FTAdviser.com

In common with IFAs all round the country, I have been grappling with the concept of TCF and have had the six main principles tattooed on my forehead.

I (and I’m sure others) have recently received what I suppose was meant to be an invitation to attend a road show, but rather looked like a summons to Torquemada’s inquisition, with quite implicit indications that if I didn’t turn up the thumb screws and my cilice would be waiting.

I (and I am sure the great majority of other IFAs) have no issue with the concept, which we think not only is right but is sensible business practice.

What is rather less engaging, however, is product providers’ complete disengagement, notwithstanding the worthless PR effort that they seem to send out saying how engaged they are. This is just flannel.

Let us take a few examples.

I wanted to provide a client with a stakeholder pension with one of our major stakeholder pension providers, Legal & General – the firm who you will remember was extremely keen on this product.

The amount of money under consideration was substantial and the client, who had already reached 65, wanted to go for a further four years. Legal & General said “we can’t do illustrations for four years because there would be a claw back”.

I tried to explain that I am not taking commission of any description and would be charging the client a small fee, but it seems that their quotation has to be for exactly five years or they can’t do it.

Is this is merely an illustration to demonstrate that a lot of providers haven’t yet got the idea that some of us, and indeed more and more of us, often don’t take commission and therefore the product structure needs to reflect this.

Then we come to the other great product that is being touted as the saviour of the post retirement market. I rather think that it is rather less the saviour of this market and more a desperate attempt for life offices and lenders to save themselves.

I refer to equity release, both home income and home reversion.

Let me say at outset that for smaller properties this may possibly have a very small niche as the residents may have no other alternatives, but as you go up the scale the only epithets that vaguely describe these plans are ‘rip offs’, ‘legalised mugging’ or ‘daylight robbery’.

In many areas of the country houses worth between £1m and £3m are by no means a rarity, even with current depressed prices.

First of all we enquire of the great Prudential. It transpires that commission on these contracts is compulsory. It doesn’t make any difference to the contract, you have to take it and it works out at about 1.75 per cent.

Let’s take an example, I have a client with a property worth £2.4m, the maximum that they will lend is £475,000. About as much use to this client as a chocolate teapot and represents just under 20 per cent loan-to-value, but the rate is fixed at 6.4 per cent for the term.

In addition there are fees of £2,596 and you don’t have to be an actuary to work out that my firm would receive £8,700 odd. So if we add all the charges together it is costing the better wedge of £11,200 in round figures.

The alternative? Well he can always move into a hovel costing £1m and realise a total of £1.4m, knock off the odd £400,000 as a rounding error, he has £1m in his pocket for which he is paying nothing.

So what about home reversion? Well in this case the home reversion firm states in their key features that he would sell 41 per cent of his house. But 41 per cent of £2.4m is £984,000.

Oh no, he doesn’t get that! He would get £376,771 – but that’s only 15.7 per cent.

So, what does that mean? It means that he is going to be spending (in effect) £984,000 to get £376,771 back. Wow – what a great deal!

Then of course you have the fees, my firm will receive £10,000 – nil commission isn’t an option and the fees amount to £1,620 – still a whack over the £11,000.

My previous remarks about this client moving into a £1m hovel apply again. Oh, and in case anybody is thinking that this guy is 35, let me tell you he is 70 and is wife 67.

This is one of the principal reasons I haven’t even bothered to take the examinations for home income plans as you don’t have to have an examination to advise on them, you only have to pass the exam if you want to transact the business – and it might interest any reader that not one provider (and I did get several quotes) actually asked if I have the qualifications.

Why I need one at all is a bit of a farce as I’m a CFP anyway. It’s a transactional qualification not an advice qualification and the advice is pretty easy with my client bank – for which I might add I do charge a fee, but nothing like the levels of the compulsory commissions being offered.

Treating customers fairly? Who mentioned that?

- Harry Katz is principal at Norwest Consultants

QUESTION: I’ve been approached by a firm offering to buy my business out. I’m five years away from retirement, how do I go about making a decision, and what kind of circumstances would determine a good time to sell?

ANSWER: I would start by asking what offer has been made for the business, as this is could significantly influence the answer to this question.

Being five years away from retirement you have some time to get your business into the best shape for a sale and potentially improve its sale value.

