James ConeySep 9 2020

A roadmap for cutting FSCS costs and restoring industry confidence

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We all know where the shambles over the Financial Services Compensation Scheme levy is going to end up, but the Financial Conduct Authority either seems not to have realised, or just does not care.

So, let’s spell it out. If we continue down the path that we are heading then the financial advice market will be torn apart.

There will be no advice for those who need it the most

We will end up with the majority of the market resting in the hands of a few vertically integrated businesses who have the financial clout to be able to pay the combination of fees and professional indemnity cover needed to run a fully-operational advice business.

In short, there will be no competition. Smaller companies will go out of business or will refocus their activities on a handful of largely uncomplicated high-net-worth clients.

There will be no advice for those who need it the most: the middle income families who have started saving and want to get their retirements on the right track.

Financial advice will be for the few – even more than it is already today – not the many. It will be an activity for the elite.

How to levy fees and charges for financial advice has always been a complicated issue for the industry. The greatest mistake companies ever made was to fight calls to be open about trail commission and to have a proper conversation about the cost of advice.

It was a chance missed to show value.

Instead the industry likes to talk about client outcomes, without really ever being specific about what that means. The result is no one normal understands the advice model.

To win the argument on fees, the first thing advice companies would be wise to do is admit that some mistakes have been made.

For too long, some companies took business from unauthorised introducers without any due diligence.

Others allowed obviously risky investments to be dumped in self-invested personal pensions, thinking again that there would be no comeback.

Everyone in the industry knows the people behind the same schemes that crop up again and again, targeted at those with large pots of savings.

And too many looked on and said nothing when they could see what rogue advice businesses were doing. 

Companies should also make it clear that they are not adverse to picking up some of the tab, but that they want fairness built in to the model.

After all, as I have said before, why are the insurance companies and investment businesses who are still today benefiting from the billions they have acquired through questionable pension transfers, not being asked to shoulder some of the responsibility?

You would think they would care more, given that advisers are their distribution model.

In the doomsday scenario, that would be gone and money will be channelled into a handful of products run by those giant vertically integrated businesses.

Perhaps it would also be wise to welcome greater accountability from company directors and authorised advisers – allowing customers to see details of mis-selling complaints and striking off those who have already walked away from one failed company.

This would instil greater confidence in the industry.

In principle shouldering the burden across a sector is fine, but in practice it places a burden on good businesses that cannot afford the extra costs.

Nowhere else does this model exist. It is like asking every cafe in the country to pay the costs when Patisserie Valerie went bust. We need to take the discussion over the levy forward and focus on what the future may hold for the entire industry.

Margins are slim enough already across many companies, and the volatile nature of the FSCS levy makes it impossible to plan for.

But to begin with, the City watchdog needs to sit up and listen and realise what the future holds.

If it really does believe all households should have access to advice, then it needs to rethink the FSCS levy, and do so today. 

Phoney funds

A moment of clarity while I was cycling to work the other day: if there were proper accountability in investing there would be no need for environmental, social and governance funds.

If fund managers and tracker funds properly engaged with annual meetings and interacted with the savers whose money they were investing, then consumers would be able to properly set out their concerns and companies would act (or not) on it.

It is the lack of accountability that allows the lunacy of ESG funds and their phoney targets to persist.

End ACD roles

One of the reasons we should be thankful for the Woodford scandal is that it highlighted the role of authorised corporate directors across the industry.

These are the real power behind fund managers, but they sit almost unaccountable and anonymously – happily taking fees for doing (it seems) very little.

And when they do get criticism, they do not seem to be able to understand why.

Time for this iniquitous relationship to end.

James Coney is money editor of The Times and The Sunday Times