Why a Manifesto for Advice? @ 12:28 PM    


The RDR seems intent on focusing on advisory distribution and how it is paid for. It seems keen to avoid addressing the issues caused by the fastest growing and most profitable sector of distribution; non advice conducted over the web and phone. I’m not at all sure why that limitation is accepted by anyone, least of all the team conducting the review. Their apparent disinterest may be because there are comparatively few complaints about non advised sales, though the reason for this is surely simply because a lack of ‘suitability’ (in its FSA context of something being good advice) is the cause of a huge proportion of complaints and that’s the one thing you can’t complain about if you have not taken advice.

So AIFA’s ‘Manifesto for Advice’ is a very necessary and timely intervention. If it succeeds it getting advice revalued in relation to its alternative selling method then it will do consumers huge good. I hope it focuses not on how a perfect adviser should look, but rather on demonstrating the good that advice does when compared to non advised selling. The difference is vast. In protection it has been shown for example, that 70% of buyers improve their non advised decision when later getting advice.

Were the RDR to focus one of its streams of review, as it should have from the start, on non advised selling they would find a huge amount of so-far half-hidden consumer detriment. Firstly they would find that advised sales often cost less than non advised sales. This might cause them to ask why the cost of advice must be fully disclosed, but the cost of non advice need not be. They might feel that it is facile to point out that ‘advice is not free’ when neither is any non-advised purchase. Indeed one can argue that in an FSA context advice is free when it leads to lower actual charges and costs than non advice does for the same product exactly. As it routinely does in protection.

Going further they would find substantial consumer detriment being caused by the encouraging and facilitating of bad consumer purchasing decisions by poorly understood information on non advised sites. Advisers get told about it every day by those who come to us having previously messed up their DIY planning and purchasing job. With non advice now booming it will not be long before more people have been ruined by their own non advised decisions than ever were by advised decisions. Indeed with the growth in the various ‘gaps’ in financial provision eerily tracking the growth of non advice, perhaps that is already the case.

Non advised selling does not cause consumer detriment by dishonest practice of a sort the FOS can punish. It does it by not pointing out its limitations clearly enough, and by allowing consumers to take good information out of context and make really bad decisions – the sort that would get an adviser straight in front of the FOS.

Of course, non advised selling is a perfectly proper route to market, the issue is simply that the FSA currently allows it to routinely overstate its benefits and understate its drawbacks. That is what the RDR and the Manifesto for Advice should

change. That non advised selling should operate on a “caveat emptor” basis while the RDR seeks quite clearly to further the grip of the “caveat vendor” principle over
all independent advisers is a grave discrimination in favour of that which all consumer groups and indeed the Treasury deem the worse of the two generic purchasing methods.

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Warnings Must Be Headed @ 12:20 PM    
Deadlines being what they are, I must write this before the FSA publishes its final ICOB rules. So I believe, rather than know, that they will require stronger safeguards so that those who buy over the phone are clear as whether they are getting advice or not; and will also require all those who sell without advice to make clear to that what that actually means is that the customer is responsible for the product bought being suitable, not the seller.

What’s more I believe they will be asked to do this in an ‘outcomes-focused’ way. That must mean a way that gets the consumer to realise that they really should be certain of what they really want before they buy. The FSA is rightly concerned that the quick and easy financial services product purchase decision has a horrible habit of turning out to be the wrong one, so making consumers think twice and thus get it more right is a laudable regulatory aim.

But there will be two likely consequent seller reactions that need simply to be enforced out if the ICOB rules are not to make a mockery of. The first is that non advisers will migrate to web only sales (a fast growing non advised area already) in order to more easily get away with things. The second is that whichever way they sell, those scared of making the consumer think twice will make the warnings as meaningless as they are now. On the web they will perhaps rely on a huge ‘tick to acknowledge you accept our terms’ pop up that no-one ever reads; over the phone it will be a monotone drawl read out once the decision is made in the consumers mind so that they switch off and just want to get on with it.

Bearing in mind these fears I was delighted to read Dan Waters, Director of Retail Policy and Themes at the FSA, quoted as saying: "For many people the internet is the channel of choice for shopping around for financial products. However, it can expose consumers to high risk as they are able to make instant purchases without advice. This is why it is so important that firms' websites are fair, clear and not misleading…… firms should take immediate steps to improve their websites. The FSA will be carrying out a further review in March 2008 and will take action if it finds further failings.” That sounds like planned enforcement to me, and it would be wonderful if it was a joined up approach governing ICOB sellers too. Let us hope the enforcers make this rule count!

Should web based sellers, or those providers whose products they sell, want to see a way I think consumers could be treated fairly in this area, they could have a look at the dummy website snippet http://www.lifesearch.co.uk/breakthrough and see an effective way of confronting consumers with the realities of their situation. Over the phone operators can easily develop a verbal version. The aim in all cases of course is to ask short clear questions to which the expected answer is not totally obvious. In a warning-crowded world, that is perhaps the best way of making warnings work.




Now that sort of outcomes-focused approach is, I suspect, the last thing non advisers will desire, so it will be as ever up to advisers draw the attention of Dan Waters and his team to those who flout or more likely subvert the rules with non outcomes-focused warnings, so that the rank bad practice that is most non advised selling today is sorted out.

