11th March 2024
Alan Lakey: How regulation has failed
Financial services regulation is approaching its 36th birthday and it is reasonable to assume that most of today’s advisers have never worked in a non-regulated world.
Pre-regulation, the adviser population was 10 times today’s figure. Back then, there was far less focus on pensions and investments and a much greater emphasis on protection.
Aggregator sites such as Compare the Market and MoneySuperMarket didn’t exist; neither did comparison tools such as CIExpert, nor a range of financial services media, aside from Money Management, Planned Savings and Prospect.
Most protection plans were unit-linked whole of life, where regular reviews determined either the future premium or the sum insured.
Nonetheless, the protection gap was smaller than today’s simply because more conversations took place.
Much has been written and philosophised about the benefits, or otherwise, of regulation, but what is clear is that the world is a very different place from that of April 1988.
The basic logic behind the imposition of regulation was to kick out the idiots, conmen and rip-off artists. Professor Jim Gower, the architect of the 1986 Financial Services Act, stated in his ‘Review of Investor Protection’ that “consumers should not be made fools of but should be allowed to make fools of themselves”.
The rigours of regulation caused the closure of numerous insurers to the extent that today, in the adviser market, only 10 remain. By way of example, in March 1999 — 10 years after the inception of regulation — there were 42 insurers offering some variety of critical-illness cover, and 32 marketing unit-linked whole-of-life plans.
Another consequence of regulation, primarily the Retail Distribution Review, was confusion among consumers.
Until 2013, it was relatively simple: advisers were tied, multi-tied or whole of market. The term ‘whole of market’ signified IFA — an independent financial adviser, who was able to scour the market for the most appropriate plan.
The IFA brand became widely accepted by consumers and journalists as a sign of quality, but now we suffer from a fourth appellation — restricted whole of market. Within the industry we know this to mean an IFA who opts to not advise on every product. However, to the unknowing consumer it signifies a lesser creature; one who stands several rungs below the IFA mantle.
It is extremely foolish to adopt this regulatory stance, which denigrates whole-of-market advisers who choose to not advise on offshore bonds, protection insurance or some other area; particularly as the ‘Key facts about the cost of our services’ document highlights the areas within which an adviser works.
Regulator’s rod
Of course, the regulator has created a rod for its own back because, in reality, how many advisers are actually whole of market?
Some years back, I asked the Financial Conduct Authority for the numbers of IFA/whole-market restricted/multi-tied and tied advisers. It replied that it didn’t know because many firms operated more than one of these business types.
Meanwhile, although two of the FCA’s key roles are the promotion of competition and the protection of consumers, it allows mortgage lenders such as Bank of Ireland, HSBC and TSB to routinely refuse agencies to advisers because they prefer to deal with the volume introducers.
How about the lender that offers a range of fixed and tracker rates to its preferred panel of introducers while the remainder are allowed to arrange only base-rate loans?
Some years back I wrote to Linda Blackwell, then the FCA’s head of mortgages. I asked why the regulator allowed Santander to offer higher fixed rates to interest-only borrowers as opposed to those on a repayment mortgage. Her reply, in essence, stated it was a matter of “commercial judgement”, but she avowed that offering dual base rates would be investigated thoroughly.
Readers, particularly those with a long memory, will hold their own opinion as to the success of regulation — possibly viewed through the screen of ‘commercial judgement’.
Alan Lakey is founder of CI Expert
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