Consumers 0 – 1 Financial Services Industry (FT)

If you had the faintest hope that the banking crisis might be a catalyst for a new style of respectful conversation between the financial services industry and the consumers of its products and services, then it’s likely they’ve been dashed.

Because, last Thursday, the UK’s City watchdog – the Financial Services Authority (FSA) – published a proposed set of new rules that will determine how you are able to purchase investment products from 1 January 2013. (So if you have an ISA or a personal pension or investment bonds etc., this affects you.)

Its the result of the FSA’s Retail Distribution Review (RDR), which set out to create clarity for consumers about how you could obtain advice about financial products, who you could obtain that advice from and how that advice could be paid for. The big idea was to distinguish the value of advice, where advice is offered, from the cost of buying a product.

That’s because, in the UK, where advice is associated with the purchase of a product, a large majority of financial advisers receive their fee for that advice through commission payable on the sale of the product. (Although advice paid for by fees, rather than commission, is slowly growing among a minority of advice practices.)

The FSA’s assertion has been that, the higher the commission payable for the sale of a particular product, the higher the likelihood that that product will be sold. In other words, a financial adviser will sell more of the products that earn them more money.

(It’s an assertion that is hotly disputed within the industry, by the way).

I’ll deal with the commission issue in a post later this week; in the meantime, Friday’s Independent carried a comment piece by David Prosser that sets outs the issues in a succinctly articulate way.

Communicating clearly

Editorially, most media outlets seem to be focusing on this commission debate. It’s important, but I don’t think it’s the big issue that the FSA has so spectacularly failed to address.

Rather, I’d suggest that RDR delivers the kind of retail financial service industry that today’s industry is willing to deliver, and not one that UK consumers deserve.

So the outcome of three years of consultation and debate is a conclusion about what today’s industry could do, and not what tomorrow’s should do; its about the industry and not about consumers.

To illustrate, I’ll start with the issue of clarity of choice for consumers.

Unfair, unclear and misleading

Whereas, today, you are either sold a product, recommended a product under advice, or simply choose to buy-it-yourself by phone, by post or online, in future someone simply selling you a choice of one product will be able to claim it’s an advised sale.

That’s because there will be four flavours of advice

  1. Independent – ‘I’ve searched the whole market and here are a few products that I think suit you based on all the conversations we’ve had.’
  2. Restricted – ‘Here’s a couple of products available from a few brands that I think would suit you based on the conversations we’ve had’
  3. Simplified – ‘Here’s a product that I think would suit you but it’s the only product I sell.’
  4. Basic – ‘Here’s the only product I sell. It does this. Do you want to buy it?’

There’s no question in my mind that only 1 and 2 (above) represent anything that could reasonably be described as advice. Numbers 3 and 4 are simply a way of selling you a single product. But guess who’s likely to sell products in the highest volume to consumers using methods 3 and 4? Banks and big financial product providers’ direct sales teams.

Who’s profession is it anyway?

One of the few positive aspects to emerge from the proposed rules is the establishment of minimum standards of professional qualification for advice, with one possible and one definite exception. On the list above, the Simplified adviser (3) may be required to achieve minimum professional qualifications (the FSA hasn’t decided yet) and the Basic adviser (4) will not be required to obtain minimum professional qualifications at all.

But guess who’s likely to sell products in the highest volume to consumers using methods 3 and 4? Banks and big financial product providers’ direct sales teams.

So the banks’ retail outlets and financial product providers’ direct sales operations will be able to hold out sales as advice, and the people ‘advising’ (sic.) will probably not require minimum professional qualifications to sell the product to you. They will be employed to sell and not to help buyers buy.

Why its matters

Let me be clear here: I don’t have a problem at all with banks and big financial product providers selling anything. What I have a problem with is the risk of misselling because the motivation of the person I’m purchasing from is not clear.

So, as a consumer I’d rather engage with an industry that helps me buy. And I would suggest the industry has an enormous amount to gain by helping more and more buyers buy.

The issue of motivation is important. Take a look at the most recent information, published by the Financial Ombudman Service (FOS), detailing consumer complaints against financial services organisations.

Who consistently attracts a double-digit percentage proportion of all complaints, more often than not topping the table?

If the motive driving the sales of products was based on helping buyers buy, wouldn’t the level of complaints be more evenly spread? Or is that too simplistic?

In any event, it’s no wonder that the British Bankers Association (BBA), for instance, has welcomed the outcome, whilst applying the Sir Humphrey Appleby rule of ‘deal with the difficult bit in the title’ (in this case the ironic ‘FSA must not fail consumers’). Google the Association of British Insurers (ABI) and RDR, and I bet you’ll spot the similarity.

It’s also why the Association of Independent Financial Advisers (AIFA) – which has broadly welcomed the new rules – have gone on the record to call for common minimum professional standards across the board.

I’m alright Jack

The fact that many participants in the industry appear broadly happy with the RDR outcome – although small business owners like most Independent Financial Advisers will be disproportionately affected by it – suggests that this was the equivalent of a Cabinet reshuffle and not a change of Government.

