Independent Financial Advice? FSA, stop the name-calling – my manifesto for real change

Is high-quality individual financial advice important?

We’ve been discussing it at MM, in the light of the apparent impasse between the regulator and the industry.

Tracey McDermott FSA’s acting enforcement head is apparently convinced that the loss of confidence evident in financial services is nothing to do with the failure of regulation and is entirely the fault of independent financial advisors.

As a result, the FSA (and its successor the Financial Conduct Authority (FCA)) would be:

“pre-emptive, bold and tough” in its quest to achieve better outcomes for consumers and markets.

When she added that:

Also by ensuring that the regulator is, and is seen to be, taking action to protect consumers or the markets – by doing whatever it takes to change behaviour in the industry – even where that means making unpopular and risky decisions.”

I would have been really impressed, after all, she’s talking about changing behaviour, my subject (psychology = the science of behaviour).

Except for a few niggles; listed below, followed by my solution to this situation – a manifesto for real change.

The Niggles

1. Are IFAs really the culprits?

I’ve mentioned before the penchant “own-product-only sales” have for mis-sales, with my own true story about a 74 year old for whom this IFA did the right thing when a regulator approved bank would have mis-sold. I’ve mentioned the regulator approved Barlow Clowes affair.

If Ms McDermott wants to trade specific horror stories I’m sure the IFAs of the country can match her fairly easily. I’m happy to give her half a dozen or so others to make her hair curl if she wants to ask.

Of course, for real, mass horror (as a parallel, think financial genocide as distinct from crime of passion financial murder), we can look at the IPP scandal, the pension transfer scandal, the low-cost endowment sales scandal, the pensions mis-selling scandal etc.  These are all the results of regulated products, mainly from mass market and regulated companies (not IFAs) and usually (as with endowments and transfers) based on regulator approved or provided growth rates.  That’s little to do with IFAs, but everything to do with repeated failures of the regulator to see the consequence of their own actions.

2. Do they really appreciate how human behaviour works?

If Ms McDermott wants to influence behaviour, she could to talk to somebody who understands it.  Repeatedly, regulators have set rules for the future, based on the past, and on a total ignorance of what governs human behaviour.

Probably if she does seek advice at all, she will go to unqualified people.  As her colleagues and predecessors did in asking economists such as Layard and Thaler to devise policy on psychological concepts such as happiness and consumer behaviour respectively, instead of asking actual experts such as Seligman or the marketing psychologists who devise the “nudges” that make people buy from Tesco!

3. Do they understand the difference between risk & uncertainty?

If she’s going to make tough decisions, she has to understand that they aren’t risk.  By definition (at least in insurance), risk is definable, you can put probabilities to it, as with a casino gamble or an actuarial table.  What she is talking about is uncertainty, you can’t put probabilities to the potential outcomes (you don’t even know what they are) and you can’t evaluate each outcome in terms of general utility.  It would probably be handy if she took a course in mathematics, focussing on statistics, chaos theory, non-linear dynamics and fractals.  Or she could ask the experts.

4. Can’t we stop the scapegoating of IFAs and accept that its more complex than that?

The IFA view is, of course, rather different.

They haven’t really helped themselves by immediately branding Ms McDermott as an unqualified player of the blame game and a defender of regulator incompetence who has gone on the attack because she has no valid defence.

They’re probably right (I have no idea what qualifications she has, but she’s certainly not accepted any regulator responsibility and gone on the attack on IFAs).  But it isn’t going to do them any good – Ms McDermott isn’t going to listen.

If she listened, she’d have to admit to being at least partly at fault, and to her (as to the IFAs) that admission is not acceptable behaviour.

My solution:

A Mindful IFA Manifesto

I’ve already suggested a better way to do things here.

We could stop the focus on product over service.

We could ban “own company” sales (to stop product bias via a “cross-unit credit” etc.)

We could produce valid and consistent risk profiling.

We could raise the qualification bar!

That last will raise protests from IFAs, of course.  Like the regulators (none of whom seem actually to be qualified to give advice themselves, any more than most of the “experts” in the media), many IFAs think that technical qualification isn’t really important.

It isn’t, a lot of the time.  But sometimes it is.  And if financial advice is to be a profession, the question has to be asked, “if you went to a solicitor, accountant or psychologist and they said they had an A-level, or a first year degree” (the current level necessary for financial advice) “would you take their advice”?  When you add that Ms McDermott and her colleagues are happy for advisors not to know anything about products their own company don’t offer, have total ignorance of swathes of potentially useful information like trust laws, expatriate tax, and the latest state of play on pension carry forward, I’d say that the bar is way too low.