Read More »

At last the cat is out of the bag with Openwork. Its new chief executive, Martin Davis has finally admitted that post 2012, his business model might not work.

In this week’s Financial Adviser, Mr Davis says that we will return to a polarisation of the intermediary market, and his multi-tied business model will struggle.

Aside from at least getting clarity on the matter, it does allow for some discussion about what the RDR is really about. Read More »

It was a tale of two building societies last week. Chelsea revealed it had been hit by a £41m mortgage fraud within its buy-to-let book and as a result posted a loss of £26m for the first half of the year.

Buy-to-let lending was swiftly held up so it could be beaten with a stick by industry commentators but a quick read of Coventry Building Society’s results for the same period showed this type of mortgage should not be stoned to death.

Coventry reported a post tax profit of £31.1m for the first half of this year, compared with £25.1m for the same period in 2008.

David Stewart, chief executive of Coventry, said this performance was made possible by the strength of the building society’s funding position and by the very high quality of mortgage lending undertaken in previous years.

In common with rivals, Mr Stewart said Coventry had undertaken buy-to-let business and at 30 June 2009, its buy-to-let portfolio totalled £2.9bn, representing around 22 per cent of the society’s mortgage book.

Buy-to-let mortgages have helped some savvy individuals build up a property portfolio and a regular income for themselves.

All too often in this industry, a product have been deemed bad – think mortgage endowments and split capital investment trusts. But things are rarely that black and white.

Let us hope buy-to-let deals are not thrown on the scrap heap just because some lenders got their fingers burnt.

We have long been at the mercy of regulatory requirements for data protection registrations, consumer credit licences and FSA fees, the costs of which increase year-on-year and seemingly beyond any realm of inflationary linked or cost based analysis.

In 2007, we saw the introduction of the CCJ levy, costing firms an additional £150 on the normal cost of the consumer credit licences.

The CCJ levy (Consumer Credit Jurisdiction Levy), saw the OFT with the challenge of collecting £2.475m on behalf of the Financial Ombudsman Service, who took on an extended role in considering complaints about consumer credit products and services. Read More »

As I write my final blog for FTAdviser, I can think of a number of issues I should throw open to debate in what marks my farewell blog to Speakers’ Corner followers.

Over the last two years, while writing for FTAdviser, so many problems have emerged in the financial services industry and many opinions have been batted around about how best to tackle them.

The intermediary market has not only had to deal with the recession and keep business coming through the door, but has also had to ensure it has met all the FSA’s regulatory requirements, both new and old, while preparing for those coming in the future. Read More »

We came across some rather surprising research last week, indicating that the majority of IFAs favoured structured products as their preferred investment vehicle when recommending solutions to clients.

The research came from Morgan Stanley, and while I’m in no doubt of the credibility of their methodology, I do wonder who these IFAs were they were talking to.

Read More »

Fresh concerns that professional indemnity premiums could spike in the coming months are likely to cause more headshaking among the financial adviser community.

The news is destined to hit advisers in the pocket, compounding problems for the industry posed by incoming regulatory changes.

Under the RDR proposals, advisers are already facing key challenges to the way they derive income and will be put under pressure by new capital requirements. Read More »

Weeks after the Tories dropped the bombshell that the Financial services Authority (FSA) would be scrapped if it got into power, we have been given a bit of clarity on this proposed plan.

Since it announced in June that it would do away with the FSA and establish a Consumer Protection Agency (CPA) instead, tongues have been wagging as to whether this would mean the doing away with the much loathed Retail Distribution Review (RDR) as well.

Some in the industry were holding out hope that the RDR would fall by the wayside if the FSA was scrapped, whilst others were a little more realistic in their expectations, resigning themselves to the fact the RDR would indeed go ahead.

So what exactly have the Conservatives got planned?

Well, at this stage probably not much and I tend to agree with Liberal Democrat Treasury spokesman, Vince Cable who said this was a case of the Tories throwing out a line it thought many members of the public wanted to hear.

Clarifying his stance on the future of the FSA and revealed on FTAdviser, Mark Hoban MP, shadow financial secretary to the Treasury, said “the FSA has failed to perform both its function as custodian of financial markets and in its duty to safeguard the interests of consumers,” and this is why it needs to be scrapped.

