Bamford: Industry must help kill off toxic investment products
A small number of advisers are spoiling it for the rest of us. Along with every other IFA firm in the UK, we got our invoice recently for the latest Financial Service Compensation Scheme interim levy. This goes towards paying compensation for the victims of such firms as MF Global, Keydata, CF Arch cru and Wills & Co.
We collectively have the financially painful responsibility of funding the £60m of compensation costs for customers of these firms.
When we got a similar invoice this time last year, it made me angry enough to gather nearly 700 signatures on a petition for a fairer FSCS. Nothing much has changed. We are still waiting for the FSA to consult on reforms to the funding structure of the FSCS and even when this consultation paper is published, few of the advisers I have spoken to recently hold much hope of genuine reform.
Assuming the FSA is not going to change its methodology and categorise fund managers and stockbrokers more fairly to remove them from the same sub-class as financial advisers, maybe we need to consider a different approach.
A couple of months ago, I applied for my first-ever statement of professional standing. By the end of this year, every adviser will need to have one in order to trade. If we view the FSCS levies like a fire, removing one of heat, oxygen or fuel should bring it under control.
We might not be able to influence an improvement in regulation to prevent these toxic investment schemes from being sold to retail investors in the first place. The promised early intervention strategy from the Financial Conduct Authority offers some hope but not much.
What I believe we can do to bring the FSCS costs under control is deprive toxic investment schemes of their oxygen. Advisers need to proactively prevent these schemes from being sold in the first place. If unregulated schemes are not sold to retail investors by regulated advisers, there is no recourse to the FSCS when things go wrong.
This is where the statement of professional standing can play a role. An SPS confirms three things about an adviser – in addition to holding required qualifications and completing relevant CPD, it also confirms that an adviser has adhered to a code of ethical standards.
Reviewing the CII code of ethics and conduct, there are several items that a professional body could use to stop advisers from flogging toxic investment schemes. In particular, advisers who sign up to this code must “ensure any conduct does not bring the profession into disrepute”.
The FSA has handed accredited bodies a lot of responsibility for the conduct of individual advisers as part of the RDR. Rather than telling the FSA when we see examples of bad behaviour, we should instead report to professional bodies and place the onus on them to withdraw the ability to pollute the sector before that pollution becomes widespread and costly.
Martin Bamford is managing director at Informed Choice
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Readers' comments (14)
Well said Martin, an excellent idea. The FSA has failed to act fast enough or with enough vigour to prevent many recent products gaining traction in the IFA market. Complaints to the FSA about the products when launched bring insufficient action, so a form of industry censure should work better. The dangerous investments are normally easy enough to spot (excessive and over-stable returns, dubious valuation methodolgy etc.) and even a "grey list" of products with particular issues may help steer advisers away from them, without incurring the threat of legal action - as well as giving manufacturers and promoters a right of reply.
I'm optimistic the industry has moved on from the days of collective spivery - endowment mortgages post LAPR etc. so this idea could well work.
Martin... How about you lead a panel of well respected IFA's and Compliance people to vet and check investments that come to market....
How about killing off toxic investment advice?
What is 'toxic'? One man's meat and all that.
Then you have the 100% hindsight of a compensation machine...
A good idea Martin, but -
Probably like you, I received in the post this morning, my copy of 'Financial Solutions', the PFS magazine.
Page 13 includes the item 'Disciplinary Matters', in which a number of members involved in the recent improper sales of UCIS, and as a result suffering large FSA fines and I believe, withdrawal of permissions, have been censured by the PFS.
The 'punishment'? - They have 'recieved a reprimand'
Over very many years, I have come across a very wide range of people in this industry, some of them clearly unscrupulous, judged on everything they say and do. Others, often outwardly very professional and highly qualified, have been more subtle in the way that they exploit their too trusting clients.
Are punishments such as those mentioned going to deter such people? I fear not.
The other problem might be that, now that there is a choice of 'professional bodies', all competing for members and income, they will be less inclined to ramp up their disciplinary processes, and the less scrupulous may well choose the body with the more relaxed regime?
This is all very well provided there is some precision around the parameters of "Toxic" and "Retail Investor". Clearly if criminality is involved the product is not toxic it is fraudulent and the culprits responsible must face the full force of the law. But well managed funds such as a Single Life Settlement Fund which can demonstrate how its methodology works and risk mitigation provisions then it should not be labelled as toxic by an incompetent regulator well versed in regulatory vandalism; without the nous to properly evaluate unusual funds. The regulatory track record is not good cf with-profit funds, endowelment mortgages, Equitable Life, interest only mortgages at 125% LTV and (looming carbon credits) the list goes on. If IFA's recognise a product as being a scam YOU report it, don't wait for the regulator. Then you might save on premiums.
Hmm...
I think the adviser community has failed to regulate and protect itself just as much as the product providers.
We need MORE cooperation, collaboration and joined up thinking, not more battles.
And the term 'toxic' has no place in financial services. One person's toxic can be another's tonic.
What happens when investors go direct with no advice involved? The levy would still fall on the industry so I fail to see what action advisers can take?
If an investor goes directly to the product provider the provider needs be satisfied that the investor is sufficiently learned to be classified as "Not Retail". This is easier to do than it sounds. Eg QA on their other investments and understanding of the product literature. If they lie they are in the fraud camp.
