Advice and products sometimes fail and compensation is necessary. But is there a better way to fund for this failure than the current model?
Certainly, there seems to be an urgent need to find a better way to fund consumer compensation for ‘inappropriate (bad) or unsuitable advice’ and/or failure of product.
But if this is not found, the only way to get access to advice will become so expensive only the very rich will be able to seek it out.
This would create further problems to those provider firms who rely almost totally on intermediated distribution. So what might be a better way?
As I see it, regulation and the so-called 'compensation culture', based on consumer expectations, fraud and entitlements has presented the financial services industry as providing an opportunity for limitless cash calls. There are some consumers always seeking to claim compensation - some of whom one may argue should take some responsibility for their own actions.
Be that as it may, financial products are predominately ‘purchased’ as a result of an adviser recommendation. Pretty much all life, pension and investment product providers rely on third parties to distribute what they manufacture and that third party is the adviser community, whether tied, restricted or whole of market. And this distribution method became predominantly fee-based on 31st December 2012.
Many argued this date - the date on which the Retail Distribution Review came into effect - spelled the end of mass-market access to financial advice and the beginning of a more professional era where, if you could not pay, or were not deemed financially worthy, you would end up segmented and perhaps end up with little or no advice at all.
Since then, any blame for any advice or recommendation at all has been laid at the advisers' door. In some cases, the blame may be correctly placed, but adviser firms are not always financially well-resourced to compensate, thanks to the Financial Services Compensation Scheme levy, rising Professional Indemnity insurance and a smaller pool of firms still left standing.
Poorly, yet still compliantly capital adequate firms often collapse after a big call of money from the FSCS. Even a single successful complaint could lead to unaffordable compensation payments.
Smaller IFA firms often do not use limited liability protection options, instead using their personal assets to satisfy capital adequacy. And even for many established firms adequate, affordable and operationally functional PI to ride out a bad advice claim award is difficult to get because of a restricted pool of insurers and a slew of claims for unregulated products being distributed by a regulated entity.
As PI cover is arranged a year at a time, any claim or notification of a claim in the current year could mean 'curtains' at renewal in the next year. And no PI equals no business.