He also said the RDR will pass to the Consumer Protection Authority as the body which will take over the regulation of the IFA community.

So there you have it no end to the RDR and potentially a new regulator to boot, so not much good news for the adviser community.

But I really wonder if the end of the FSA is such a good thing after all. It will mean new regulatory rules having to be drawn up and more administrative hoops for firms to jump through while the changes take place.

And at the end of the day, someone has to pay for the upheaval and depending on how the Tories structure the new regulator, the costs could potentially be high.

As a result, firms may find themselves having to endure unnecessary fee hikes and for what?

A new regulatory name on the front of Canary Towers? Maybe it’s a case of better the devil you know than the devil you don’t.

Tell us what you think here.

Some IFAs may have thought Christmas had come early when the Tories announced they were to scrap the FSA and declared that IFAs are ‘no threat’, at the same time we hear that advisers are to be regulated by a Consumer Protection Agency (CPA) made up of the OFT and perhaps Trading Standards et al, a suggestion some people put forward many moons ago.

The regulators themselves will not be concerned about this because it was also announced that they would be employed either by the new Bank of England or the new CPA.

What I wanted was for it to be burned down as per Eric Bettelheim’s cunning plan, but no, that was too simple to work, or was it? Read More »

QUESTION: With all the recent talk about how much the Retail Distribution Review is going to cost advisers, I have begun to panic a little about whether I am not only doing enough to prepare for the changes.

I am also concerned whether as a sole trader, I will be able to bare the extra costs involved. Read More »

I am thinking about submitting the interim report about the compensation payments into the Equitable Life debacle to the Plain English Campaign.

I almost cried when I read the latest report – the fourteenth in the last 10 years.
The 33 page report, Equitable Life ex-gratia payment scheme: Interim Report, earlier this week was almost incomprehensible in its content.

Written by former judge Sir John Chadwick, it highlighted several ways to calculate how much compensation the Equitable Life policyholders could get by using complex algebraic formulas.
Read More »

was on holiday tramping the backwoods of the Canadian Rockies when news of Michael Jackson’s death broke, but I was so cut off from all forms of communication at the time that it was a week before I heard about it.

At about the same time, the latest consultation paper on the RDR was published, but for some strange reason this received a lot less publicity than Jacko’s demise, so I only got around to reading about it on my return.

Unsurprisingly, perhaps, this latest consultation paper is greatly amended from that of last year. The latest missive has drawn back from the absolute brink of its proposals of a year ago of having just two types of adviser – independent and salesman – and is now proposing three types of advice, with restricted and simplified advice alongside independent. Read More »

Is it just me or is there a common thread to the banning notices handed out by the FSA to naughty mortgage advisers?

Today, the City watchdog banned a London mortgage broker and fined her £70,000, for knowingly submitting false and misleading mortgage applications. Read More »

The RDR proposals have had a huge amount of criticism, not least from me, over the last few months and there have also been a few IFAs that have welcomed it.

I have read their reasoning but remain convinced that it is, as far as IFAs are concerned and at the very least, an enormously time consuming and expensive exercise that would drive many out of the business.

I am told that IFAs must embrace change or perish. Read More »

Many questions have been raised since the Tories threw into the public domain their lavish proposals to do away with the FSA.

If anything was a headline grabber, that certainly was and it has certainly got people talking.

People are now left debating the rights and wrongs of the regulator and whether it will continue to exist if the Conservatives get into power.

The regulator itself it seems is also suffering from low self esteem, as potential candidates who look to take up its new enforcement roles trickle through the doors as opposed to coming through in droves.

But from my conversation with the head of regulatory services at KPMG, all the Tories have created by indicating they will scrap the FSA is a degree of uncertainty in financial services markets.

In particular, financial advisers are uncertain whether the RDR will go ahead if the FSA exists no more. But from Marcus Sephton’s experience, he says it is best to plan as if it will go ahead anyway.

He said: “Forget the noise in the system and keep charging ahead. Whether it’s the RDR or capital liquidity it doesn’t really matter whose name underpins the regulation, it’s still going to happen.”

But perhaps a little more concerning is the fact the FSA had intended to ramp up its regulatory oversight and enforcement capabilities by taking on a number of new supervisory staff, but this now looks as if it is not quite going to plan.

