Light in the FCA tunnel
The FCA was created to encourage best practice and thereby grow each of the financial services sectors under its oversight. By adopting an adversarial position towards its charges, it has achieved the very opposite of the Chancellor’s intentions, nowhere more so than in the personal financial advice sector. The traditional arrangements for financially advising individuals were turned upside down at the start of 2013 by the FCA’s new rules (in fact a continuation of a policy initiated by its predecessor the Financial Services Authority) known as the “Retail Distribution Review” (RDR) in which Independent Financial Advisors (IFAs) could no longer be reimbursed by the providers of the investments selected, but only by the clients themselves. “Trail commissions”, i.e. the annual fees paid to IFAs by their customers over the lifetime of products such as pensions, with-profits bonds and unit trusts were banned on sales of new investment products from April 2014 and will required to be completely phased out by April 2016. So the client must fund the advisory costs wholly up front instead of being able to spread them over the years of benefit. Is there any regulator, in any sector, anywhere in the world who restricts the way customers pay for services?
The IFAs were presumed by the FCA to be providing advice to maximise their own short-term gain rather than in their clients’ best interests. If the FCA regulated independent shoe retailers, where different shoes also have different styles, features and benefits, the customer would have to hand over £30 before the assistant could advise on shoes. The new rules showed that the FCA has no idea of how competitive markets, or IFAs, work. There are thousands of IFAs, all of whom were already required to make full commission disclosure, and investors can, and should, shop around.
An IFA is trained explain their calculations and show the “present value”, using simple enough techniques such as discounted cash flow and factoring risk. It is not quantum physics and if the investor does not understand every detail, it matters not. Present values of investment proposals are no more difficult to compare than house prices.
Sometimes IFAs split commission with their clients to be more competitive. IFAs businesses are built on long client relationships which would be destroyed by diddling their customers.
The clients of IFAs and shoe shops alike resent having suddenly to pay for what had always seemed free and, furthermore, to pay for advice before they had the benefit from it. It is a bit like expecting consumers to pay for groceries in one month and receive them the next. Needless to say, to the extent that IFAs and their advisees were consulted, their opinions were ignored. The FCA knew best.
The FCA torpedoed the market it was supposed to be nurturing. According to Heath Report II which uses the FCA’s own figures, by March 2015 two thirds of the individuals previously seeking financial advice no longer did so: 23 million had dropped to 7 million causing 13,500 IFAs, and about the same number of administrators to lose their jobs. The FCA claimed, with very dubious arithmetic, that the old system cost clients £233 million but their remedy is costing £344 million. And all these losses are before Trail commission is fully phased out.
It is truly extraordinary that HM Treasury should hand older people unlimited access to their pension pots precisely at a time when the FCA has removed the market’s capability to advise them.
But there is light ahead. The head of the FCA has been replaced and, jointly chaired by his successor and a senior HMT civil servant, a new review started work last month which “will consider the current regulatory and legal framework governing the provision of financial advice and guidance to consumers and its effectiveness in ensuring that all consumers have access to the information, advice and guidance necessary to empower them to make effective decisions about their finances.”
Would it not be wonderful if sense prevailed?