Thursday, December 31, 2009

FTAdviser.com - FSA reveals how advisers will be assessed at work

FTAdviser.com - FSA reveals how advisers will be assessed at work: "She said: 'The level of technical understanding and competence required will still be the same. It is just the way it is delivered.
'This is taking account of the fact it may be some years since some advisers have taken exams. It is taking account of the fact it is perfectly possible to show technical competence in a real life environment.'"


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I welcome some flexibility on this but wonder which areas the FSA has identified where there are weaknesses in the "level of technical understanding and competence".

Monday, December 21, 2009

"The Financial Services Authority (FSA) says there will be 'no let-up' in moves to clean up the industry's act following its role in plunging Britain into the worst financial crisis in a generation."


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Until the FSA has an appropriate number of supervisors monitoring banks we will continue to see problems. It was reported that Northern Rock had only six regulators dedicated to the task of supervision, recently I was told that there are as little as SIXTEEN staff allocated to Barclays.

All the while the FSA applies a disproportionate amount of time and money from supposedly limited resources on small firms.

We need regulatory balance, I see none.

Friday, December 18, 2009

Finextra: 'Too complex to thrive' Western banks face uncertain future - IBM study

Finextra: 'Too complex to thrive' Western banks face uncertain future - IBM study: "According to the IBV report, banks can close the 'trust gap' by investing in behavioural analytics to gain a better understanding not only of their clients' perception of value, but also of what they are actually willing to pay a premium for. Instead, too many banks are currently over-reliant on less useful demographic metrics, such as age, health, or stage of life, suggests the research."


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We would have thought that similar research should be carried out by the government through the regulator, this was proposed but rejected. As was a thorough examination of where financial crime is being carried out among insurers and their intermediaries. They were unwilling to pay for the experience which can only be gathered at the 'coalface'. The mindset of regulators is of major concern, recycled regulation is not the way forward. We are sure the regulator is listening at last so perhaps IFAs can be made part of the solution rather than being perceived (we assume) as part of the problem.

Mind the regulatory gaps!

FT.com / UK / Business - Bank calls City’s bluff on regulation

FT.com / UK / Business - Bank calls City’s bluff on regulation: "“Some of the downside of carrying around a big financial system is now evident to all. If some of that were to migrate overseas that would be unfortunate but given the costs of carrying that financial system around, it may be a price worth paying,” he said."


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This is accaepted, however, the 'ingenuity' of the designers of these 'socially useless' operations will find another gap in the regulations whithin which to create the next catastrophe.

Tuesday, December 15, 2009

Evidence that the 'conspiracy theorists' were right?

Evidence that the 'conspiracy theorists' were right?
Here is information about a study of intermediary remuneration - A report prepared for the ABI as long ago as 2005







cherry was recently asked by (and given permission by) an IFA (name supplied) to publish the following which was received by him from the MD of a lobby group.
The entire document is lengthy so if you just prefer to read what have been identified by the supplier as 'the highlights' please read on.
"Most of us are unaware but, back in 2005, the ABI commissioned research by Charles River Associates into the potential for product and provider bias in the marketplace.
Charles River Associates are a leading global consulting firm that offers economic, financial, and business management expertise to major law firms, industries, accounting firms, and governments around the world.
The ABI (shown from their later submission to the FSA) were looking for methods to show how bancassurance could supersede IFA business. This has been part of the ABI and FSA agenda and thereafter developed in the FSA Retail Distribution Review.
Unfortunately for the ABI the research failed to uncover product or provider bias and as a result the ABI buried the research.
Under a FOI request xxxxxxx obtained a copy of the research from the FSA and it makes illuminating reading."
Click here to visit  the forum topic regarding this subject
Click here to view a full copy of the Charles Rivers Research Report
Study of intermediary remuneration - A report for the ABI
Charles River Associates - February 2005

5.  The remuneration of intermediaries for distributing investment products has been a persistent problem for the reputation of the life industry.
Most recently a report by the Treasury Select Committee criticised the nature of remuneration in the saving and investment industry along a number of dimensions arguing:

  • Commission based selling leads to an inevitable conflict of interest, as advisers have an incentive to sell products without proper reference to customers' needs as opposed to providing a less sales focused ongoing
    advice service. Only by moving away from commission based selling can confidence be restored in the industry;



  • Greater comparability between fee based and commission based remuneration needs to be included in the menu proposals in order to enable consumers to compare the alternatives they face; and



  • Trail commissions are inappropriate if the consumer is not receiving ongoing advice. Only those consumers receiving ongoing advice should be paying trail and they should be offered the opportunity to pay for this
    through an annual fee.


