Financial Services Authority (FSA) FAILINGS...

The following was published as an aritcle "IFA View" by Money Marketing in September 2009...

In 1989 there were c 300,000 financial advisers active in the UK, and while admittedly a goodly proportion were hairdressers within the previous few months, the savings ratio as a percentage of GDP was still pushing 10%. By the way conventional wisdom has it that it needs to be over 12%...

After 20 years of regulation by the hugely expensive FSA and its  predessessors the numbers are dramatically different. There are now only c 40,000 financial adviser left and the savings ratio is down to less than 3%. There have been other contributory factors to this decline; but of the FSA's many failures the fall in savings ratio is probably the most damaging.

The latest RDR is set to introduce 4 key principles; not one of which will address this:

1. A return to polarisation: IFA's welcome this and even the legal profession now recognises that life companies are not independent. But will the FSA act against those tied advisers who hold themselves out as independent post 2012. It certainly refused to act against "independent" mortgage advisers who were tied to life companies for life business.
2. Higher professional qualifications: while some IFA's may moan - this is great news - if IFA's want to be taken seriously as a profession then this is essential. The LIA was telling SIB to do this 20 years ago...Fortunately Facts & Figures' directors are already qualified well above the required standard.
3. Adviser agreed remuneration will arrive. But the government and the FSA consistently cannot understand that the purchase of financial products is driven by quality advice and rarely by cost - the failure of stakeholder is the most obvious example. If price were the only consideration we'd all be driving a Kia...
4. Doubling of capital adequacy requirements: this one is not yet finalised and has to be resisted! What is the purpose of making IFA's place £20,000 on deposit that can't be touched unless you notify the FSA of a breach? If a bad firm gets into trouble the directors will simply extract all resources and put the company into liquidation. The company then no longer exists and its liabilities fall on the FSCS. All this requirement achieves is to make smaller IFA's tie up another £10,000 that they can't use to sefrve their clients. This will doubtless cheer the banks, nationals and networks whose adviser numbers may well rise as a result of this requirement.

But here's the thing. As a network member our PI insurance premium was over 7% of turnover. When we went direct (3 advisers) it went down immediately to less than three - where it has remained for the last 4 years. I queried this with my broker. The answer was small, director-owned IFA businesses are seen as less of a risk by the risk professionals than large institutions; because as the business is the directors' livelihood more care is taken and they have fewer complaints and therefore less claims.

The FSA's response is to consider pricing smaller IFA's out of business. Given their track record this is hardly surprising. But paraphrasing Ian Hislop if this is logical, I'm a banana.

It is suggested that another 5 - 10,000 advisers will leave the profession by 2012 - what hope for the savings ratio then?