FTAdviser.com

A reader contacted me recently about a problem he encountered with a policy he has with Scottish Widows. It was an FSAVC plan he took out some 20 years ago He opted for the with profits fund, and arranged it all through his IFA on a fee basis, so no commission was paid on the plan.

All went well for a few years, but then the reader was made redundant and his Scottish Widows plan was made paid up. It was largely forgotten about until the run up to his allotted retirement age of 65 earlier this year, when he received a wodge of bumph from Scottish Widows, asking him what he wanted to do with his money.
The plan actually had a GAR, which turned out to be very worthwhile, as the guaranteed annuity rate was a whopping 11% pa – pity, then, the policyholder said, that it was such a small fund, having been made paid up years ago, otherwise he would have been laughing all the way to the Caribbean.

After wading through all the conditions surrounding the options on offer, the policyholder then completed all the paperwork necessary to secure the GAR, and finally managed to tackle the mountain of forms required by the so called simplification of pensions to ensure that he hadn’t breached the £1.8m lifetime allowance (no hope!), which was enough to make anyone give up the will to live at that point.

Thinking that was an end of it, he then came across a single sheet of paper saying that commission would be payable in respect of this transaction to his IFA .

Why would this be when the policy was arranged on a fee basis at outset? I phoned Scottish Widows to ask what was going on with this policy. Scottish Widows replied that “the only reason an IFA would be mentioned would be because they were on our system as being the IFA given to us by the customer.”

Scottish Widows said that even though the original policy was arranged on a commission free basis, “the option to pay commission to an IFA now is added in case, at this stage, advice was sought”. But, the plan was arranged on a commission free basis, so if advice had been sought it should surely be assumed by Scottish Widows to have been on a fee basis, so no commission should have been paid at all.

The amount of commission was paltry – £14.96 at the rate of 1% of a very small fund. But it was the principle of the thing that got this policyholder riled. He said that, had he not spotted this one piece of paper in amongst the rest, commission would have automatically been paid to the IFA. This is because he hadn’t realised that he had to tick a separate box on another form in the pack if no advice had been sought. But there was no connection between this and the statement bout the commission payable to the IFA.

Which begs the question of how many other £14.96s are out there that might wrongly be paid to IFAs if the policyholder is not vigilant? And what would have happened if the policyholder had ticked the box to say that advice had been sought, but it had been paid for by fee? No part of the form allowed for this option.
The reason the policyholder did not want any commission to be paid, and that he had not sought any further advice from his IFA, was because his original IFA, Fraser Smith, had long since disappeared. It is now part of Towry Law and the policyholder has heard nothing from TL since the takeover.

Andrew Fisher, CEO of Towry Law, regular readers will know, shocked the audience at the Financial Times Intermediary Forum in November last year when he admitted that Towry Law received £6m a year in trail commission from legacy business.

This year it will be £5,999,985.04

The easiest way to acquire a small fortune is to begin with a large one, goes the old joke, but those who want to hang on to their wealth usually need professional help to do so. With the advent of the mass affluent has come a new breed of investment manager or, more recently, firms that term themselves wealth managers, many of which offer a range of inhouse discretionary investment funds.
Read More »

After a year conducting market research with 3,000 jobholders, employers and pensions advisers, at a cost of some £363k, PADA has finally chosen a permanent name for personal accounts, the working name of the government backed new pensions savings scheme due to be launched in 2012.

The new name selected is the National Employment Savings Trust, or NEST, chosen by the research participants because it implied growth, reward and an easy acronym, plus an appropriately ovoid shaped logo, chosen because it had the highest ratings for the intended brand attributes of clarity, trustworthiness, approachability and appeal.

Read More »

What a huge can of worms was opened when Andrew Fisher of Towry Law said his firm received £6m in trail commission each year. The revelation came in response to a question put to Fisher by Alan Lakey during a panel session at the Financial Times Intermediary Forum in November last year that I was chairing. The subsequent outpouring of mockery and condemnation from the industry was, perhaps, predictable, given Fisher’s well publicised tub thumping stance on the evils of commission.

Fisher doesn’t suffer fools gladly and seems to delight in alienating just about everyone in the industry. So you could be forgiven for thinking that he’s had his conscience surgically removed to make way for his ego as he sees no contradiction in accepting this commission; his justification is that it’s in lieu of initial commission, and therefore payment for advice already given and no further contact/advice was necessary.

It seems that he’s right on this point. The FSA has confirmed that ongoing service is not a condition of trail commission under current regulations. In a speech delivered on 10 July 2009, Dan Waters said that “any pre-existing trail commission can continue as before; we will not require adviser firms to revisit business conducted before the deadline”. Furthermore, it makes no difference whether trail is paid in lieu of initial commission, or in addition.

Despite this, IFAs will, mostly, consider that the clients who generate trail commission are their clients, with whom they will try to build an ongoing relationship.

However, Fisher was adamant that the people who generate this trail are not TL clients, a point David Middleton of Towry Law was at great pains to explain. “TL has no clients from whom or for whom it receives trail. TL receives trail from product providers. The investors are clients of the product provider not TL. Trail commission links a product provider and an introducing agent of that product. There is a contract that governs this relationship: the agency agreement between the product provider and the IFA. The trail that TL receives is as a result of these historic agency agreements. The client relationship is between the product provider and their client, the investor. No investor is paying trail commission but is paying a fee for a product to the product provider – the client never pays a commission to anyone. Typically, IFAs introduce the product provider to the investor. The investor becomes the client of the product provider”.