 5.  Against this background, Charles River Associates was commissioned by the ABI in order to assess the extent to which:

  • The current remuneration model leads to consumer detriment; and



  • Changes to today's model of remuneration could be implemented that would benefit consumers and lead to increased confidence in the long-term insurance industry. In order to assess these we compare how the current market trends measure up to the critical success factors of different stakeholders, and whether this results in a remuneration system that meets consumer needs. The critical success factors determine what the ideal outcome would look like from the perspective of each of the stakeholders (consumers, intermediaries, product providers and financial regulators).


5.  No evidence of bias being prevalent across the advice market
6.  No evidence of bias to over-sell
6.  No evidence of provider bias on regular premium products
6.  Evidence of limited provider bias in single premium products but this has not got worse over the last three years
6.  Evidence of limited product bias but this has not got worse over the last three years:
6.  Evidence of no relationship between the structure of commission and the consumer's service requirements
8.  We therefore conclude that the problems of perception are greater than the reality - there is no evidence of bias to sell and problems of provider bias will be addressed by the menu.
8.  One of the models tested was a fee based model - we concluded that there was no evidence that artificially moving to such a regime, to the exclusion of commission, would lead to benefits since consumers choosing to pay on a fee basis do not receive better advice than those opting for a commission basis.
8.  The menu will improve the comparability of the fee and commission based regimes compared with today but this in itself is unlikely to increase the fee based market quickly as most consumers, with the exception of the very wealthy, have a preference for paying for advice only when they purchase a product. There is evidence, however, that although most commission based advisers are happy to operate on a fee basis there are some who are reluctant to do this and seek to persuade consumers to pay by commission. This should be monitored by the industry in any future analysis, and examined by the FSA in its early supervision work once depolarisation and the menu have been implemented.
9.  There is currently no link between the structure of commission and the type of relationship requested by the consumer, leading to the accusation that providers are competing for intermediaries rather than for consumers. This reflects the fact that commission is performing a number of different roles each of which are legitimate in their own right but in combination lead to confusion over the role of commission.
These include:

  • Rewarding advisers' "prospecting" activities which, as well as being a distribution service to providers, is the principle means of raising consumers' awareness of the need to address their financial needs and offering them a starting point for doing so. This encouragement and awareness-raising is not only an important source of generic advice, but also important to closing the savings gap;



  • Rewarding advisers for the initial cost of undertaking the advice process and fulfilling the transaction. These costs occur predominantly at the start of the advice process but ongoing commission (renewal and trail) is often perceived as deferred initial payment for this service;



  • Providing an incentive to encourage high levels of persistency and preventing unnecessary churning of consumers' portfolios; and



  • Payment for ongoing services to meet the needs of consumers including the administration of the product, follow-up meeting to discuss the ongoing suitability of the investment, and ongoing surveillance of the market-place.


10.  Certain aspects of market behaviour work to the consumer's benefit. In other areas, the current variability serves the interests only of providers and advisers. We believe that standardisation and simplification in these areas - subject to the agreement of the competition authorities - would serve consumers better than the current market.
24.  Most consumers appear reluctant to pay the full cost of advice at the point at which advice is given - this may be due to a number of reasons. Firstly, consumers may not understand the value of advice. A fee may represent a high upfront cost in comparison to the value the consumer believes they receive. However, evidence suggests relatively few consumers do not go through with a commission based transaction because they have been made aware of the size of the commission.
Secondly, this may reflect consumers being unwilling to agree to an unconditional payment when the quality of the advice is unknown. This may be entirely rational since when consumers first take out advice they may not be able to assess the quality of the advice. Only after the advice has been given and a product has been recommended do consumers feel comfortable in remunerating advisers.
Therefore, consumers typically prefer remuneration structures that are conditional on sale in order that there would be no requirement of payment if there is no purchase of a product. Indeed there is a substantial body of evidence showing a very low willingness to pay fees:

  • IFA Promotion / B-different found that only 11% of consumers were willing to pay fees (with 63% preferring commission and 20% preferring fees with commission offset);



  • AMP found that they thought £100 was a fair figure for the total price of advice;



  • Swiss Re found that less than 2.5% of consumers were prepared to pay more than £75 and less than 1% were prepared to pay more than £100;



  • Continental Research found that 70% of consumers thought that any fee should be less than £70; and



  • The FSA found that consumers were willing to pay an average of around £70 per hour or a total fee of around £130.