Sephton said: “The FSA recruitment campaign is going quite well, that’s what I believe. But inevitably there will be a few people who have got cold feet and they aren’t dropping out in droves.”

If the regulator can’t attract the staff, then how can it ramp up its regulatory oversight?

And isn’t it necessary that it does increase its oversight to ensure good industry practice, so that we don’t see a repeat of the problems we saw during the credit crisis, credit crunch or whatever you want to call it?

Is it possible that this Tory teaser could be more damaging to the financial services industry with bad practices slipping through the net as the future of the FSA is pondered?

Tell us here.

While historically investors were inclined to “sell in May and go away”, this year has proven the exception to the rule.

The fact is that so few people were actually in the market in the first place, compared to recent years, there was nowhere for them to actually ‘go away’ from.

Rather, what we have been seeing is that investors (fuelled by the media, granted) are leaning towards particularly short-sighted views with regard to the markets and where they are throwing their money. Read More »

There will be tears and cheers this week and next as thousands of students from around the country collect their A-Level and GCSE exam results.

They will find out if they have achieved the results they need to go on to further and higher education or for one of the scarce jobs available.

The parallels for the young advisers is uncanny, many will empathise with the younger generation who have studied for years only to face further exams or job uncertainty in the current market.

Read More »

Many advisers have already made quite clear their intention to leave the industry when the Retail Distribution Review (RDR) comes into force.

This is not new. But as the implementation of the market reform draws closer, advisers are now more seriously considering which best course of action to take.

For some it will be to simply make the required changes to their business as it stands, such as adapting their business model, setting appropriate fees and charges and getting the Level 4 qualification.

But for others, it will be to leave the industry altogether – and how they go about this is now beginning to be seriously debated. Read More »

As banks try to justify their second-quarter pay packets, authorities should be asking them a simple question: do utilities need to pay banker-style bonuses to succeed?

If regulators are due to turn banks into crisis-proof – or idiot-proof – utilities, surely incentivisation should be more mundane?

The fact authorities have not been pushing this utility vision is, in part, because it is complicated to execute. To make consumer banks safe and insurable by the taxpayer, it would have to split consumer and investment banking activities and ensure commercial banking is funded purely by deposits.

To make investment banks safe, it would have to regulate them more scrupulously and, in addition, regulate all financial companies and investment funds to ensure a shadow banking system does not develop. Above all, no one institution, for consumers or professionals, should remain ‘too big to fail’.

This is a massive overarching task that needs co-ordinated microeconomic analysis from the FSA, macroeconomic input from the Bank of England and the ultimate support of Parliament – by proxy, the taxpayer. To accomplish it, authorities need to invent a new-look brand for the UK that confirms it as a financial centre and innovator without scaring off capital.

This is hard, but not impossible. In another industry, Ucits regulation provides a reasonable, if imperfect, model, in that it has made funds safer, more flexible and more attractive to international investors. Politicians from the two main parties have pushed this integrated vision too passively. Even the supposedly more radical Conservatives have called for the abolition of the FSA, which would complicate policy co-ordination and deprive it of checks and balances.

If the state fails to simplify UK banks along such commonsensical lines, they will remain high-wire acts too complex to survive without the best talent and pay.

A gigantic international conglomerate, basking in its too-big-to-fail status, suddenly announces not only its first annual loss in many years, but a multi-billion-dollar hole in profits that leads to a restructuring.

Governments initially decide the company can stagger on without their help, but then force it into bankruptcy three years later. Investors who thought politicians would never let the company go under lose millions.

Is this a brief history of General Motors from the beginning of 2006 to the present? Or does it describe a financial giant that announced a massive loss at the start of 2008 and repaid its state aid so it could distribute bonuses in 2009, but thereby drained the company of funds and was declared insolvent in 2011?

Investors who feel the political status quo is too entrenched to let a bonus-guzzling institution go under should heed the example of the automotive industry. In spite of bank-like pressure from oil lobbies, unions and car executives, even right-wingers started admitting massive gas-guzzlers and their manufacturers were unsustainable.

