A kind of literature
This February, the FCA has published it's Sector Views document, some 85 pages, stuffed with charts, generic image-library graphics, and presenting an overview of the financial kingdom that the FCA rules. The document covers retail banking, lending, GI & protection, pensions & retirement income, retail investments, investment management and wholesale markets. One could argue that compressing this sheer breadth of scope into a mere 85 pages is something of an impossibility, and therefore ask the reasonable question: who is it intended for? I suspect that its primary function is as a sop to the financial media, for the kind of journalism which is content with sound-bites, and simple charts.
Equally well, Sector Views does have some value - the voluminous references included at the end of each section suggest that, whatever we might conclude about the content, it is at least based upon something objective. How do we therefore extract some value from it? Presupposing that most Advisers are unlikely to willingly read this kind of publication, here is a quick overview of some of the main themes:
(A) Investor behaviours
Setting to one side the limitations attached to the data-periods considered (July 2012-June 2014, cf July 2014-June 2016), one notes that auto-enrolment savings have increased from 17% of households to 22%, and holdings in ISAs have increased over the same period from 10% of households to 12%. Alongside this, we learn that 1.9 million customers predominantly use cash for their savings, despite an environment of low interest rates (overall a +3% increase in allocation to cash deposits to June 2019). The FCA's use of disparate periods for comparison purposes, does rather interfere with one's capacity to draw meaningful conclusions from the publication, but nevertheless, the information is suggestive of a population which, to a large degree, has not grasped the significance of appropriate long-term investment strategies. Is there therefore a role for good IFA communication on these kinds of issues?
(B) A view on tech
Within Sector View, there are repeated references to technological innovation - Open Banking, Big Data, AI, Fintech etc. The prevailing tone of the FCA's treatment is negative, tending throughout to emphasise the dangers, challenges and the enhanced potential for cybercrime etc. Even when a positive emphasis is included ('Innovation gives consumers greater control, improved security and better authentication'), it is almost immediately counterbalanced by a less positive view ('Criminals misusing technology can cause financial loss to consumers'). Of course, the latter point is always going to be true - criminals 'can' misuse technology, given that is the kind of thing which criminals tend to do. Otherwise, presumably, they would not be criminals. But, as a kind of argument, this holds no water: technological development is what it is, and the key providers in our market are taking steps to develop systems which are as secure as possible, investing huge sums to stay ahead of the baddies. Intermediaries have an important role in protecting our customers against financial fraud, and in order to do that we need strong systems and controls.
(C) Risks in lending
The FCA's treatment of the retail lending marketplace is relatively uncontroversial, and it does highlight the phenomenon of what it terms 'Disorderly firm failure in the Peer-to-Peer (P2P) market', something we have highlighted concerns over to our Members in the past. Intriguingly, the paper also notes a tendency amongst Claims Management Companies to offer poor value - a trend we can absolutely echo, based upon our experience of the intellectual and ethical vacuity at the heart of this sector. Even more interestingly, there is no mention anywhere in Sector Views of the exponential rise in mortgage fraud - a matter which now forms the prevailing concern of those mainstream lenders that we have talked to.
(D) General insurance and protection
Not a lot of 'new news' here. We are reminded that only 35% of UK adults hold a personal protection product (Term, CIC, PHI, PMI etc), which is less than the proportion of the population that have extended warranties for their smartphones and household gadgets. From 2016 to 2018 there were slight increases in the sales of individual protection products, but nothing to indicate anything other than a stagnant market. At one point, the FCA voices a concern that 'Consumers with specific needs are facing barriers to insurance policies' without displaying any irony at all about the complete meltdown in the PII market, largely due to regulatory behaviours.
(E) The 'can', 'could' or 'may' of consumer detriment
There's an awful lot of this going on within Sector Views. 'Unsuitable transfers out of DB schemes could, collectively, result in losses of up to £20 billion worth of guarantees over 5 years' and 'Consumers making unsuitable product choices in retirement could also, collectively, lose £20 billion from unsuitable investment strategies over 5 years.' By any definition, £20 billion represents a huge dollop of detriment, and that's going to be the kind of figure which catches the eye of the online publishing journos, on the hunt for clickbait. Of course, prefacing that kind of figure with the caveat 'could' does change the picture somewhat, although we doubt that that the CMCs will pay much attention to terminological inexactitude. A couple of pages later, the FCA tells us that 'Unsuitable SIPP investments are increasingly targeted by claims management companies (CMCs)': not a sign of a 'could' or 'may' anywhere to be seen there! And there are no provisos a little later when we're told that the 'Financial Ombudsman Service complaints data show a sustained increase in SIPP complaints'. To be clear, SIPP complaints have an uphold rate of 61%, and complaints in relation to income-drawdown show a 36% year on year increase, and have an uphold rate of 52%. We might add, that the incidence of synthetic narrative to justify redress shows a remarkably similar pattern: this is now a 'growth industry'.
(F) The elephant is in the room
Skipping on to the 'Retail investments' section, we learn that 'The most significant consumer harm has come directly from ongoing consumer exposure to investment risk'. This may, or may not, contain an element of truth - but certainly, it helps to underscore ValidPath's insistence upon a careful and reflective advisory process, which measures the client's attitude towards risk, as well as their capacity to tolerate risk in practice. One matter is especially clear in the text: the FCA does not like 'proliferation' - 'The proliferation of products, providers, intermediaries and charges across the investment supply chain contributes to this complexity and creates concerns around value for money'. One might somewhat cynically conclude that the collapse of PII capacity might rather helpfully curb this matter of unwanted proliferation. In fact, there is absolutely no mention, in the entirety of this document's 85 pages, of this most catastrophic development, in relation to the one form of insurance which, alone, is able to satisfy the demands of a regulatory-fostered benefits culture. There is an indirect reference to one outcome of this, in the present market, namely the phenomenon of advisory firms 'phoenixing', in order to escape the noose. About this, the FCA tells us, cryptically, 'We are working with the FSCS and Financial Ombudsman Service to prevent this'. One is reminded of that immortal line from the Eagles' hit single Hotel California: 'You can check out any time you like, but you can never leave'.
(G) Investment management - what's missing
This is the final section that I will comment on here. It contains the usual tropes that one would be churlish to disagree with: 'Market abuse can cause losses to investors'. Yes. It certainly 'can'. And again, 'Investment in higher risk or less liquid assets can heighten the risk of disorderly markets'. Yup. That 'can' word again. A little later, that concern then feeds through to something more concrete, when the FCA tells us that it is going to be implementing (from September 2020) 'New rules to improve firms' approach to open-ended funds investing in illiquid assets'. No doubt this is a response to the Woodfordian debacle, but the focus appears to be on open-ended funds. My own concern would be primarily in relation to closed-ended funds within the EIS and BPR market, where the management of liquidity continues to be a core concern, and where the practices and management of these vehicles can tend to be so opaque as to present an insoluble obstacle to Advisers actually being able to accurately educate clients as to what to expect.
Here, I think, is one area where financial planners add real value. The overarching issue of managed liquidity should be handled at the client level, through the nuanced use of decent risk-profiling systems, coupled with good cashflow forecasting. All of these key areas of planning are baked into the ValidPath proposition, demonstrating that the most significant protections for customers are derived from best adviser practice.