed several times in the last 24 months.

I have personally attended three and a half days of training on this one issue alone in the last two months. I charge £200 per hour so the cost to my firm is 3.5 times eight times 200 which equals £5,600. It might all be worthwhile if I now knew the answer—but I don't. I attended one 3rd party course with other advisers who had also been to FSA RDR road shows where it became clear that different FSA teams were putting out conflicting information on this vital issue.

THE PLATFORM DEBATE

The FSA has determined that consumers should know the precise cost of every aspect of any financial transaction in cash terms. Like much of the what the FSA comes up with it sounds great in theory. But when people buy a car they do not know who much the engine or the seats cost individually—they just know that the car costs say £15,000. The FSA wants costs broken down to the nth degree. The cost of the paperwork to present this information is onerous in the extreme. The amount of paperwork the public is expected to read is excessive (often over 50 sides of A4 paper for a single transaction) and when there is a complaint the common client answer is: "I signed what I was asked to sign—but I did not understand it." In these circumstances FOS often deems the adviser liable.

Instead of an adviser being able to suggest invest your money with XYZ and the total cost will be x% per annum. The FSA wants advisers to break down the cost of advice, the cost of the platform, the cost of individual funds, dealing charges & stamp duty costs then add back the value of any rebate. In theory this is not a problem, but because the same funds are sold through many different outlets the fund management houses risk having to create whole rafts of different versions of the same fund with a different underlying charge (and therefore different performance) instead of having one fund and offering different rebates.

This is a subtle point but the cost ramifications are potentially exorbitant. So much so that when the FSA finally realised the scale of the problem it postponed making its rules in this vital area until after RDR implementation. So now as a firm we are not sure to best structure ourselves for the best. It is actually a farce. The cost to the fund management industry of these changes is incalculable but will run into many millions. There is also a huge cost to our firm alone which will run into thousands.

ADVISER REMUNERATION

The FSA has determined that commission on investment business is bad because they say advisers are churning (rewriting) existing client plans to generate more income. The FSA commissioned research in this area which proved the contrary; but the FSA pressed ahead with a commission ban anyway. Instead of limiting the maximum commission that could be paid (which was deemed anti-competitive) we now have a move to what is being termed "adviser charging". Laughably this can be a percentage of the sum invested and can be taken from the product so in many minds it is still commission. BUT there are two huge unintended consequences of this route:

—  There will be no commission on regular savings plans; so if someone comes into my office for advice on his £250 per month personal pension I have to charge him £500 up front to cover my costs. But it is generally accepted that most will not pay. Perhaps the FSA hopes people will deal online without advice (but where, as I understand it, commission can be paid). Consider the "success" of workplace stakeholder pensions—over 90% have zero contributions. Conversely individual stakeholder plans have a capped charge of 1.5% per annum and commission could be paid to advisers, while the no advice, and supposedly cheap NEST plan has a 1.8% contribution charge and a 0.3% AMC—which equates to a 1.5% per annum AMC. In other words commission based advice is available under present rules—effectively free. It's not, because zero commission stakeholders are available with a sub 1% AMC. But the question then becomes is advice and the motivation to invest worth 0.5% per annum-surely it is?

—  In addition one bi product of adviser charging is that those clients with investment bonds in receipt of on-going advice will have to fund that advice from their 5% annual withdrawal allowance rather than from the product so those who qualify for age allowance are now being disadvantaged.

Every advice firm in the UK is having to rejig its business model to comply with adviser charging. Commission is being banned to solve a problem that does not exist at a huge cost to every advice firm—we have spent literally weeks on this—at least £30,000 worth of time. But the future of our business (and every other advice firm in the UK) is at stake.

At manufacturer level every product provider in the UK is having to rewrite their software yet again at the behest of the latest FSA whim. Let us not forget this is not the first "play" they have had with adviser remuneration: first they introduced mandatory c 8 page illustrations; then they mandated hard disclosure of commission and now this; and each change requires yet more hugely costly IT work from every product provider in the UK.

C 4 years ago when RDR was first floated and the FSA's interest in abolishing commission on investment business became known they were warned that EU rules (now crystallised as MIFID 2) might have a serious impact here. Nevertheless they were determined to proceed. We are about to enter RDR and only a month or so ago the MIFID rules, which are potentially binding on the UK were published and they are totally at odds with what the FSA is trying to achieve. So this area is again a mass of confusion. All at huge cost.

October 2011



 
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Prepared 13 January 2012