Be that as it may, I bet if you ask any of those legacy clients who they consider themselves to be the client of and they would say TL, not the provider.

So I asked the FSA what it thought of this. Its spokesman said that “this is a complex area and will depend on the exact nature of the contracts and relationships between the client and firms involved. For this reason, we are unable to give a definitive answer. However, in this type of scenario the answer could be both: if a client buys a life policy from a provider on the advice of an IFA, there is a contract between the provider (to pay out when life assured dies, cancellation period etc) and the customer; and also a relationship (presumably ongoing) between the same client and the IFA (for which the IFA gets paid by way of commission)”.

This is one of the things being addressed by the FSA and, post RDR, any new business will only be able to accept such ongoing payments in return for ongoing advice.
But that will not affect legacy trail, which can continue to be paid ad nauseum until it falls off the books for whatever reason.

So all TL, (and any other IFA for that matter), has to do to legitimately continue to receive this legacy trail commission is…absolutely nothing. If TL stopped accepting the trail, it would simply go into the pockets of the providers, of course. TL could rebate it or provide ongoing advice, but why bother with such a huge and costly exercise when it doesn’t have to? So there are many reasons why TL would want to hang on to this £6m in revenue, especially considering that it accounted for over 12% of turnover for 2008; in that year it made an operating loss of £7m, and an underlying profit of just £5.1m.

At the FT Intermediary Forum held in London earlier this month, the keynote speaker, Theresa May MP, shadow secretary of state for work and pensions, said that, if and when the Conservative party came to power, it intends to establish a national independent advice line, providing free financial advice. This echoes something of what Thoresen said in his report to the Treasury last year, in which he proposed the establish-ment of a national money guidance service, to teach people how to manage their money.

Read More »

Anyone living outside the Greater London area probably hasn’t seen the rash of adverts that have appeared in a variety of formats for Dixon’s.

Dixon’s, you may recall, used to have a large high street presence and competed head to head with Curry’s (at least, pre its apostrophe removal) in the sale of computers, cameras, TVs and all things electrical.

Nowadays, its only presence is online and at airport departure lounges.

The adverts suggest that prospective buyers of electrical goods first go to a high street store, get all the advice they need about the most appropriate product from the store experts, but then go to Dixon’s to buy it.

The adverts end with the words that Dixon’s is “the last place you want to go”, implying that the buyer gets the best price while benefiting from free expert advice.

Of course, the buyer would be unable to do this if everyone followed Dixon’s suggestion, and the high street stores were driven out of business.

We all buy products online of course, but they tend to be products that are fairly straightforward, that don’t require detailed advice and that are mostly purchased solely on the basis of price.

But for more complex purchases, especially where large outlays are involved, you need advice.

The same analogy can be applied to financial advice. People could go to a financial adviser for advice and then buy the product/investment elsewhere, (or, in this case, make the investment direct, etc), not a problem for fee-based advisers of course.

Or they could weigh up the cost of that advice against doing all their own research, taking on the risk of choosing the wrong thing and the consequences of their decisions.

But what if products were all regulated? Would you still need independent advice?

Product regulation has been mooted once again this month by John McFall, outspoken chairman of the Treasury select committee and lover extraordinaire of the sound bite.

His call for product regulation was delivered at the Labour party conference, and echoes remarks made by Jon Pain, managing director of retail markets for the FSA, at a speech he gave at Gleneagles Leaders’ Summit in September.

The attractions of product regulation appear seductive, but there are downsides too.

For starters, it would stifle innovation, although McFall said that “when I hear the word innovation, I cringe”.

But without innovation the market would quickly stagnate – if the FSA had to regulate all products, it could take years for any new product to see the light of day.

Furthermore, the regulator would become, de facto, responsible for the product, providing a halo effect.

That in turn could lead buyers and investors to feel that they didn’t have to worry about being personally responsible for their financial decisions because, hey, the regulator says the product is OK.

On the other hand, if financial products were to be regulated it may restore some semblance of confidence in the industry.

But product regulation wouldn’t cut out the need for compliance, nor the need for all the bumph that comes with a financial product purchase or investment.

And as you still have to choose between them anyway, regulated products can still be mis-sold if the buyer doesn’t actually need them, or mis-bought if the buyer goes direct.

McFall reckons the FSA has been “too timid in doing anything about product regulation in the past”.

I don’t believe that product regulation will be the utopia that McFall probably thinks it will be, not least because you can’t regulate for every circumstance.

Finances are rarely a simple matter, and for this reason alone no amount of regulation will do away with the need for the sort of impartial, personal, advice that you can only get from an adviser – or a high street store for consumer goods for that matter.

So will buyers be persuaded by the admonitions in the Dixon’s ad?

Personally I am a big fan of John Lewis, and not only go to them for advice, but then also buy the product they recommend – including electrical goods too.

Why? For the same reason as using a financial adviser: I know I will get good quality advice, the product will be explained to me in a way I can understand, and if anything goes wrong I know that they would put it right.

Under the circumstances, Dixon’s and its ilk really is the last place I want to go.

Isn’t it always the way that you can wait years for a report on complaints against personal finance firms to come out, and then two come along together.

The FSA was first off the mark on 3 September providing aggregate data by types of complaint and firm, but with no names.

