“You cannot escape the responsibility of tomorrow by evading it today,” Abraham Lincoln.
In 2002 the FSA was given a unique opportunity to modernise financial advice. David Severn, the then regulator’s head of retail projects, proposed the consultation paper CP121. It laid out the unambiguous objective to oblige independent financial advisers to charge fees for their counsel. Mr Severn believed banning commission payments would reduce the potential for commission bias, make consumers more aware of the cost of advice and facilitate shopping around by consumers.
We might guess that if CP121’s recommendations had been implemented in 2002, consumers would have avoided inadequate standards of advice for more than a decade. In principle, the failure to execute CP121 is a fundamental regulatory blunder. It is entirely conceivable the implementation may have avoided widespread mis-selling of, among others, precipice bonds, long-term care products, equity release and un-regulated collective schemes.
A realistic questioner might enquire as to why CP121 was abandoned and who, as they say, ought one’s digit point at? In my view the answer is quite singular, the trade body – the Association of Professional Financial Advisers (APFA) – is indeed fully culpable.
The ensuing pandemonium from APFA and the wider adviser sphere caused Mr Severn’s proposals to be weakened, resulting in the ‘menu-option’ approach. Of more importance, the notion that IFAs charging fees to instil professionalism and consumer trust was duly abandoned. The FSA itself admitted in 2002, “the menu option was the result of a working party convened by APFA [then the Association of Independet Financial Advisers, AIFA] and IFA promotion, based on an original concept contained in APFAs response to CP121”.
It is public record that Paul Smee, APFA’s director general (1999 to 2004), fought the FSA to avoid CP121. He was also instrumental in the FSA’s decision to cancel the defined payment system proposed, occasioning IFAs to charge fees if they wanted to label themselves independent. After the intervention of APFA, the option menu was adopted by the regulator – a quite preposterous document that baffled any client who chose to scan the firm’s pre-sale literature.
A quite extraordinary meander in this APFA yarn, which instigated the wrath of members, was occasioned by the appointment of Paul Severn, originator of CP121 and former FSA head of retail projects, who became director general of APFA for a short period in 2004 after leaving the FSA.
The appointment lasted four months and Mr Severn was eventually replaced by the judicious Chris Cummings. Mr Severn in 2014 stated, “[Advisers] had all the personality of a dog whelk and I found it difficult to spend a minute in their company, let alone the time which would be needed to deliver full financial advice.” His departure was listed as “health reasons” in 2004. Now 12 years on, we are perhaps presented with a more factual motive for abandoning his comrades.
In 2007, when the FSA began discussions around the RDR (in effect CP121 redux), talk of commission bans and new examination standards were not met with entire contempt from the trade body. The new director general of APFA (and arguably more accommodating), Mr Cummings, did not brawl with the regulator and the general tone was muted with perhaps a few arguments on the cliff-edge approach for new examination standards and inane talk of grandfathering advisers, to avoid new exam standards. The general tone towards the RDR was unenthusiastic, while avoiding outright skirmishes with the regulator. In point of fact, Mr Cummings’ strategy centred on lobbying in Brussels and avoiding the London-based FSA.
APFA’s generally lethargic approach and avoidance to embrace professionalism, drafted via the RDR, caused minor in-fighting. In 2007, Towry Law chief executive officer, Andrew Fisher, condemned APFA, suggesting, “We agree with the RDR and what it is trying to do for the industry, so how can we stay in a group we fundamentally disagree with on the RDR and what they stand for,” and duly rescinded his monetary support for the trade body.
On two occasions, APFA failed to embrace change for the good of consumers. Twice, it simply averted its gaze from its micro-environment and with gusto, followed the selfish needs of the internal market. It must be noted that throughout the late 2000s, Mr Cummings’ prophecy of the adviser gap and the reduction in advisers was quite remarkable. This was especially at a time when most pooh-poohed his assertions. A perfectly reasonable argument ought to suggest why in 2016 any financial adviser would support an organisation that held the unqualified opportunity in 2002 to improve client outcomes by insisting IFAs charge by fee. But then again in 2008 (in discussion around the RDR) still proclaimed that new examination standards should be abandoned for existing advisers or the implementation time period extended.
The industry trade body, the voice of advisers ought to be beyond reproach with professionalism, trust and reliable client outcomes its only objective. We simply cannot expect the government and its regulators to note advisers concerns on – regulatory costs, longstops and regulatory reporting – when the trade body retains a fully documented history in 2002 and again in 2012 of pugnacious behaviour.
Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser
