The row over the Keydata liability claims looks set to expose one of the weaknesses in the present regulatory paradigm – the regulation of products.
We have long compared retail financial products to medicines: some have a very low regulatory overview, such as the average cough syrup and aspirins, and can be bought in corner shops and supermarkets; others have tighter controls and the person on the check-out desk must ask pertinent questions such as if the purchase is on your own behalf and are you on any other medication; and others must be prescribed by a regulated person, ie a family doctor.
The oversight goes right up to the trials of new medicines and to NICE, the supervisory body that makes life or death decisions about our access to these high-cost medicines.
With retail financial products, the drill is more or less the same, with the only difference being the City regulator’s reluctance to introduce an official policy of pre-sale regulation of products.
The simple reason for this is the FSA’s fear that to regulate products in any shape or form will implicitly be underwriting any future liabilities, such as non-performance.
As things stand, the regulator would rather use hindsight to penalise financial advisers, while allowing the product manufacturers with their high-powered actuaries, to escape free of blame.
Now we have a situation in which small IFA firms, doing their best to meet the year-end retail distribution review requirements, are threatened with their very existence because of a clumsy Financial Services Compensation Scheme demand over liability cover. This is clearly an issue for the Treasury select committee, and even for written questions to the chancellor.
The FSA and its satellite organisations cannot be allowed to make up the rules as they go along.
Cometh the hour
Lord Neuberger, the Master of the Rolls, one of our cleverest post-war judges, has now come out against the myth that the method of remuneration makes a person a professional.
The learned judge has hit out at the hourly rates paid to solicitors since, he suggested, it simply rewards inefficiency. Of course, he was too polite to say and dishonesty.
Billing clerks often find creative ways of bumping up the firms’ earnings – back to the old bonus culture – and this often has nothing to do with the actual service delivered to the client. The form of remuneration does not replace sound ethical behaviour, which is why Financial Adviser is playing a central role in the Question of Trust campaign.
As the Master of the Rolls pointed out, businesses that base their remuneration simply on hourly billing do not deserve to succeed, even survive.
Are we now going to revisit the old, tired debate of fees versus commission?