One of the things I like to bang on about in speeches and whatnot is that retail financial services is the UK’s most heavily regulated industry outside of the supply of recreational pharmaceuticals. I have no idea if this is true; it’s more of a desperate ruse to raise a smile and gain a little warmth from an otherwise flinty audience.
True or not, though, it’s undeniable that the weight - or perceived weight - of regulation is an omnipresent factor for those tasked with designing new stuff for advisers and clients. Fear of regulatory intervention is the equivalent of the cilice (a spiky metal chain) which the mad albino monk dude in The Da Vinci Code wears around his thigh. It’s there to remind us; to stop us doing things we might otherwise do.
Fear of regulation
In the case of the big bald monk guy, this presumably stops him coveting his neighbour’s ass or whatever, and that’s fine. But in our industry, fear of regulatory intervention stifles innovation both at product design stage, and when it’s time to think about how to use technology to carry propositions to their intended audience.
The stifling of innovation was a theme of the FCA’s recent Thematic Review and Guidance Consultation papers (TR14/10 and GC14/03). Both papers are well worth a read if you are in the business of providing information to customers of financial services in any way. And if you’re not, this is probably the wrong publication.
We’ll dive into both in a moment, but this point about innovation being strangled by regulation bears a bit of further examination.
In TR14/10, the FCA says, a little plaintively:
“However, it was clear that uncertainty on the boundary between sales that involve personal recommendations and those that do not was having a significant influence on the design of some firms’ customer interfaces. Within these firms we were concerned that uncertainty regarding the application of the regulatory framework (or an overly cautious interpretation of how it applied) had led them to exclude information and/or tools that were likely to support customer decision-making or help reduce the impact of common behavioural biases (and thereby prompt better decisions).”
Now, we’re talking here specifically about designing services which don’t involve personal financial advice, but the point is that regulatory fear is a brake on product development and innovation in our market.
Shifting over to GC14/03, because we can, we find a much longer document which allows the FCA to expand further on the issue:
“We are aware from feedback we have received from both customers and the industry that a lack of clarity may be inhibiting the development of different investment sales models. This may restrict engagement by customer with investments. We therefore believe that it is important to deliver greater clarity on the concepts of ‘regulated advice’, ‘generic advice’, and ‘personal recommendation’.”
I’ll say.
Strong base
The thing is, when you’re designing a new proposition, whether you’re an adviser, a platform, a biscuit maker or a chemist engaged in the manufacture of recreational pharmaceuticals, you need to start from a strong base. Part of that is understanding your target market, understanding how to access them and understanding the commercial model that goes with all this.
In the most interesting parts of retail financial services at the moment - which I’d argue are all about automated, simplified and non-advice models (whether delivered through an adviser as part of the dreaded B2B2C alphabet soup or direct from a provider) - there is a genuine fear that big technology spends will all be in vain. The nature of our regulatory environment is risk-based and principles-based; the regulator sets principles and then gets interested in areas where they believe there may be naughtiness or devilment.
In a way that’s positive, but the flipside is that it’s always been very difficult to get a straight answer as to whether something’s compliant. I remember asking a FSA wallah one time whether a certain drawdown whatchamacallit thingummybobber I was working on somewhere would cut the mustard, and his response was that he wouldn’t tell us; we had to satisfy ourselves, do it, launch it, wait for them to come and look at it, and then if it was deficient in any way we’d get our asses handed to us in the manner of a half-strength Brazilian football team facing a brutally efficient German regulatory onslaught.
No light at the end of the tunnel
Needless to say, what we were doing never saw the light of day. The spend to build something is just too big these days if you can’t get certainty.
To try to help companies Innovate, the FCA has launched a new Project. It is called, er, Project Innovate, plain English really meaning something round Canary Wharf way these days.
Innovate aims to help companies do something different and smooth the path by providing enlightened (ish) regulatory insight to incubator or more established businesses as they try to bring new models to market. Cynics might point out that the advice gap these propositions seek to plug was also caused by regulation, but who likes a cynic?
Anyway, Innovate is worth reading up on as well, whether or not you’re planning to build anything, because it will give you a sense of where things might be going.
All this is really an extended moan about platforms and adviser tech, most of which is extremely ordinary, especially platforms. We just aren’t seeing much in the way of exciting developments for advisers - a basic cut of an advised platform boshed out as a B2B2C offering doesn’t cut anyone’s mustard really.
Which is why I was intrigued to see a new offering from Parmenion the other week. It’s an automated, simplified advice system which Parmenion calls Interact. The idea is that advisers using Parmenion (which is a discretionary investment platform) with an element of their client base for whom it’s overkill, can use Interact to get the benefit of having asset consolidation, but on a simplified advice basis.
The tool uses the same back end (fnarr, oops, sorry, haven’t got my cilice on) as Parmenion but is radically different at the front end. Parmenion reckons a client can go through it all in about 10 minutes. It’s limited in terms of tax wrappers at the moment, but more will come in time.
I was lucky enough to get a demo of the system, and was impressed with what I saw. Clients start with a proprietary nine-question risk appetite test, and a speedo with nice animation gives you a number from 1 to 10. This leads investors to a series of interactive graphs which allow them to play with their risk grade and view the impact on the potential probability of achieving their goal. Once playing is complete, there is a seven-question test to gauge capacity for loss.
From all this, Interact then generates a proposed risk grade, which may well vary from the client’s own perception. Depending on adviser preference, Interact can allow an insistent client to overcode his or her risk, but at that point the Interact tool will kick them out and they’ll need an adviser to sign this off before they can proceed.
From there it’s portfolio generation, charge disclosure (which is very well handled in our view), and then a CTA (call to action) page - continue, save or download.
Now, one thing you won’t have seen so far is any mention of personal details. It’s only at this stage that Interact starts wanting these. You can play as much as you like before this point and be totally anonymous, inasmuch as you ever are on the interwebs.
And then it’s investment proposal reports, next steps, disclosure and getting going. The UI is very nice, not flashy but functional, and overall I was impressed.
In a market where innovation counts as capping charges, it’s refreshing to see someone trying to take on the simplified advice challenge. We’ve also seen automated / algorithmic advice efforts from Money on Toast and Wealth Wizards among others. Are any of these the answer or the finished article? No. But we may see parts of the answer in them.
Interact is an interesting tool, but the most interesting thing about it is when it asks investors to get serious - right at the end. No marketing capture (these are adviser clients after all, just uneconomic ones), no grudgingness in allowing investors to play.
Dreadlock holiday
My hope is that the quite stark guidance in GC14/3 (and you’ll have to go read it, I deliberately haven’t given you a primer here) and the potential support of Innovate will help break some of the deadlock. We need some new stuff to look at; stuff that isn’t rooted pre-RDR, in a world where it was direct vs advised and never the twain should meet. I don’t think we’ll lose much or any regulation, but if we can get to a culture of positive engagement rather than the financial services equivalent of cooking crystal meth in our pants in an RV in the desert, that’ll be a win in itself.
Mark Polson is principal of platform and specialist consultancy the lang cat