25.  There are a number of reasons that have been given by consumers regarding the advantages of commissions compared to fees including:

  • paying a stranger is a leap of faith and therefore it needs to be conditional on the services being provided;



  • fees might put off people who do not know whether they need advice from seeking it in the first place;



  • not everyone can afford to pay upfront fees;



  • advisers will still have arrangements (e.g. bonuses) with some providers i.e. fees would not necessarily eliminate any biases;



  • advisers might not earn enough to encourage them to perform well.


The first of these reasons seems particularly important for new users of financial advice or of a particular financial adviser. In addition, it seems unlikely that the majority of consumers will ever have sufficient information about the quality of advice to be prepared to pay unconditionally for advice at the beginning of an advice relationship.
Further, many consumers are reluctant to pay fees when these are described as hourly rates as they are concerned about the open-ended nature of hourly rates which could lead advisers to take longer over a task than would be necessary
26.  Although obvious, consumers are clearly seeking remuneration models that ensure that they receive high-quality advice from intermediaries. It is clear from the survey evidence that this means consumers are not necessarily looking for the cheapest source of financial advice, but rather one that they can trust and that has adequate knowledge and expertise to understand their needs.
27.  Furthermore, consumers usually see little difference between the impact of bonuses which are paid in tied channels compared to commissions which are usually earned in IFA channels. Indeed, 71% of consumers agree that it is inevitable that any adviser's judgement will be coloured by the commission they receive on products. Nonetheless, 47% of those same consumers also agreed that advisers choose the best products for their customers regardless of the commission they receive.
27.  In addition, it is clear that different consumers are looking for different services from their advisers. Some are seeking a solution to a particular problem at that time (the investment of a an inheritance for example), while others are looking for an ongoing relationship with their adviser. It is reasonable to assume that those wanting advice over time would prefer remuneration regimes that incentivise the appropriate behaviour from their adviser.
Those who seek one-off advice may, rightly, be concerned about the payment for ongoing relationship that they do not desire (not withstanding the general preference to have advice paid for over time)
59.  It is clear from the chart that commission has been falling as a percentage of premiums from a peak of 7.5% in 1988 to a low of 2.9% in 2000. However, the last few years have seen a reversal of this trend as commission has increased to 4% of premiums. The main cause of this has been stagnant premiums while commission jumped by 20% in 2001 as was seen in Figure 12. When considering commission in comparison to other expenses, it has remained a broadly constant proportion over the period.
It is important therefore to see the concerns regarding commission in the context of commission relative to premiums falling over the last fifteen years, suggesting that any detriment driven by commission may fall in importance over time. (Although the last few years have seen a halt to this steady decline, commission rates as a proportion of premiums are still well below their level in the late 1980s.)
60.  There were a number of different tests that were undertaken to assess whether there is a bias to sell, including:

  • comparison of fee based versus commission based IFAs in terms of amount invested; and



  • pressure to buy analysis based on the Mystery Shopping.


