I am also needy, opportunistic and shamelessly attention grabbing and I know you people will read the compliance stuff so that's why here's another compliance guest blog by yet another Phil.
This time filling in with his fact filled finance feature is a Phil by the name of Phil Billingham (Phil Young guest blogged here on compliance a few weeks ago, here's the link to his post).
It seems to me that the industry is chock-a-block with Phils who have a word or two to say about compliance, and the smarter and better off we all are for it as well. May there be many more financial Phils.
So allow me to quickly fill you in on this Phil:
Phil Billingham is an ACII CFP Chartered Financial Planner who runs the rather appropriately named Phil Billingham Partnership which is a leading provider of Regulatory change and Business Consultancy to Independent Financial Advisers and Financial Planners.
Phil is a former Director of the Society of Financial Advisers as well as of the Institute of Financial Planning and still sits on the Financial Planning Standards Board (FPSB) Regulatory Advice Panel.
In addition he is also a Financial Planner and Director of Perceptive Planning Limited. This firm has been awarded both Chartered Financial Planner and Accredited Financial Planner designations, one of only a handful of firms in the UK to be recognised in this way.
So based on all the above it sounds to me like he knows his marbles from his chestnuts. So without further ado. Please, take it away Phil:
The future for Compliance?
This world of Insurance Sales was characterised as follows:
- Commission only
- Sales and target driven
- High turnover of Salespeople
- A ‘Buyer Beware’ approach to consumer protection, involving disclosure, ‘Cooling off’ or cancellation periods
- A small percentage of Salespeople succeeded, and many of these gave limited but good and ethical advice to their clients
- Many others gave, at best, narrow and dubious advice. Often this was as a result of ignorance rather than malice
Some countries around the world retain this model to this day – but this is changing
The Financial Services Act of 1986 was created to try to manage this model. And this is still the model of Regulation and Compliance we have today:
- Transaction based
- Assumption that products are OK – it’s all about Suitability
- Seeking to micromanage Point of Sale behaviour
- There is an assumption that Advisers are Salespeople who will sell anyone anything if they are allowed to do so
In the meantime, the world of Investment Management carried on pretty much unchallenged by the Regulation imposed on the ‘Sales’ environment
This world was characterised by:
- A focus on relatively short term investment returns
- A structural need for clients to be willing to risk capital in order to be sold products
- Much marketing was based on the premise the manager would ‘beat the market / benchmark’, but they rarely did
- Often complex and opaque charging structures
- Inherent conflicts of interest, such as the sale of ‘in house’ funds whilst badged as ‘Independent’
Some of these features have come back to bite us, especially in 2008, and the continued design and marketing of ‘Toxic Products’. These firms are – reluctantly – having to bring their processes up to speed. This is being ‘encouraged’ with regulatory fines reaching many millions of pounds.
The position in which we find ourselves in 2014 is that:
- We have inherited a Regulatory system that was designed to manage the perceived risks to consumers as they were in 1986. The world has changed significantly since then
- We have a Regulatory system that has been very slow to recognise the dangers posed to consumers by the Investment / Product industry
- We have a Compliance sector that, understandably, reflects the past assumptions in the Regulator.
- In turn, this often leads to compliance function being at odds with the ethos and direction of travel of Adviser and especially Financial Planning firms, whilst adding little in terms of consumer protection.
However, things may be changing. It is clear that regulators around the world share a vision of the faults inherent in the past models of Financial Services and Product design and distribution, and Financial Services firms must either adapt to this vision, or go out of business
This international model is crudely:
- Advisers must be competent – that means educated, qualified and trained
- Advisers should either be Independent and have a fiduciary like duty of care to their clients, or be labelled as salespeople / restricted / tied agents.
- Independent Advisers should do what it says on the tin, and truly be the agent of the client – the ‘Trusted Adviser’ role.
- All costs and commissions must be declared. Increasingly the view is that Independent Advisers in particular should not receive commissions.
- Consumers have the right to be ‘Treated Fairly’. By everyone in the Product / Advice chain.
- The consumer should be sufficiently advised or educated about the features and risks of products and investments to truly be able to give Informed Consent.
Ultimately the regulators will get their way. The model above is seen to be better for consumers, and the regulators have the power to effect change, even in the face of entrenched self-interest. It is significant that the UK is seen as the world leader in these changes.
However, could we really claim that our Compliance sector are also world leaders in how we do things? Or are we still trying to check ‘is there a fact find on file’ and ‘have fees been disclosed in Pounds as well as percentages?’. All this while not being able, or often not even trying, to look at the suitability of the actual advice, and if the firms own standards and process has been followed? In short, are we still just ticking boxes, or are we adding real value?
I think the challenges facing the advice focussed compliance sector are:
- How do we help firms in their transition to regulation as it applies in 2014 and beyond, instead of simply checking that they have obeyed rules that are now over 20 years old?
- How do we industrialise basic compliance to take cost out of the system?
- How can we truly become ‘Risk Managers’ within the system, looking forward, rather than ‘Compliance staff’ looking back?
Some Compliance / Risk Management professionals have made, or started, on this change of focus. The rest of us need to do so – and soon.