The FSA says it can’t disclose the names because it is information gathered in confidence in order to carry out its regulatory role.

The Fos doesn’t have to worry about such niceties, however, because it’s not a regulator, so its data on complaints published on 15 September named names.

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 »

Every now and again, something noxious pollutes the financial services ecosystem and the shame of it is that it can cast the entire financial services community under a shadow in the eyes of the British public.

More often than not, this happens when consumer demand, and often desperation, meets the grasping greed of financial institutions

The most recent example, of course, was the spectacular collapse of sub prime credit the world over. Read More »

At the time I was writing this column, the High Court had still not announced its decision in the FSA vs ICO case regarding the principle of confidentiality and the naming of the Lautro offices. The decision is now six weeks overdue, giving some idea, perhaps, of the importance of the outcome.

But whatever the outcome, the FSA has stated that it intends to take the case to the next stage if it loses this round, and I suspect the ICO will do likewise. Apart from the fact that this whole situation has escalated out of all proportion, it may well yet be overtaken by events before it is finally concluded.

Read More »

Many, many moons ago I addressed a meeting of IFAs and insurance company reps (as they were in those days) during which I criticised many of those present for using the letters ALIA and FLIA after their names.

Sounds grand, doesn’t it, but in fact those designatory letters signified very little. For those of you who’ve forgotten, or never knew anyway, ALIA stood for Associate of the Life Insurance Association and meant that that the holder had been a member of the LIA for five years and had relevant industry experience; FLIA was the same, but applied after 10 years.

The point I made at the talk was that advisers/reps using these letters were conveying a false impression to clients that the holders were better qualified than was actually the case, and they should cease immediately.

Read More »

The latest round in the ongoing saga of the Lautro charges debacle reached the High Court on 30 March, with the FSA declaring right at the start of proceedings that it would not give up the fight to protect the names of the companies involved if it lost this latest round.

Charles Flint, QC, acting for the FSA, told the presiding judge, Justice Munby, that the FSA intended to take the matter to appeal if it lost.

The original grounds for refusing to name the companies, put forward by the FSA at the Tribunal, were Ss.31, 43 and 44 of the Freedom of Information Act.

The new defence by the FSA at the High Court hearing hinged on S.348 of FISMA 2000 claiming that “the names themselves [the life insurance companies using Lautro charges], when taken with information already in the public domain, would breach S.348 because it would convey information covered by that section”.

The ICO refuted this claim, saying that all parts of S.348 had to “apply before S.348 bites”.

Underneath all the legal jargon, the FSA is vigorously defending its practice of regulation through informal operations.

The FSA claims that disclosing information provided voluntarily would deter companies from volunteering information in the future; this in turn would hamper the FSA’s ability to investigate problems.

I’m afraid I regard that statement with the same sort of cynicism that I normally reserve for sightings of Elvis.

I find it hard to believe that life offices would decline to volunteer information in the future for FSA investigations. After all, volunteering information is likely to be in their own best interests, as it would show that they were willing to cooperate if any FSA findings were subsequently made public.

I suspect, therefore, that a much more likely reason for the FSA’s vigorous defence of confidentiality is that such voluntary arrangements make the lives of the FSA’s regulators a lot simpler – if information were not provided voluntarily the FSA would have to invoke legal powers to acquire information, and it might not necessarily know what details to ask for in order to get the right answers.

The FSA has spent nearly £60,000 on direct legal fees to Charles Flint and others, just to get the case this far. And this is just the FSA’s direct fees – don’t forget those of the ICO and their advisers, plus all the support staff on both sides needed to get the case this far in the first place.

I don’t think the FSA can possibly justify spending so much money defending what increasingly seems to be the indefensible.

What I think is even more crazy about the FSA’s stubborn stance on this whole matter is that one of the three reasons for the FSA’s very existence, given on its website for all to see, is “helping retail consumers achieve a fair deal”.

How can the FSA possibly square its current stand on the Lautro companies with that objective? The answer is simple – it can’t.

The FSA stated in its submission to the ICO that, as a result of its investigations “each of the 12 companies voluntarily agreed to compensate their clients,” which probably is helping the consumer – provided of course that compensation actually has been paid.

Leaving aside whether any compensation was on a fair basis, I asked the FSA for assurance that compensation has actually been paid. Back came the reply, “we are unable to give details as to whether the firms actually compensated their customers”.

I asked if this was because the information was classified, or because they simply didn’t know? As the FSA was incapable of giving me an answer either way, I presume that they actually don’t know whether compensation was ever paid.

That’s not giving consumers a fair deal – it’s simply nuts.

Without a doubt, the proudest moment of my career so far was being awarded an OBE. I never dreamed I’d ever be honoured in such a way and every time I see the letters after my name I get a kick out of it all over again.

To get such an honour is not only a huge privilege but also a great responsibility too – for me this means keeping on battling away for what is right in this industry and our ultimate employer, the consumer.

The purpose of the awards is to recognise consistently high standards of service and behaviour, and the higher up the gong scale you go, the greater is supposed to be the input from the individual.

I therefore assumed that anyone receiving a knighthood, entitling recipients to be called Sir, (or Dame for a woman) would be even more conscious of the need to uphold this hierarchy and not bring it into disrepute. Read More »

Probably the most classic and best known example of a total misunderstanding between two people was a sketch on the Two Ronnies TV show between a hardware shop owner, played by Ronnie Corbett and a typical customer.

