Katz on the FSA grilling: Monsters, simplified advice and exits

I watched every minute of the two hour web cast and found it highly illuminating and educational. I think it gave a very valuable insight into the mind set and attitudes of the Regulator.

Let me make it clear that I have nothing in particular against the FSA; I just have a lifelong antipathy to bureaucrats of all types.

What I found mildly amusing was that as a spectator it seemed to me that the Parliamentarians in the form of the Treasury Select Committee seemed very uncomfortable with the monster of their creation.

It also caused me some amusement to see that the member who widely publicised that he was going to ‘give the FSA hell' at the meeting, was actually a bit of a pussy cat. The Rottweiler of the show was undoubtedly George Mudie, who in fact really did give them hell and I have little doubt that any other IFAs that may have been watching this were probably quietly cheering.

However, I thought that Sants played a pretty good defensive game and if there was anything that he didn't want to answer, his stock response was to undertake to write to the Committee; which was a pretty cute way of stalling and I was surprised that the members of the TFC rolled over for this quite so easily.

Turning to the specifics, there were many interesting statements early on. Mr. Sants said that the RDR was not specifically designed to close the savings gap. Later on he went on to speak of potential detriment. That logically in itself is a regulatory failure. If they feel that risk at the level of which they were speaking is as a result of the RDR then it would seem that their efforts are self defeating. I also found it rather chilling that when speaking of regulatory enforcement he was talking of ‘judgement'. Now we are not talking about judgement in the legal sense when there is recourse as we all know those who are judged by the FSA do not have much recourse - if any. Therefore judgement in this context means nothing more than an opinion. In which case I find it rather chilling that we are regulated by opinion, or putting it more bluntly, on a whim.

The tick box approach may have had its critics but at least the rules are clear and if the box is ticked we know we are in the right place. If we are to have a judgemental regulatory environment, then I would have thought it would be logical that we could have recourse to those judgements in order to make them genuine judgements and that of course implies that there would be no great cost to small practitioners in doing so.

On other small statements I also found my eyebrows rising particularly when Mr Sants said he was mild mannered - how does that chime with his statement "be afraid, be very afraid". That sort of statements sits better with a medieval war lord than a mild mannered regulator I would have thought.

He also mentioned that the RDR had undergone a cost benefit analysis. What wasn't clear was who did this? Did the FSA do it or was that done externally? If they did their own cost benefit analysis then I wouldn't be surprised to find that it came out favourably.

When questioned he was at pains to point out the RDR didn't only apply to IFAs, but he seems to be bending over backwards to institute ‘simplified' products (are there really such things?) which of course will benefit banks most as it plays to their ‘pile it high, flog it to all' model.

The tenor of his response concerning those of us who may not have issues with certain aspects of the RDR was redolent of the old Imperial divide and rule policy. There are those such as myself who achieved Level 4 more than 20 years ago, and then achieved it again with further examinations later and have been fee charging for about the same length of time. I don't say this to make us heroes but to point out that to a large extent the RDR follows us - not vice versa.

Notwithstanding many of us in this position are still not happy with the RDR. We might not have concerns about fees and exams but there is the vexed question of all these silly divisions. When that came up at the Committee I was surprised that nobody actually asked why the FSA thought that 4 divisions were a good idea. It was clearly pointed out to Mr Sants that in all previous research by independent bodies such as, for example, Which?, who presumably the FSA are quite close to, have always said that (putting it in the least complimentary way I can think of) "IFAs are the least bad conduit for advice". But that doesn't seem to cut any ice with Mr Sants at all.

His definition of restricted sounded extremely vague and those who are restricted to a single adviser aren't restricted, they are tied under the current definition. We can all imagine the excited expectation of certain organisations when considering the new regulatory environment. They can now fudge the issue with greater alacrity than they ever have done in the past.

Basic advice wasn't even discussed and when we got to simplified advice I thought that logic flew right out of the window. We already have simple products. Payment protection insurance is extremely simple. What other simple scams will be thought up by those who want to avoid full regulation? I found it hair raising that if you don't want to pay a fee to an independent or a restricted adviser, you can go to a simplified adviser and pay commission. This after a lengthy exposition by Mr Sants saying how they disparaged commission and how it was detrimental to customers. How can you have your cake and eat it? Either commission is not desirable or it is acceptable - which is it? If he actually honestly believes that there is such a thing as a simple product then perhaps he's a little out of touch.

Even for those with modest incomes, what is considered to be a simple term assurance product isn't really simple because unless the person providing the product understands that invariably the life assured should not be the owner, then much of this effort is rather wasted. I accept that in these circumstances inheritance tax might not be an issue, but access to the money when required is important and therefore perhaps life of another might be more appropriate so that the life assured is not the owner. That's merely an example of what appears simple isn't.

There was evident discomfort when asked how many of his staff had actually worked in small firms face to face with customers, and I think this is the very nub of the issue. The salaries (on average) at the FSA are well beyond income levels enjoyed by the small firms which they regulate - so is it any wonder that they find difficulty relating to those they police

I also was rather disappointed with the TSC when commission itself was discussed and particularly the topic of disclosure. Mr Sants and his ventriloquist dummy said that customers' didn't understand the disclosure documents. Whose fault is that? The FSA designed the disclosure documents. If there was a failure then it was their failure not ours. I well know that many in the IFA community had actually written and commented that disclosure documents could be much simpler. Indeed I myself sat in on an FSA focus group on at least two occasions and all the practitioner members of the groups made the same point about the disclosure document. There was no reason why it couldn't be simple and cover one page but, like so much else, the Regulator has to complicate things unnecessarily. You only have to look at their latest risk document that takes 97 pages - the nitty gritty is in the executive summary that takes up 4 pages.

When the topic of FSA immunity came up Andrew Tyrie referred to recklessness. I thought that Mr Sans' responses looked like a game of dodge ball. He certainly lived up to his new nick name on this subject. However, what I found unacceptable and what wasn't brought out was that they expect those standards from us, when they are not prepared to accept the same standards for themselves. If we behaved recklessly or without good faith, they would be on to us like a ton of bricks and for small firms the fine imposed comes straight out of our own pockets. Mr Sants avoided this aspect by saying that any fines would come out of fees if the FSA was brought to account. Not necessarily; they could take it out of your bonus pool - that would concentrate your minds.

When it came to statistics the FSA really did highlight their weakness. In spite of RMAR, Gabriel and all the other hoops that take up so much of our time, they still can't be precise and tell us how many IFAs there are, what their age groups are, how long they have been practising, how many complaints each individual IFA is responsible for and so forth. And then they are playing fast and loose with the statistics they do have. The 20% is firms that might be lost but that only equates to 10% advisers. Excuse me for being dim, but even if the 20% are sole traders then it is still 20%, but most firms have more than one IFA so how can 20% firms equate to 10% advisers unless they are saying that some firms will close and the advisers of those firms will join larger firms, but that wasn't made clear at all. And then we had three figures bandied around, there was the 20%, the 10% and an 8%. I wonder how they would view it if we gave answers like that when they interrogate us.

In conclusion, when all the points are taken into account that were made by the interlocutors it would seem that in order to satisfy all the various requirements in a way that would please the Regulator most, it is the small firms that are best suited to do this, who pose the least risk (by virtue of being directly responsible) and who have the best relationship with their customers. Perhaps if this were recognised we might see some progress.

All in all I think the meeting made good viewing, but will have little effect and we will have to accept what the Regulator doles out whatever we may think of it until Parliament finally realises that the monster is of their making and Frankenstein needs more surgery to make him a little more human.