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The FSA & Payment Protection Insurance @ 12:08 PM    
A few weeks ago I addressed the Head of the FSA’s RDR review and others at the Cicero RDR conference. I took the opportunity to explain some of the arguments this column has discussed since I realised in 2004 that a key threat to the growth and success of advice in financial services was the near-unregulated growth and success of non advised selling in financial services. The advent of RDR has crystallised that threat, by considering a huge raft of change that advisers will have to cope with, while non-advisers will face no such cost of change.

Simply put, as the Government proved in causing the demise of Final Salary Pension schemes, if you regulate the good to perfection, the bad take over the market. That is already demonstrated by the retreat of advice from the mass market, and its replacement by those who sell but do not advise. This takeover is made easier by confusing FSA jargon. “Non advisers” are actually just sellers, but don’t have to say so. They don’t have any duty to check suitability, but don’t have to say so. In fact even if they did, no consumer would readily understand what that meant. In short sellers can easily use FSA speak to confuse normal consumers into believing they are getting the same service as they would from an adviser, but for less cost.

Without that consumer understanding of the difference between advice and sales in financial services, advice has become devalued amongst all but the most wise of consumers. So in my talk, I challenged the FSA to undertake to promote and support advice as better for consumers, before they seek to perfect its outcomes. We shall see, but to encourage them to consider making this effort, may I demonstrate just how the sly cleverness of the salesman is still alive and well in non-advised UK financial services.

The PPI market is a hugely profitable one, though sales are shrinking somewhat now in the face of pressure from the OFT and, belatedly, the FSA. In fact the current premium rates on PPI/ASU depend, I’m told, on it being sold to many who can’t claim. If it is only sold to those it should be sold to it needs to become dramatically more expensive.

So the search goes on for the gullible, but the new target is not those who can’t claim, but rather those who should have a better type of policy, but who can be seduced from that path by the simplicity of applying for PPI. The better policy is known as Income Protection (PHI as was) and as you will know, it should be the first consideration of anyone trying to protect themselves and family against the financial effects of personal disaster. Except that today if you type those words into a web search engine you get pages full of Income Protection advertisements actually selling various types of PPI.

The sharp sellers have realised that they can pass their product off as Income Protection and sell it to innocent clients as if it was the proper thing. That will be bad for the consumer, but good for the sellers as those suited by Income Protection have relatively low claim rates. Trebles all round, as Private Eye would say!



Now the Financial Promotions team at the FSA could stop this, but I suspect they have little stomach for the fight. It would be different I think, if it was advisers working this little scam, but just how can we convince the FSA that it is high time the sellers were sorted out?

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The FSA & ICOB rules @ 11:58 AM    
In March 2004 I first explained how non–advisers were cheating the public by not explaining what the words “We don’t give advice” mean in FSA terms. I went on to explain why this was particularly pernicious in the area of protection, where innocent mistakes can destroy families long after anything can be done about them. 3 years later the FSA has addressed this issue in the draft ICOB rules. It has been a long hard road explaining this truth in the face of simplistic dismissal from the insurance establishment. I have no doubt at all that they will now do their utmost to get those draft rules changed and if they fail in that, to ensure that they are never enforced effectively.

The big providers fail to realise that the real profit in protection lies in providing well worked out solutions to an individual’s needs, rather than trying to sell more term life assurance to people ever less likely to claim on it. The collision of the commoditisation model and the supermarkets’ product diversification model has proved to easily attractive. The future is shown by ASDA’s delight in the results achieved by their decision to use advice after trying it the other way and my own business’ rapid growth in a consistently shrinking market. In protection, advice makes money, non advice barely breaks even.

If the leaders at the ABI opened their minds and decided to invest in growing the market rather than squabbling over a share of it, they would embrace advice and leave the new ICOB rules as they are drafted. But as they will not, I would urge you, gentle reader, to join me in campaigning on 2 specific points.

1. Term Life Assurance must stay where the FSA intend it to, in the ‘Pure Protection’ category, where it is subject to the same regulation as other protection products. This is right, because “life insurance” is not as simple as it looks, indeed it is not even one product. Its tax free income version should be considered by every buyer, and no one should buy life cover while they need IP, which they are far more likely to claim on. The term “life insurance” serves as the entry point for consumers seeking to protect themselves and to have it separated from the other ways of doing that causes grave consumer detriment.
2. Non advisers are required by the new rules to explain to their customers that it is up to them, the customer, to decide if the product being sold is suitable for them. They are further required to do this in a way that achieves the outcome the FSA require, that those buying without advice do not think they are getting advice and understand what this lack actually means. But this explanation will reduce non advised sales and so will be dealt with in the time honoured way. It will be robbed of any relevance to the customer, by being reduced to parroted jargon. After all,” advice” and “suitability” rightly have specific consumer protection meanings in our world, which they do not in any other. We need to make sure that these rules are not rendered as ineffective as their predecessors if advice is ever to be seen to add value at the point of sale.

It is up to advisers to ensure that the new rules mean that non advisers properly explain their shortcomings. Providers will not; they are still hooked on the commoditised approach, which may be fine in motor insurance, but does not treat customers fairly in protection.

This article has featured in MoneyMarketing, 2007
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