The customer, played by Ronnie Barker, appeared to be asking for four candles. When the shop owner produced the four candles, it turned out he was actually being asked for fork handles. This marvellous sketch illustrates perfectly how easily a simple everyday term can be totally misinterpreted.

When, for example, a fund is described as ‘invested 100% in cash’, most people would, quite reasonably, understand this to mean that it invests in cash deposits. The pie chart in the brochure for the Sterling fund adds to this impression by showing its asset weighting to be “cash: 100%”. Under the circumstances, what would you reasonably assume it was invested in? Folding stuff, naturally.

Read More »

Tomorrow Life? Er, that’s the name under which GE Life is now known, which was itself the new name for National Mutual Life.

Luncheon vouchers? No, LV is the reincarnation of Liverpool Victoria.

Arriva? No, that’s a bus company and not to be confused with Aviva, the new name for Norwich Union, the latest financial company to cast off its history and change its name.

The new name is meant to be more acceptable internationally, as apparently the Norwich Union brand, widely known and mostly respected in the UK market, is too parochial for its worldwide operations. Read More »

Madam ,
I was a financial adviser for 10 years up to 1988 but, finding myself increasingly disillusioned with what was happening in the personal finance industry, I successfully volunteered for a place on a 20 year expedition to Planet Zog to bring life assurance to the Zogians. I was hoping that, on my return, things might have improved in personal finance.

How wrong could I be? On re-entering the earth’s atmosphere during my return journey, I discovered a wonderful device called the world wide web, which has enabled me to catch up with events of the past 20 years. By Zeus! I could hardly believe what I was reading!

When I left there was a maximum commissions agreement in force, which I thought was a jolly good idea. I gather, though that it was scrapped as being “uncompetitive” with the result that commissions went through the roof. I could have told them that for nothing but I was light years away by then.
I couldn’t believe how stupid chancellor Gordon Brown was to actually give notice in his 1997 Budget that double tax relief on mortgage interest was going to end in April 1988. Anyone could see it would result in a mortgage frenzy followed promptly by a collapse in house prices. And he was supposed to be charge of our money!

And how was fat Bob allowed to raid the Daily Mirror’s pension fund? Did no one see that coming? Fat lot of use passing retrospective laws when there are hardly any company pension schemes left to be members of. Gordon Brown was just as bad when he raided company pensions by abolishing ACT. And that was legal!

I see that the multitude of regulators that were around when I left has been squeezed in to one giant one, but they don’t seem to have made a very good job of it so far – what with the split cap investment trust debacle, and the stories about the Lautro charges cock up and the guaranteed annuities fiasco that I read in my online Money Management.

When I left, that nice Richard Branson, who I remember as publishing that lovely Tubular Bells LP, had launched his own airline. Now I see that he’s running a railway line and a life insurance company too. After that little shock I tried to look up the value of my own life policies online, only to find most of the companies have vanished, including, unbelievably Equitable Life, or been taken over by foreigners.
Speaking of foreigners, what’s all this nonsense about Europe? Last time I was there it took two hours to get to France on a clapped out ferry; now I find there’s actually a tunnel connecting Blighty with them. What benefit’s that been for everyone? Lots of weird initials, more bureaucracy and unit trusts being called oeics. I always thought that meant ignorant or inferior – different spelling though.

One of the things I thought I’d miss when I embarked on my space mission was the chance to work in a polarised market. Now I find this was scrapped a few years ago and the banks have been having a free for all in the subsequent confusion. And I see that the bankers have now managed to cause a worldwide meltdown following their inability to manage mortgages. I was obviously looking in the wrong place on the web, because – surprise! – I couldn’t find any reference to those in question being fined or going to prison for the chaos they’ve caused. That would never have happened on Zog – there, they would simply have been vapourised and their details deleted from life’s database.

What to do now? My mission to Planet Zog completed, I thought I might return to being an independent adviser. But I discover from something called the RDR report that despite spending six years obtaining my FCII back in the 80s, it now counts for only 80 points towards something called a QCA level 4. In order to continue trading after 2012 this means I’ll have to take even more exams. Sigh.

I have therefore decided, reluctantly, to have myself cryogenically frozen, with instructions to my keepers to thaw me out in 10 years, when the first child trust funds will mature and the post war baby boomers will start to pop their clogs and hopefully release some of that equity they’re sitting on. I hope that by then some sanity might have returned both to the markets and to this once wonderful industry – always assuming, of course, that there’s any personal finance industry left to return to in the first place…

Yours resignedly,
Disillusioned of Planet Zog,
Via ethereal matter advanced inter-galactic letter (email)

The subject of guaranteed annuity rates usually invokes strong feelings, both in those that have them and those that don’t.

GARs are generally at levels of 9-12% pa, which stacks up very well with the current annuity rate of about 7% pa.

There are some drawbacks to the GAR, of course – usually it is only payable on the exact pre determined retirement date and the pension doesn’t include any spouse’s pension or escalation, but it is probably safe to say that most people take the GAR when it’s available. Read More »

The FSA has lost the second round in the Lautro charges fiasco. The Information Tribunal Service handed down its judgement on 13 October in favour of the Information Commission Officer’s ruling that the FSA disclose the names of the offices using Lautro charges, following a request for this information from Evan Owen last year.