We could educate consumers about decision-making not finance

We shouldn’t be teaching consumer about finance.  How could that possibly be a realistic aspiration if the regulators can’t get qualified and the top IFAs (who are qualified to Masters level) have to do constant CPD in order to keep up to date?

Given the shortfalls amongst those for whom it’s a full time occupation how can members of the public possibly keep their information up to a useful level?

But we could teach people how to make decisions, how to work out what they actually want.  And the regulator could actually bother about behaviour and produce a “know your customer” questionnaire that had some chance of working.

Conclusion: a personal message to the FCA and to IFAs

For Ms McDermott

Let’s remind ourselves of how Ms McDermott has framed the FCA’s mission:

The FCA will seek to view issues through the eyes of consumers and understand the drivers of their behaviour as well as that of firms.”

I’d like to propose to Ms. McDermott that if you really want to understand their behaviour, you have only to ask.

But you need to ask the right people.

For IFAs

You want to be able to do your job and be given some respect, rather than being the whipping boys for a failed regulator, so you could support an alternative.

But you have to have an alternative that would work.

To the community at large (including the FSA and IFAs), I’d like to say that’s what MM is for, to look at ways round apparent road blocks, the easy answers and finger-pointing and to find the difficult, realistic, long-terms solutions that stand a chance of really working for all stakeholders.

So please contribute – let me know what you think. Whether you agree or disagree isn’t really the point, the idea is to get the conversation moving again so that we can, together, search for alternatives that might work.

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  • Anonymous

    Excellent piece, Kim. Ms. McDermott seems to be stuck in a trichotomy: she wants the views of consumers (their drivers), she needs the views of the industry (their drivers) but she also has to consider the views of her civil servants (their drivers which are probably distant from any  other. Being a civil servant herself means that she will listen to but not accept views (drivers) from the first two categories. If I can use a quote from H.L.Mencken: “One of the main purposes of laws in a democratic society is to put burdens upon intelligence and reduce it to impotence. Ostensibly, the aim is to penalize anti-social acts; actually the aim is to penalize heretical opinions.” She will take note of the needs of her subordinate (?) colleagues as she has to be seen to be toeing the party line, which leads me to another quote from Mencken: “Laws are no longer made by a rational process of public discussion; they are made by a process of blackmail and intimidation, and they are executed in the same manner.”

  • Kate_Hammond

    I think this is very interesting.  There is probably a lot of work to be done on the decision-making – and what influences this.  I am thinking about social identities and how different people are influenced by advice from a ‘professional’: some of us are naturally cynical, but others are more socially lead  – by professional looking people in suits who could be selling the right thing or snake oil.  There needs to be consideration of how they should be protected/encouraged to make their own decisions.  Kim’s emphasis on decision making – the how rather than the what seems to be a good step in this direction

  • Anonymous

    Kate – you make some good points. May I build on them by saying that how individuals are influenced by “professionalism” is an extremely grey area. Perhaps one way of overcoming personal influence is for IFA’s to not only have high quality professional examinations under their belt, but also to have a sort of “IFA Hippocratic Oath”. I know it sounds somewhat off-beat but considering the fact that so many people have a high level of trust in their doctors and their skills, surely similar should /could apply. After all, to many money is of second importance after their own health.   

  • Kim

    Thanks Kate and Ray,

    The credibility issue is a big one (not least for psychologists!).  “Finance experts” abound on TV, but, it would be hard to find a “finance guru”, who can legally give advice. People follow Peston, Lewis (Martin and Paul) etc., but, not to knock them, if they cannot legally give advice, why are they so influential when genuinely well qualified IFAs (of whom there are hundreds) are unheard and frequently villified by both the pundits themselves and regulators?

    In the same way why do ”life style gurus” and self appointed “behaviour experts” have influence (not least with the government, as in the “Nudge unit”) when qualified psychologists don’t?

    It’s the way people are, so we just have to deal with it and try to get qualifications and relevant experience of real world problem solving to the fore.   

     But I think trying to teach people “how” to do things (find the cheapest energy supplier, how to deal with the stress of job loss or debt etc.) is not as useful as teaching them about “why”they need to look, why they suffer etc. and general techniques of analysis to allow them to apply the skills to whatever situations they face.

    And that applies to adults, to children (let’s teach them to question “why should I believe this person who has no qualifications just because they have been on TV”) and to public figures such as Ms McDermott (ask not, “how can you regulate”, but “why do you want to, what are you trying to achieve, why do you feel you must make the rules yourself and are not allowed to ask people who have spent a quarter of a century devising ways to analyse and hence begin to solve the problems you’re trying to solve”.)