Yet, in the light of the banking crisis and nose-diving consumer confidence, wasn’t it a change of Government that was required?

These new rules are unlikely to make the slightest difference to either the way in which consumers can confidently engage with the financial services industry, or encourage more consumer engagement.

Along the way people immersed in discussion of reform seem to have forgotten what it was about: The FSA think its all about regulating participants in the industry so is intent on reaching a conclusion that enables it to regulate, and the big industry institutions think it’s all about ensuring they don’t cede profitable market share so is intent on reaching a conclusion that enables it to profit.

So we end up in a position where someone can sell you a product in a bank or via a big product provider, using the label of ‘advice’, without requiring a minimum level of professional qualification that lets you know they understand what they’re selling you in the first place.

Why not just be clear? Consumers don’t mind being sold things because it happens every day of the week.They don’t mind seeking advice if they feel they need to because some purchases warrant comparison and help. Consumers don’t mind that businesses have to make money. Why is it so difficult to say:

  1. Advice – ‘I’ve searched the whole market and here are a few products that I think suit you based on all the conversations we’ve had.’
  2. Sales information – ‘I’m not qualified to advise whether it suits you, but here’s a product I can sell you. It’s does this.’
  3. DIY Purchase – ‘I’m unable to advise whether it suits you, but here’s a product or choice of products you can buy from me. They do this.’

The distinct difference with the statements above is the ability of the person assisting the purchase or sale. It’s about the expertise to offer advice about a sale or purchase and not about the product.

Under the FSA’s proposal, only statements 2 and 3 could conceivably be applied to Simplified and Basic advice, so surely drawing consumers into a conversation with the single intent of a sale as though it stands for something else heightens the risk of misselling? Isn’t that the art of the confidence trickster? And isn’t confidence in the ethical integrity of the financial services industry the biggest single challenge facing its participants today?

A process that, at times during the three-year debate, seemed to be a principled consideration of reform that would give consumers confidence about the way products could be bought and sold in the UK has descended into a game of self-preservation.

But here was a once-in-a-lifetime opportunity to collaboratively craft a way in which more and more consumers could positively address their lifelong financial wellbeing.

Rarely will you see a more comprehensive compromise of vested interests and self-indulgent regulatory experimentation than this.

One thought on “Consumers 0 – 1 Financial Services Industry (FT)

  1. Hi Ian

    To a large extent I agree with you. I applaud the FSA for not watering down the minimum qualification levels and for re-introducing polarisation, to a certain extent. But I do think that having simplified and basic advice muddies the waters unnecessarily; I’d like to see simple distinctions along the lines you propose.

    I think you slightly over-simplify your ‘four flavours’ of advice. Simplified advisers will still have to call themselves ‘restricted advisers’ making simplified advice more of a subset of restricted advice rather than a stream of its own. Simplified advisers will also have to comply with the adviser charging rules, meaning that costs for advice will have to be agreed up front with a client and the client given the option to pay by cheque/direct debit or have the costs added cleanly to a product.

    Make no mistake this is a sea change in the way banks operate. Currently, they never charge fees and their products are usually highly loaded with all commission payable up front. In future, the contract will have to be ‘clean’ (contain no adviser remuneration) because the client will be able to set the remuneration levels. If the adviser wants to charge £300 for setting up an investment and the client only wants to pay £200, the simplified adviser will either have to reject the business or compromise with the client. Right now, getting the business is the only objective because the bank knows what it is going to earn. In future, it will have to work out a minimum profitable cost for doing a piece of business and if the client doesnt want to pay it, it will have to reject the business.

    This really does mean the end of cosy 7% commissions on investment bonds, with the client thinking they are getting the advice for free.

    I’m sure the banks, due to their massive buying power will make a business case for continuing to sell products to people. This is good. As long as the clients are setting the remuneration agenda, they can still get much needed protection, investment and retirement planning products from their bank. Yes, they will almost certainly get superior advice from an IFA, as the FOS stats suggest. Yes they will probably have to pay more that superior advice which will price some people out of the market for independent advice.

    The biggest issue with the banks is that they havent yet worked out that people dont want to be sold to. They want, according to plenty of recent surveys, a relationship with a trusted adviser who can steer them through the maze of choices they face. Let’s face it I can get any product I want through a bit of research on the internet, and so can most consumers, but many of them will be bewildered by the choice and seek advice to help them. I have never yet met anyone who expects this service for free. The new rules will mean that this advice can no longer be given ‘for free’ by selling a policy.

    I believe that most of the ills in the financial services industry are caused by commission. The FSA has abolished commission. This is a good thing.

    The RDR is not perfect by any means, but it is a lot better than it could have been. It will get rid of unscrupulous advisers who just want to sell policies to people. It will mean the banks have to change much of the way they work, to the benefit of the customer. And by offering the ability for adviser charges to be added CLEANLY to a policy or investment, it shouldn’t mean that vast swathes of the population won’t be able to recieve advice. They’ll just realise, finally, that they have to pay for it.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.