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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