I agree with your sentiment, Martin, I really do. But, whatever rules and regs, codes of conduct, or potential penalties there are in place, there will always be certain individuals who will act improperly for their own financial gain. And that's as true in any industry as it is in the Financial Services industry... in fact it's true of 'life in general'.
The rules concerning the promotion of UCIS are already in place: FSMA, PCIS Order, COBS 4.12. UCIS are not for retail clients, but for HNW and sophisticated who satisfy certain eligibility conditions. It's all there in black and white, and has been for many, many years.
Despite this, for a number of reasons, UCIS have found their way into the portfolios of retail clients - whether through ignorance of the product (or promotion rules) by the adviser, or at the other end of the scale, because the scheme is paying a double digit marketing allowance. Effective policing of the rules SHOULD have stopped this, but the policing has failed (for example - in a recent high profile example, I think somewhere around 426 retail clients from one firm were invested in UCIS. How long, assuming each client went through the full sales process, would it have taken to execute those 426 transactions? It didn't happen over a short period of time, I'm sure). And the 'police-persons' in our industry are.....?
Now, I used to promote UCIS to IFAs (I can hear the gasps, and boos and hissing start!). I’m confident that none of the schemes I promoted were paying 10% commission, or investing in toxic assets, or run by crooks. I completed rigorous due diligence on the products before I introduced them to any IFAs. If they didn't pass my due diligence, they didn't see the light of day. All the IFAs I dealt with were provided with my DD, warts and all, and they supplemented this with their own DD. I made sure the adviser understood the rules regarding promotion of the funds, made sure they had a UCIS process in place (T&C, Registers, ongoing DD, etc), made sure they understood the fund and the risks associated, etc. I'm confident that each and every investment that was transacted through me is in the hands of a suitable investor, and has been document correctly. On average, an individual adviser had around a dozen clients in UCIS, with no more than 10% of any single client’s portfolio in such schemes. 426 investors from one firm????? I’d have had some serious conversations with them before they got to 26!
I know you haven't referred to all UCIS as 'toxic', Martin, but it does seem to be the broad brush that all UCIS are being painted with at the moment: mention ‘toxic investments’, and pretty soon the conversation moves to UCIS, as it has in post 4 here. Yes, there are a many iffy schemes around - But there are many excellent schemes available that would not pass the FSA's Prudential Spread of Risk requirements in order to establish as a retail fund in the UK. However, some of these schemes will pass the due diligence test, and will be appropriate for investors that can satisfy the rules regarding promotion of UCIS.
Many UCIS invest directly into UK assets and businesses - creating jobs, generating tax revenues, and benefiting UK Plc. Some of them provide secured lending or venture capital at a time when the banks aren't. Some of them are investing in UK environmental businesses and helping to meet our green targets, or just in legitimate UK companies. Not all of them invest in US life policies, or golf resorts in the Dominican Republic, or Shipping Companies in the Sahara.
It seems we are in danger of throwing the baby out with the bath water at the moment with the UCIS witch-hunt. Will banning UCIS (sorry… toxic investments) in the UK result in lower PI and lower FSCS levy? No – certain advisers, even with their qualifications and certificates will continue to recommend inappropriate products to clients. There will still be some who falsify mortgage applications, there will be some who ‘invest’ clients’ money into contracts that don’t exist (i.e. embezzle the client’s cash), there will be some who will find a way to generate under-the-counter income streams from products they recommend to their clients (on top of the fee they’ve charged), there will be FSA authorised retail products which fail, and clients with selective memories who’s adviser has forgotten to record certain crucial pieces of information in their fact find and suitability letter. Not to worry – the FSCS will bail them out.
Result? FSCS levies and PI premiums continue to head north.
With any other insurance contract, it’s generally the person benefitting from the protection that pays the premium, so surely the investor should be paying the levy? I guess they do under the current arrangement in that the fee they pay their adviser includes that in part, and if they invest in a UK retail fund part of the charge pays for it. But how about the investor writing out a cheque to the FSCS each time they invest? We tax General Insurance premiums, so why not some form of direct levy on investment? I guess then there would have to be Insurance Premium Tax on the FSCS Insurance Premium though, wouldn’t there?!
It is all very messy at the moment, and I really don’t know what the answer is. To my mind though, it does all come down to inadequate policing of the current rules the FS industry is supposed to work to. Perhaps every FS business should have an FSA compliance person in-house who passes or rejects each and every piece of advice (paid for by…….??), so the buck stops with the regulator?
But they do say that everyone has their price. Who’s to say that if a dodgy adviser slipped enough of an incentive to an impressionable FSA in-house police-person, certain inappropriate (but very lucrative) pieces of advice wouldn’t get through?
Unfortunately, we now live in a society that has succumbed to the Compensation Culture. “It’s everyone else’s fault, and I demand compensation. I take no responsibility for my own action (or inaction, if appropriate)”.
Wait until people start to get compensated for the fact their adviser didn’t tell them about the Cayman Islands domiciled Dominican Toxic Widget Fund that could have doubled their money in 90 days.
Then the FSCS levy will really start to go up.
I’ll get my coat….
Happy Easter.
I totally agree this has to be improved, but logic and regulation dont always combine too well.
RDR should help though as those paying high commission rates to sell their schemes will find it harder next year.
In the meantime the best way to cap industry exposure to toxic products is a 'top-down' ban from those of us who own regulated firms. We do exactly that, it isn't always popular with advisers, and it is certainly unpopular with the product provider but if enough of us 'just say no' it will have the desired effect.