When the FSA first appealed the ICO’s ruling, it defended its refusal to name names under S.41 and S.44 of the Freedom of Information Act.

However, subsequently it presented a case under S.348 of FISMA and also under the Human Rights Act in regard to confidentiality.

This subsequent defence became the preliminary point, which had to be decided first before the secondary defence was considered. As this was only the judgment on the preliminary defence, we haven’t even got to first base on the main defence yet.

The judgment, which ran to 32 pages and 87 clauses, contained nuggets of information not discussed in open session at the Tribunal hearings earlier this year.

For example, the judgment states, in point 8, the fact that the Tribunal “draws its information largely from an editorial provided to it and drawn from the June 2005 issue of Money Management”.

This was the comment piece I wrote which first broke the story of just how much a policy could be adversely affected by the use of Lautro charges. The ruling quotes Money Management twice more, so it’s good to know that all my campaigning is having some effect.

When I analysed the potential size of the problem, in the September 2007 issue, I had a guess at the compo bill being around £100+m. It now seems that I seriously under estimated the size of the problem. According to point 39 of the judgment, five offices have paid compensation amounting to £100m.

However, point 46 mentions an FSA internal memo from March 2002 which stated that there were 19 firms where Lautro charges were an issue “with the estimated compensation being £274m with over 600,000 policies affected”.

It said that, of the 19 firms, two had paid compensation, five had arranged voluntary compensation, one was in the process of compensating all policies, while four were compensating “in force only, excluding surrenders”.

Apart from the injustice of only compensating in force policies, this still leaves seven offices which seem not to have paid any compensation, contrary to reassurances given by the FSA previously.

The FSA has the right to appeal the judgment on the preliminary defence, which it must do within 28 days.

If it decides to appeal, it will be to the High Court. An FSA spokesman told me that it was “inappropriate to comment, but will fully consider the ramifications of the Tribunal judgment.” The FSA has dug itself into a deep hole over this issue.

Confidentiality is regarded by the FSA as a vital part of its regulatory role, so I don’t think it has any choice but to appeal. And if it didn’t, how could it justify spending all this time and effort thus far, and your money, defending the indefensible?

The FSA has already run up a bill of £50m; at this rate the bill for defending the case could equal or exceed the size of the compo bill. If the FSA does appeal, either of the parties may ask for the rest of the appeal to be stayed pending resolution of this, thus bringing the whole Tribunal process to a temporary halt.

Taken to its (il)logical conclusion, therefore, if the appeals process continues for long enough, and/or if the companies concerned are only expected to compensate policies still in force, there will be no one left to pay compensation to – all the plans affected will have been surrendered, reached maturity, or their holders died. Could zero compensation, then, be the ultimate goal?

No, this not about the BBC TV programme ‘Last of the summer wine’, the world’s longest running sitcom, featuring the three principal characters of Compo (the poor one), Clegg (the irritating one), and Foggy (the slightly confused one).

It is, in fact, more on the lines of a farce, featuring compo (AKA paltry compensation paid to policyholders by some providers for using Lautro charges), cleg (another name for the blood sucking horsefly, AKA the insurance companies refusing to pay compensation for using Lautro charges), and foggy (AKA the opaque situation regarding IFAs’ rights to rebates where they have overpaid compensation due to life office actions).

Although there are clear cut rules surrounding compensation to clients mis sold endowment mortgages, there is no clear cut rule about any recompense for advisers who are only now discovering that they overpaid compensation to clients due to the use of too low a surrender value calculated by life offices using Lautro charges.

Two advisers have separately forwarded copies of letters that were sent out by Clerical Medical to policyholders early in September in respect of its annual review of endowment mortgages, in this case its unit linked endowments.

The letter states that the office is aware that it used lower charges than those which would actually apply and that “for any given growth rate, the actual maturity values will be lower than those illustrated, even if the growth rate is actually achieved”.

The letter goes on to say that Clerical Medical is “not required by our regulators to take any action”, but it nevertheless has increased the unit allocation by 26% to 129.5% pa in the first case and by 29.6% to 133% in the second case, to compensate for the differences in charges.

But this isn’t as good as it first appears. Increasing the unit allocation is compensation by drip feed, so the full benefit won’t be felt until maturity. Surrendering the policy early will result in a loss of the full compensation for the policyholder and a considerable saving for the provider; it would be far better from the policyholder’s and adviser’s point to add a cash sum to the policy to compensate for the loss, but much more costly for the provider .

Adding a cash sum would also mean that compensation levels would be directly lowered, because it is calculated by comparing the policy surrender value at the time of claim with the position the client would have been in had they had a repayment mortgage.

If surrender values are calculated with an increased allocation, they would obviously be lower. In a worst case scenario the effect of this could be to push a profit into a loss, and result in a green letter becoming amber or even red. This, in turn, could lead to policyholders panicking and cancelling their plans, receiving only the (low) surrender value in the process, thereby inflating the loss, which would result in over payment of compensation by an adviser for a mis-sale.

I reported that Clerical Medical had begun making reparations to policyholders in 1999 for its use of Lautro charges, in my article in the September 2007 issue, and that such redress would cost the company £20m. But IFAs are not entitled to receive a single penny for over-payment of compensation, caused by the life office.

So if Clerical Medical is doing the decent thing and recompensing policyholders, it and other offices in the same boat should have the decency to do the same for IFAs too.