But if politicians did for General Motors by their absence, they may yet do for financial institutions by their presence. Regulators have been working overtime to get a grip on their books and on the credit derivatives markets that insure their debt. One key problem with the Lehmans bankruptcy was such knowledge was unavailable. The result was panic, rather than extreme and understandable dismay.0

With this knowledge at their disposal, regulators may find a structured bankruptcy much easier to pass. Faced with a rise in their cost of borrowing, governments may be more inclined to let a troubled company default, after committing well-heeled investors to buying its assets.

The General Motors break-up and the forced tie-up of Chrysler may yet prove a model for what is to follow.

Committed baseball fan Ben Bernanke couldn’t have chosen a more appropriate team to support than the Boston Red Sox.

No other team could better encapsulate the Fed chairman’s career of late than the Red Sox, which before 2004 had gone through an 86-year spell without winning a championship.

Similarly, Mr Bernanke has undergone a similar Renaissance following a period where the extension of his four-year tenure as chairman remained under question over his handling of the US economic crisis.

Yet the Fed chairman stepped up to the plate again last week in his semi-annual testimonial to Congress, no longer swinging wildly.

He appeared at his own Fenway Park, backed by recent praise from president Barack Obama and support from peers, bearing both good news and bad.

Mr Bernanke argued, although financial conditions remained stressed, there were some signs of hope after the precipitous fall in markets earlier this year.

Highlighting the gains made in equities markets, the reduction in risk aversion and new corporate bond issuance, Mr Bernanke said the moves could be traced back to the Fed’s policies.

He called for hard choices to be made, reflecting those made during the Red Sox championship winning season, which they had almost thrown away.

He added: “Addressing the country’s fiscal problems will require difficult choices, but postponing those choices will only make them more difficult.”

In the 2004 World Series, the Red Sox overturned a 3-0 game deficit to go and win the championship, a feat never before accomplished. Now, all eyes remain on Mr Bernanke and whether he will be able to overcome a deficit of confidence from vocal politicians on the left and right.

Will he continue to prosper beyond 2010 as chairman? It will all depend on the curve balls.

The Bank of England and members of the Monetary Policy Committee released their quarterly inflation report yesterday.

On the upside, the report pointed to easing market conditions and improvements in household and business confidence. Another positive indicator was the modest recovery of the housing market, which had a knock-on effect for house prices.

On the downside, the MPC reported that credit conditions remain tight as banks repair their balance sheets. Read More »

The recent headline of shadow chancellor George Osborne pledging to abolish the FSA will no doubt have brought a cheer to many IFAs.

In short, in less than 300 days time – I have a countdown on my wall – there will be a general election followed by the new government introducing a bill to transfer FSA’s powers over banking and other large financial concerns to the Bank of England.

The ‘rump’ of the FSA is then to be transformed into a focused ‘Consumer Protection Agency’.

Read More »

For non-believers of the advent of ‘green-shoots’, the mortgage market was given three clear indications in the last few days that the sector may be through the worst of the credit crunch.

The first came on Tuesday, when the CML announced that loans for house purchases had risen by 23 per cent in June, with 8,500 more loans granted than the previous month.

The CML went on to give further proof, stating the total number of house purchase loans (116,700 for those that were counting) represented a 50 per cent increase compared with the second quarter of 2008.

The number of loans for remortgages also increased by 13 per cent from May to 34,000 loans in June.

In addition, the latest UK housing survey from Rics, also published on Tuesday, showed optimism was rife, with 8 per cent more surveyors expecting house prices to rise rather than fall over the next three months.

It also marked the highest level of optimism among Rics members since April 2007.

Finally, today (12 August) Chesterton Humberts’ house price poll showed a second consecutive month-on-month increase in house prices.

The estate agent said house prices rose by 0.4 per cent in July, with the average price of a residential property in England and Wales increasing by £616.

However, non-grass roots converts would argue that the CML also said house purchase loans were down 22 per cent from the second quarter of 2008.

They would also argue that while demand for property is continuing to rebound, Rics stated there was a current lack of supply.

An argument could also be made with Chesterton Humberts’ poll. It said house prices fell in eight out of the 12 regions, with the stats only held up by sales in London and the South East.

Yes, it is true, we are a mile away from lending at 2007 levels. But, after hearing that the UK is definitely not in for a BBQ summer, with the nights getting darker already, is it not time to make the most of whatever good news we have?

Can the glass ever be half full?