61.  However, contrary to the accusations often facing the industry, commission based advisers do not in fact tend to recommend a greater level of investments into equity than do fee based advisers. In fact, the average level of investments recommended are higher for advisers operating on a fee basis than those on a commission basis although there is no statistically significant difference in these numbers.
We conclude from this that there is no evidence of a bias to sell by advisers working on a commission basis compared to those working on a fee basis.
61/62.  As part of the analysis, shoppers were asked whether they felt under pressure to proceed with the recommendation of the adviser. They were asked to rate this on a scale of 1 to 5 in which 1 represented "Under no pressure at all". It is important to recognise that the shoppers are not typical customers of financial advisers in that they knew when undertaking the visit that they would not be pursuing the recommendation. Nonetheless their views are useful in establishing whether there is considered to be a "hard sell" environment.
It is clear that shoppers generally did not feel under pressure to proceed with the recommendations of advisers, and many shoppers indicated that advisers had suggested that they take time to consider the recommendations. Indeed, in less than 3% of all shops did shoppers rank the pressure as 4 and no shopper ranked it as a 5.
66/67.  Drawing on results from the Provider Survey we can examine whether there is any evidence of provider bias in terms of the average level of commission and the providers' position in the market, or whether changes in commission over the last five years have resulted in a corresponding change in their market share.
Econometric analysis of this data shows that for single premium products there is no relationship between the average level of commission and the share of new business volume.
69/70.  The interpretation of the results in Table 5 above is that an increase in commission by 1% would increase market share by 1.4% in the personal pension single premium market and by 0.5% in the income drawdown market respectively. For example, in the personal pension single premium market, if commission increased from say 5% to 5.5% (a 10% increase in commission), this would lead to an increase in market share from say 20% to 34% (a 14% point increase). Such large increases in market share are not typically observed in the market-place because increases in commission rates by one provider are rarely undertaken in isolation but rather face competitive responses by other providers and hence the impact of one provider increasing their commission rates while all other providers keep their rates constant is never observed in practice.
This is consistent with the results from our analysis in 2001, where we found three single premium products where there was a positive statistically significant relationship. Perhaps surprisingly, the products where we have identified a problem do not overlap with those in the earlier study, which found distribution bonds, with-profits bonds and pension annuity to have evidence of commission bias. As with our analysis in 2001, this is a problem we associate with single premium products rather than something we attribute to particular products.
For regular premium products we tested whether, on average, changes in the initial commission resulted in changes in the market share of particular products. As we found in the analysis undertaken for the FSA in 2001, we did not find a statistically significant positive relationship between commission and new business market share.
Therefore, we conclude that the provider bias in the regular premium products remains of little concern but this analysis supports the previous analysis that there is a more significant problem with single premium products.
73.  In this chapter we distinguish between ongoing market developments and changes that are coming about due to recent or imminent regulatory change. The UK financial advisory market has been subject to a number of substantial regulatory changes over the last fifteen years; however, the last few months have seen some of the most significant to date. Below, we review what these changes are expected to do, what will determine the impact they have on the market and how the market will perform against the critical success factors identified in Chapter 2. We find:
The long-term impact of depolarisation on remuneration remains unclear, but it can be expected to result in benefits through additional choice and competition: depolarisation may increase the potential for problems in terms of how intermediaries are remunerated and introduce concerns about the role of ongoing advice. In the shortrun, there is also evidence that anticipation of multi-ties entering the market is resulting in commissions being bid up. In the long-term, efficiency gains can be expected to arise, but it is unclear when, and to what extent, these will be passed on to consumers through lower charges.

  • The menu will significantly reduce the potential for bias arising from the remuneration system: The menu is likely to reduce the potential for provider and product bias. However, it will take time for these benefits to arise and the complexity in the underlying commission structures will make comparisons across menus difficult, resulting in differences in a market average that could be confusing for consumers. Much of the concern about the effectiveness of the menu arises because the underlying complexity of the market is hard to capture and present. It would be more effective in a market with fewer, simpler and more transparent remuneration structures.



  • Stakeholder products and the basic advice regime should increase clarity between remuneration structures: Differentiation between the basic advice regime and the full advice regime will help both markets work effectively. New stakeholder products offer the potential for "clear blue water" between the stakeholder range and other products. This is likely to lead to the re-emergence of some initial charges in the non-stakeholder market, appropriately resulting in consumers sharing a portion of the cost of initial advice if they are to lapse early.


