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Other People’s Money

We all know that central and local government, as well as all the useless quangos that orbit them, spend money like lottery winners in Vegas. We’ve also seen the greed of many MP’s abusing the expenses system and taking liberties.

Now check out the FSA. Funded by those it abuses it has a £400m plus war chest which it distributes as it wishes on paintings and statues, three-figure taxi fares, 5 Star hotel junkets and lavish entertainment. It has a blank cheque which underwrites all this exravagance and each year those poor souls who subject themselves to its jurisdiction must append their signatures to it.

Not content with this annual binge (£800,000 to Hector Sants) it is forging ahead with a commercial experiment called the Retail Distribution Review (RDR) which will cause misery and dismay to a large proportion of the populationand cause the loss of upwards of 20,000 financial services jobs. Guess what? These social scientists have presented us with the bill for that as well.

Here’s the tally thus far

Estimated one-off cost to the industry £750,000,000
Annual cost to the industry……………£205,000,000
Cost thus far to the FSA……………….£ . 5,174,000
Projected cost to the FSA……………..£ . 4,805,000
……………………………………………£964,979,000

As the financial services industry signs the FSA cheques this means that by 2019 the cost will be a staggering £1,775,964,969.

This is almost two billion pounds!

They are all-powerful. They are unaccountable to Parliament or any other body. They are corrupt.

War Was Declared

Back in 2006 the FSA kick-started the Retail Distribution Review. This rather bland sounding title betrayed the reality that here was an agenda designed to rid the advice market of those irritating middle-men known as IFAs.

Little did we or the media know that the almost genteel consultation process would herald the start of a focused attempt by the regime at Canary Wharf to destroy the entire infrastructure of UK plc’s financial services sector.

In effect, it was a declaration of war.

Much like the Austrian Corporal, the FSA danced around the edges of its intentions and played the consumer card for all it was worth. Consultations were employed to give the impression that they listened. Meetings were held to apply a verbal balm to the wounds opened by the various policy statements. Warnings were given but they were not heeded, the FSA was not for turning even though four of the board members voted to derail the experiment.

The Treasury Select Committee was so concerned that Hector Sants and Sheila Nicol were dragged before it to answer questions. Rather than show up the RDR as callous and ill-thought out nonsense it served to highlight the reality that the FSA is totally unaccountable and cannot be stopped by anything other than legislation or a few bullets.

We now learn that not content with removing the commission option – that has suited both consumers and firms – they are intent on dismantling the trail commission revenue streams that advisers have relied on to build value in their businesses – in other words, their pensions.

The country is sinking, consumers finances eroding, property values falling, banks continue mis-selling yet the FSA fails to apply itself to real matters, instead it takes aim at an illusory problem where it can claim an equally illusory victory to justify its existence and a continuation of the enormous expenditure that the consumer ultimately pays for.

To paraphrase Oscar Wilde, we have the unaccountable in full pursuit of the inaudible.

I Bet You Didn’t Know That…

We constantly hear about evil product peddling advisers, fat commissions, endemic mis-selling and it seems that barely a week goes by without somebody or other conjecturing on the new scandal about to befall the industry.

What we seldom hear or read about are the areas where regulation has not only failed advisers and consumers but has actually created or exacerbated the scandal they point at.

Consider endowment mortgage plans. These are now vilified and totally discredited. All the mainstream insurers have ceased marketing them and hundreds of thousands of consumers have encashed them and many more have attempted to gain compensation via a mis-selling complaint.

Why has this happened? Well, there are many reasons but consider just four of them.

a) The impact of Lautro charges
b) The reduction to growth rate assumptions
c) Insurers devious projection calculations
d) The FSA ‘real accountancy’ rule

Back in 1988 a regulatory body called LAUTRO (Life and Unit Trust Regulatory Organisation) – which later morphed into the PIA and then into the FSA – decided that all endowment and pension providers had to use fictitious charges when projecting future growth and maturity figures. The figures they mandated were far lower than most companies charged, as a result all of the plans were off course from the outset. Standard Life wrote advising that one of their plans required 8.4% annual growth even though it had been set up on the more reasonable assumption of 7.5% annual growth!

The FSA eventually looked into the matter and decided that a number of providers (19 or 31, nobody is saying) breached their contractual obligations by using the fictional charges to set their premium levels. This breached LAUTRO rules and caused thousands, possibly hundreds of thousands, of policies to miss their targets. The FSA refuses to confirm which offices were responsible and to our knowledge has not fined any of them. More importantly, this episode has caused many advisers to receive complaints and lose clients. As the Ombudsman process used the surrender value to calculate redress it means that advisers have been penalised twice – once in that the shortfall created the complaint and, secondly, that the shortfall then caused or increased any compensation due.

The majority of mortgage endowments were sold in the late 1980s and early 1990s. Back then the industry used 5%, 7.5% and 10% as the standard growth porjections and quotation systems defaulted to the middle figure of 7.5%. This did not seem unreasonable as these plans were yielding well over 12% p.a. So, from 1988 to December 1994 these plans were generally set up to hit the mortgage target if 7.5% growth was achieved. In January 1995 the annual growth assumptions for new business were lowered to 4%, 6% and 8% and this was not unreasonable however this then meant that when existing endowment plans were reviewed using the lower growth rates they appeared to be off-target! A plan set up to hit the target if 7.5% growth was achieved and actually achieving this was deemed off-target because it wasn’t hitting the new 6% target.

The regulator was made aware of this mismatch but found it convenient to use the re-projection exercise as a method of beraying the industry and calculating compensation even whwen it was not due. The associated publicity also convinced many policyholders to encash their plans on the false assumption that they were off-target. It also created a whirlwind of complaints, egged on by the popular press and the antics of claims management companies who correctly anticipated a windfall coming their way.

Consumers Battered By RDR Experiment

Independent Financial Advisers have been arguing since 2007 that the RDR would not benefit consumers.

The FSA and some strange individuals and vested interest groups have contended otherwise.

We now see the reality with the admission by HSBC that up to 700 jobs could be lost as it rearranges its advisory business to fit in with the RDR experiment. This is on top of Barclays Bank closing its sales force and limiting advice to the high net worth.

Mark Hoban at the Treasury and Parliament look on as the FSA imposes its theories on an unsuspecting public. Even if Hoban disagreed with the FSA he could do nothing about it as they are unaccountable to anybody as Hector Sants glibly explained to the Treasury Select Committee.

x 30%-50% of advisers leaving the industry
x Thousands giving up their independent status
x Barclays no longer offering financial services to the non wealthy
As with most experiments, where the mice and gerbils are killed or permanently damaged by the experimentors, the outcomes will be anything but pleasant.