After all, IFAs have no choice in how they calculate the compensation due, whereas the life offices currently not only have a choice of whether or not to pay compensation to clients for using Lautro charges, but also in how they go about doing it.

When I finally put down my quill pen and retire, my husband has this romantic notion that I will sit down at my shiny new home computer and pen a best selling novel. I sigh and explain that, to be a successful novelist you need a fertile imagination and a believable scenario. The skill of being a successful financial journalist, on the other hand, is turning technical bumph into readable copy and, frankly, there are not many chances in this job to marry the two.

But then, having sat through the second two day round of stop/start mind-numbing minutiae of the tribunal hearings on the LAUTRO charges fiasco, I thought to myself that the two are not that far removed after all and here could be the makings of a first class novel.

I was, in fact, quite shocked by many aspects of the whole tribunal process. Banished into the hinterland of the waiting room when the tribunal went into yet another closed session, I pondered how much the FSA was paying Charles Flint, QC out of your hard earned fees to argue its case. I put this question to the FSA and, shock number one, was told that this info was not generally available and I would have to apply for it under the Freedom of Information Act . This I did, but it was not forthcoming by the time we went to press.

However, with a little digging around, shock number two was to discover that someone of Flint’s seniority would probably charge in the region of £500 per hour. I have no idea how much time he and his staff would have spent on the case, of course, but I am guessing that preparation and attendance at the Tribunal probably amounted to at least 100 billable hours, making a total cost of £50k thus far.

Then came the biggest shock: Charles Flint informed the Tribunal that, far from there being only 12 offices as originally stated, the FSA had found “19 firms using inappropriate charges which were liable to redress”, meaning of course a much bigger compo bill than originally thought.

The Tribunal is due to hand down its ruling shortly. If the Tribunal rules in favour of the FSA, that will not be an end to the matter. Either Evan Owen, whose original request to the FSA for the names of the offices using inappropriate charges led to the Tribunal hearing in the first place, or the ICO, can challenge the ruling through the High Court. But shock number four was that if the Tribunal finds against the FSA, it doesn’t mean the names of the 19 offices will be revealed; the FSA also has the right to appeal, which, judging by events so far, it doubtless will. This means the case could drag on into next year with yet more costs.

But, great material for my novel, though! The story line would run thus: “government body rules that a standard set of costs must be used across an entire industry, regardless of the true costs; providers subject to this rule produce products that can never achieve what they claim as a result; buyers of these products, being out of pocket, demand compensation; the producers say no, they were only following orders; the regulators refuse to name the providers, who would be liable to pay compensation; their claim that providers paid compensation could not be ratified; regulators subsequently told to disclose names by another government body, but refuse; regulator spends thousands of hours and tens of thousands of pounds defending refusal”.

However, I don’t think my putative novel will ever see the light of day; let’s face it, no publisher in their right mind is ever going to accept this as a believable story line…

With profits policies have had a bad press over recent years, and at the heart of much policyholder dissatisfaction is perception that they are no longer good value.

At Money Management we are nowadays regularly seeing examples of insurance companies paying no reversionary bonuses at all for years at a time on some policies. I have details of one such policy, an FSAVC with Scottish Widows, taken out in 1992. It has a guaranteed annuity rate of 9% and gross premiums of £100 pm. Benefits are due to be taken in September this year.

BUT, no reversionary bonuses have been added to this plan since 2002. So have the £7,000+ premiums paid since then vanished into a black hole?

“When no regular bonus is being added, this does not mean that the value of the plan is not growing” claimed Scottish Widows.

Instead, the plan is on track to have a reasonable terminal bonus added, but the policyholder won’t know exactly how much that will be until the policy matures. And although an indication has been given of what this might be, with the stock market in its current state, whether that amount is actually paid is a moot point.

Scottish Widows added that “in retrospect the level of guarantees offered for the most of the 1990s is significantly higher than any company would offer now. We will certainly honour the guarantees we have made, but we have not felt able to increase them by adding regular bonuses in recent years”.

It appears that, because Scottish Widows was being too generous earlier on with its reversionary bonus additions, it is now using a different form of smoothing – ie adding nothing to the guarantees by paying zero reversionary bonuses.

Because regular bonuses increase the cash amount guaranteed at retirement, such guarantees restrict the investment freedom of the with profits fund. Scottish Widows is currently adding reversionary bonuses to pension policies with no guaranteed annuity rate, but is at pains to stress that this does not amount to differential bonus rate payments, a practice outlawed following the Equitable Life High Court case. SW states that the guaranteed annuity rate “is not taken into account in setting…bonus rates. These are based purely on the cash guarantees in the policies.”

SW explains that it is “managing the levels of guarantees” in this way. In so doing, however, it’s not managing the expectations of policyholders very well: should they continue doggedly to pay premiums in the hope of an extra, unknown and unguaranteed payout?

The policy may turn out to be good value in the end, but it requires a huge leap of faith by the policyholder, who won’t know if it is until it’s too late.

Is it right that a with profits fund should bear the costs of misselling?

Yes, say the life companies citing a statement made in 1998 by Patricia Hewitt, the then Economic Secretary to the Treasury.  She made clear that it was acceptable to meet the pensions misselling costs from the inherited estate, because it is  “a sensible way to protect policyholders from immediate and severe cuts in their bonuses”.