103.  Based on the analysis in Chapter 3 and Chapter 4 our assessment is that the perception of problems in the financial advice market is worse than the reality. Problems in the remuneration system are not prevalent. In particular, there is no evidence of a bias to sell, and evidence of provider bias is likely to be substantially addressed by the introduction of the menu and the corresponding increase in transparency.
In particular, issues surrounding product bias remain along with a proliferation of commission structures with no clear link to service, which add complexity and do not help positive incentives. A new approach or model of remuneration that addresses these issues would clearly be beneficial in terms of consumer welfare, in addition to addressing the problems of perception.
108.  A large increase in the fee based market, with remuneration that is unconditional on sales, is inconsistent with market realities. In particular, it is clear from the evidence in Chapter 2 that consumers do not like fees and are unwilling to pay them. That is, the amount that consumers are willing to pay as a fee for financial advice is much less than what it would actually cost to pay for advice through fees. Based on evidence from consumer surveys, consumers would not purchase advice from advisers operating on a fee basis given the current rates of fees. Hence a wholesale move towards fees would lead to a dramatic decline in the advice market with a corresponding reduction in the number of consumers purchasing products and making long-term savings provision.
Finally, it is important to note that remuneration structures evolve with customer relationships. Most consumers operating on a fee relationship started on a commission basis and over time moved onto a fee basis. This observation is consistent with a desire by both advisers and consumers to build up trust in the relationship. From the consumer perspective, this is entirely rational since consumers are unable to judge the quality of their advisers at the outset. Similarly, from the adviser perspective, this is thought to be a way of signalling that advice will initially be free unless the consumer thinks it is worth following.
There does not, on the basis of our analysis, seem particular merit in artificially expanding the fee based sector. Hence from Figure 22, we would not wish to move the whole advisory market to operating on an unconditional basis. This does not, however, imply that fee based advisers are not providing a very valuable service to consumers who prefer to transact on this basis, nor that more cannot be done to deliver fee options to consumers.
109/110.  There is currently no link between the structure of commission and the type of relationship requested by the consumer, leading to the accusation that providers are competing for intermediaries rather than for consumers. This reflects the fact that commission is performing a number of different roles each of which are legitimate in their own right but in combination lead to confusion over the role of commission. These include:

  • Rewarding advisers' "prospecting" activities which as well as being a distribution service to providers is the principal means of raising consumers' awareness of the need to address their financial needs and offering them a starting point for doing so. This encouragement and awareness-raising is not only an important source of generic advice, but also important to closing the savings gap;



  • Rewarding advisers for the initial cost of undertaking the advice process and fulfilling the transaction. These costs occur predominantly at the start of the advice process but ongoing commission (renewal and trail) is often perceived as deferred initial payment for this service;



  • Providing an incentive to encourage high levels of persistency and preventing unnecessary churning of consumers' portfolios; and



  • Payment for ongoing services to meet the needs of consumers including the administration of the product, follow-up meetings to discuss the ongoing suitability of the investment and ongoing surveillance of the market-place.


117.  The focus of our analysis and recommendations has been on saving and investment products. The research did not find any evidence of commission related problems for protection products.
126.  Equalise remuneration by provider Currently we observe different levels of commission and different structures of commission for different providers of the same product. In this business model there would be a restriction in place such that whatever provider an adviser chose they would receive the same level of commission (and the same structure of that commission). This would be intended to prevent any potential or perceived provider bias.
This type of model could only come about due to the choice of intermediaries themselves (by negotiating with product providers or only choosing providers offering the same level of commission) or by the actions of the regulator such that the commission set on the menu was the level transacted at (and any additional commission was rebated directly to the consumer).
It is unlikely that collective action or action by a group of providers (which would resemble the maximum commission agreement) would be possible under Competition regulations. However, although providers would not be able to coordinate on levels of remuneration, they could potentially agree on the structure of remuneration for a particular product.
Equalise remuneration by product
Historically, commission levels have varied significantly by product both in terms of their level relative to premiums (with lower premium products such as protection having a higher rate of commission, although this may result in a similar monetary value) and in terms of structure; for example, unit linked bonds have higher initial commission and are less likely to pay trail commission than unit trust products that have a lower level of initial commission and a higher level of trail commission (although, again, this may result in the same value of remuneration over the life of the product).
An alternative business model would have the same level of commission paid independent of the product advised. This could take a number of forms, for example, it could be the same percentage of premium or a fixed monetary amount. Combining product groups on the menu could bring this about. Given the difference in the amount invested, it may be necessary to have a number of product groupings.
This model could be brought about by intermediaries themselves or the regulator but it is again unlikely that this could be negotiated by a group of providers or collective action (for the reasons given above). However, although providers would not be able to coordinate on levels of remuneration by product, they could potentially agree on the structure of remuneration.  

Thursday, December 3, 2009

FTAdviser.com - Taking a punt

FTAdviser.com - Taking a punt: "Adam Samuel is a compliance consultant and freelance journalist"


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And no more than that...

FTAdviser.com - Taking a punt

FTAdviser.com - Taking a punt: "Adam Samuel is a compliance consultant and freelance journalist"



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And no more than that.