The FSA’s scrutiny of wraps and internal rebates could ultimately be to the detriment of the consumer
By Terry O'Halloran | Published Apr 04, 2012
Article from FT Adviser
In days of yore it seemed to me that broker bonds were the absolute pinnacle of the financial adviser fund management evolution.
We had moved on from the unit trust portfolios of the 1970s and the days of Julian Gibb and other great ‘brokers’ that looked after people’s money so well.
The metamorphoses following regulation of everything other than term insurance and unit trusts led to the great Lloyds TSB partnership and the mass marketing of savings plans into unitised contracts ‘buy term and invest the rest’. The savings market, in effect, was well taken care of and the investment market suddenly found a new niche in ‘broker bonds’ which started with one advocate of the ‘investment bond’ fund management fraternity starting a trend that eventually, in 1987, brought many companies to their knees and some five or six years later to their graves. The modern manifestation of the broker bond, and unit trust fund manager that pre-dated it, is of course the wrap.
As with the downfall of previous incarnations, the wrap is now under severe scrutiny particularly by the FSA in policy statement 11/09 and has become so embroiled with detail that it is examining the supermarket funds’ internal rebates from fund managers because they “lack transparency”. The FSA concludes that it feels that rebates are undesirable. Why? The consumer cannot see the cost. But is it a cost? Well, even the FSA does not know. PS11/09 does not tell us. Indeed the document leaves us all hanging in mid-air.
The preoccupation and fetish of the FSA to look unswervingly at ‘cost’ ignores almost entirely the end benefit that is available to the consumer. The latter of course is a function of the markets and the former is an accountancy process fact and there, perhaps, is the report’s Achilles heel.
If we go back to the maximum commission agreement I spent three years working as an intermediary, with the companies that provided life assurance products, pensions and investment bonds as well as the investment houses, in order to gain an industry-wide acceptance of a level of commission that would be acceptable. I found at the 11th hour that Lord Borrie, then head of the Office of Fair Trading, declared the agreement “a constraint of trade”and said it was, in fact, “anti-competitive”.
Damage
In the years since the early 1990s I have failed to work out quite where Lord Borrie got his determination of that fact. He created a lot of damage in subsequent years by failing to allow the industry to resolve its own commercial problems without government interference.
Coincidentally, of course, there was a banking crisis (the Bank of Credit and Commerce International went bust) and the withdrawal of the maximum commission agreement allowed building societies and banks to over-egg their particular cakes by taking up to 230 per cent Life Assurance and Unit Trust Regulatory Organisation commissions while consumer-conscious intermediaries such as myself restrained our enthusiasm and stayed with 130 per cent Lautro, the norm under the agreement.
Surely, it is plain to see that the rebates that were paid back to ‘supermarket fund’ providers is merely a bulk discount, an internal mechanism acknowledging the size of the purchase? When a large supermarket such as Tesco approaches Heinz for a bulk order it expects to get a higher margin. In other words, a rebate on cost because of the volume of the product that it is buying.
How can we possibly have Lord Borrie making a decision at one point in time an agreement that offends the retail price maintenance mentality (and legislation) and here we have the FSA endeavouring to, unsuccessfully, prescribe what are basic valid commercial decisions between two commercial entities. It just does not make sense.
Of course someone will see it as unfair.
The fact that Tesco should be able to sell beans cheaper than the corner shop could also be seen as ‘unfair’, but please do not get on at me with puerile letters saying: ‘What is Mr O’Halloran doing comparing tins of beans with financial products?’ I did not make the rules.
The FSA is endeavouring to make the rules and failing at just about every hurdle. PS11/09 does not come to a conclusion, it comes to a ‘non-statement’ that leaves the market in doubt as to which way it should go and what it should do.
All that does, as it has in the past, is promote ‘the industry’ predisposition to dump the products that are under threat and innovate with new products which circumvent the problem. That actually helps nobody particularly as there is £40bn reportedly in supermarket funds that is going to find itself in a regulatory cleft stick that can only have one outcome – detriment to the consumer.
On what basis does the FSA come to these decisions, or non-decisions as is the case with PS11/09? What are the qualifications of those who are making the decision or non-decision in the first place? Are they practitioners? Do they have any idea as to how these products are put together? Have they any knowledge of commerce? Margaret Cole, the FSA’s former managing director and board member, was apparently a corporate lawyer and yet she was enabled to pass comment about life assurance products, or more precisely, investment products that involved life assurance products.
If we are going to have a regulator of any genuine credibility in the UK then it has to be populated by researchers who know their subject inside out and can make decisions based upon fact rather than hypotheses and experiment. When one wrap platform provider starts saying: ‘We are not like the rest of the market’, then you can pretty well put money on the fact that, such as unit trusts and broker bonds before them, the writing is on the wall for their demise.
Confidence
That is not good for public confidence nor for the offices that spend millions of pounds developing not only their market products but also the market into which they provide their service.
Before the retail distribution review is even contemplated the rules under which we are all bound should be clear and unequivocal. They should follow normal commercial practice, the best practice of course, and be capable of producing the best outcome for clients, not necessarily at the least cost inherent in the product.
If stakeholder pensions have anything to prove to the world at large, and the regulator in particular, it is that forcing suppliers to wait 25 years to make any profit on a financial product while leaving that product open, through pension transfers, to pillaging by fund management groups when the funds get large enough, is not only bad commerce, it is bad value for those invested.
PS11/09 should be relegated to ‘File 101’ and the wrap/platform market left to commercial pressures which the FSA should monitor, not prescribe. Reading the Better Regulation paper of 2006 would help the FSA understand the current disquiet.
Terry O’Halloran is founder of O’Halloran & Company
Article from FT Adviser