But the FSA has had an attack of conscience. It has published a Consultation Paper for an amendment to the Conduct of Business Rules (COBs) governing  the treatment of funds that may be used for payment of compensation to victims of misselling. The document proposes that insurance companies will no longer be permitted to charge compensation for misselling to the inherited estates of proprietary offices’ with profits funds.

The FSA has re-examined COBs and concluded that “there is a case to consult again on whether shareholders alone should meet the cost of compensation and redress as the current rules may not lead to the fair treatment of policyholders.”

The timing of this CP coincides with statements made in evidence by Prudential and Norwich Union to the Treasury Select Committee enquiry into the inherited estates of life companies on 30 April 2008.

Nikki Maynard, director of strategic services at Prudential, told the hearing  that “the policyholders of the [with profits] fund share 90:10 in the profits and losses of that business.

Therefore it seems appropriate, where you have losses, that those would be shared 90:10 in the same way as profits are shared 90:10…for shareholders to bear 100% of the cost on a business, where they only get 10% of the profits would probably seem equally unfair to them”.

This completely misses the point that  shareholders generally have entirely different attitudes to, and acceptance of, risk compared to with profits policyholders. The latter will be largely small savers who want low risk savings plans.

Shareholders, on the other hand, will usually be far more savvy, and accept that one of the aspects of stock market investment is volatility. In buying shares they are investing directly in the company’s management and its ability,  hopefully, to make a profit in the shape of rising share prices and dividend payouts. If that management makes a mistake, it is the shareholders (and of course the managers) that should bear the costs.

Norwich Union has paid out about £500m in total for misselling endowment policies and pensions, from its inherited estate. Nick Prettejohn, chief executive of Prudential, told the TSC that it had used “about £1.6bn in total” to pay compensation for misselling victims and the cost of admin of those payments, all of which came out of the inherited estate.

Nick Ainger MP responded to this by saying that this meant there was £1.6bn less money to be distributed from the inherited estate and that it was the shareholders’ responsibility to ensure that the FSA guidance was abided by and therefore the shareholders who should bear a significant proportion of that responsibility.

This seems eminently fair to me: if the shareholders have to bear the cost of misselling, management will be under much greater pressure to ensure it doesn’t happen again.

The proposals for misselling compensation to be paid by shareholders only affect payments made after November 2008 (although it is regardless of when the misselling took place). But, the bulk of misselling payouts have probably now been paid, and the bill for misselling in the future is unlikely to be nearly as large.

That noise I can hear in the background sounds very much to me like the stable door being slammed shut after all the horses have bolted.

When polarisation was abandoned in mid 2005 it was justified by claims that it was anti competitive and that consumers had failed to understand the difference between independent and tied advisers.

We ended up with a mish-mash of different categories of advisers, with the borders between independent and tied advice blurred beyond recognition, not helped by some multi tied advisers claiming erroneously to be independent, because of the obvious cachet attached to the word.

The reforms proposed in the original RDR report were over complex and confusing. But the FSA interim report on the feedback to these proposals seem to suggest a return virtually to the status quo of polarisation, albeit with a couple of notable differences.

The consensus was for a much simplified three tier structure; if adopted it will show that the FSA has accepted that distinct independent advice is in the best interests of consumers.

Most feedback supported a single tier of adviser for full advice: to be considered independent, advisers  must offer products from the whole market; there are to be minimum educational standards with no grandfathering; and providers should have no part in determining the amount of commission paid to advisers – remuneration should be agreed between adviser and client only. So the door is not completely closed on commission, but this may change.

Any advisers who are not whole of market will in future have to call themselves salesmen, suggests the report. This is an astonishing and highly controversial proposition, which has delighted the IFA community but horrified the banks and building societies, most of which abandoned independence for the easy ride of multi tieing. There is no doubt that they won’t like it one bit, and I expect to see strong lobbying on their part for the FSA to abandon this proposal before its final report in October.

I also can’t help wondering where this will place companies like St James’s Place, which calls itself a wealth management company. Under the current regime, it is technically a multi tied agent, so its ‘partners’ would become “salesmen” under the proposals. In response to my question about how they felt about being called salesmen in the future, its spokeswoman said that SJP “view themselves very differently to what is proposed”. I bet.

There are, of course, many excellent tied advisers who give a first class service to their clients and SJP may well be one of those. BUT, they are offering a limited range of solutions and depend almost entirely on commission for their income.
The FSA said it has a huge amount of work to do on this, and needs to consider the legal, regulatory and commercial issues of the proposals, which it believes have “potential to improve consumer understanding of the market,” although “there may…be less choice for consumers”. I’m not sure why less choice for consumers might now be acceptable, when it was not in 2005.

The report goes on to say that “we recognise that in making final decisions, there may  have to be trade offs against this simple view to achieve the right outcomes for consumers”. This last statement sounds to me remarkably like a get out clause for the likes of the bancassurers and SJP.

Where: Ambridge, Borsetshire, home of Britain’s longest running radio soap, The Archers. When: Sometime in the near future. Scene: Eddie Grundy (EG) is talking to his father Joe (JG), and son William (WG) in the kitchen of their home.

EG: “I’m sure I shouldn’t ’ave bin sold that endowment plan all them years ago when we was still at Grange Farm, but the idea of trying to claim me money back is doin’ me ’ead in”.

JG:  “’Ere, I just seen in the Screws of the World as ’ow there’s these firms what do all that work for yer. ‘No win, no fee’ says in their advert. You could get them to do it.”

WG: “Nah, you don’t wanna go to them firms. They’s all rip off merchants. Says in the Scaily Mail as ’ow you can do it all for yerself with this ’ere Financial Ombudsman scheme. And, it’s completely free, so’s you get to keep all the money you win back wivout some firm taking a big chunk ov it. And they’ve got this new simple system wiv a  freephone service that’s open till 8pm. You could call ’em when you gets ’ome from doin’ the evenin’ milkin’”.

CG: “Willyum, you’re a very clever boy. What would we do wivout you?”

The Archers was originally set up after WWII to provide information about farming in an easily assimilated manner, so the likelihood of the above scenario coming to a radio near you is not so preposterous if Lord Hunt has his way; one of the proposals made in his report on the FOS is that it should “develop partnerships to encourage relevant story lines in radio and television soap operas” to help less advantaged people access the service.

Although it runs to some 35,000 words, I was disappointed that the report did not contain more radical proposals. On the plus side, Hunt recommends that the FOS provide clear figures on recommended compensation to claimants rather than simply a formula, that case fees should be charged to claims management companies found to be submitting vexatious claims and that case fees be removed for cases found to be outside the remit of the FOS.

On the minus side, however, he rejected fees for individual complainants – even vexatious ones, ruled out any appeals process against FOS decisions, rejected any long-stop time limit beyond which firms cannot be pursued by complainants and rejected any change to fees being payable by financial services firms whether or not a claim is upheld.

Hunt has proposed that a league table be published of successful complaints against financial services firms and that a wooden spoon be presented to firms that have lost the highest proportion of cases.

Although on the surface this sounds like a good idea, I can just imagine the colossal pressure that will put on companies not to oppose even the most obviously vexatious claim in order to avoid appearing on either list. The suggestion  could end up having exactly the opposite effect of what he is hoping for.

Hunt also suggested a more ‘user friendly’ name for the FOS of the Financial Complaints Service. But the FOS is meant only to be contacted when all other avenues have been exhausted; it is not meant to be a first port of call, and changing the name in this way will only cause confusion.

Suggestions such as this lead me to conclude that Hunt seems to have completely overlooked the fact that the FOS is not meant to be a consumer champion but an unbiased and independent adjudicator.

Today’s consumers want jam today, not tomorrow, so any whiff of ‘free money’ is likely to result in a stampede.

When Axa made a distribution of inherited estate between its with profits policyholders and shareholders back in 2000, the terms of the deal caused an outcry. Although the Axa offer was accepted by policyholders, the FSA subsequently brought in new guidelines in 2005 on the future treatment of inherited estates. The forthcoming NU distribution of its inherited estate is the first to come under those new guidelines.

Contrary to much misinformation in the national press, the NU distribution has nothing to do with orphan assets – these are not the property of the company to distribute in this way. Instead it is to do with a surplus in the inherited estate, which has arisen from a change to the investment strategy supporting policy guarantees, freeing up funds, which do belong to NU. The FSA rules require that if a firm has excess surplus in its inherited estate, it is required to distribute it and this must be done on a 90:10 basis; this distribution is therefore a done deal and not subject to a vote by policyholders.

The distribution will take the form of an addition of about 10% to the value of existing in-force policies. Those benefiting will be about 1m with profits policyholders of CGNU and CULAC, but not Norwich Union policyholders who received free shares when the company demutualised in 1997. The additions will be made in three instalments on 1 January 2008, 2009 and 2010. Those whose policies mature in the interim will therefore lose out on the second and/or third instalments under this arrangement. The NU 90:10 distribution is in respect of £2.5bn of funds, representing about 40% of the inherited estate.

However, the controversy over the NU offer concerns the reattribution of the 60% balance of the inherited estate. With profits policyholders are being offered a cash payment upfront in return for their giving up any future rights to this balance. The cash payment, details of which have not yet been announced, will apply to all policyholders with policies in force as at November 06, even if they have since been encashed. Unlike the distribution, policyholders do have the right to vote for or against this reattribution offer; those who vote against it will get no cash payment now but will retain their right to any future payments from the surplus inherited estate if a further distribution were to be made.

Clare Spottiswoode CBE was appointed the policyholder advocate in November 2006 to look after NU policyholder interests. Since then she has raised several issues both with NU and the FSA over the deal. As a result, NU has improved its reattribution offer twice and is putting pressure on Spottiswoode to respond to this third offer by the end of February.

The reattribution payment cannot go ahead unless she makes a recommendation to the policyholders to accept it. If she does recommend acceptance, the deal goes before the High Court for ratification, where the FSA will also be present to ensure regulations are met. If she decides that, in all conscience she cannot recommend this latest deal, no money is paid to anyone. NU is unlikely to make any further offers, since it doesn’t have to reattribute the balance, but could leave the money invested and no one would get anything unless there were a further distribution in the future.

So Spottiswoode is in an awkward position. She may, privately, not like this latest offer but, given the rapacious appetite of today’s consumer for jam today and not jam tomorrow, any whiff of ‘free money’ is likely to result in a stampede, so if she rejects it about 1m policyholders are likely to be very cross indeed.

Policyholders should, obviously, consider what is in their own best long term interests in regard to the cash payment. However, even though it may make good sense for some to turn down the cash in hope of better future benefits, I doubt that many will.