What are we to make of the news the Financial Conduct Authority is to review consolidation in the advice market?

The regulator has written to advice and investment firm bosses noting an increase in the acquisition of firms or their assets over the past two years.

It warned that, while industry consolidation can provide benefits, various types of harm can occur where this is not done in a ‘prudent manner’ with effective controls to promote good outcomes.

The FCA says: “Where we receive notifications from individuals or firms to acquire or increase control in regulated firms, we will assess and challenge their suitability and the financial soundness of the acquisition.”

For the FCA to step in now seems a spectacular example of shutting the stable door after multiple horses have bolted

I think it’s a case of too little too late.

Back in November 2021, Money Marketing’s Lois Vallely penned a useful guide to consolidation in which she noted how its origins date back to the 1980s and 1990s heyday of DBS and M&E Network, which then bought Interdependence in 1999 to bring it under the Tenet umbrella.

In the early noughties, we also had Millfield, Berkeley Berry Birch and Inter-Alliance, several of them engaging in failed mergers with each other. None of these firms now exist in their present form, with shareholders – both individual and corporate – having taken a massive loss on their investments.

Undeterred by these exercises in value destruction, in 2005 Standard Life bought a 20% stake in the Tenet Group network. Tenet’s other shareholders – Norwich Union, Friends Provident and Aegon – each increased their stakes to around 20% in light of the deal.

Quite how anyone could have been remotely surprised by what had been screamingly obvious for years is anyone’s guess. Hundreds of ARs had exited Tenet in the years before it went under

As we know, earlier this year, Tenet went into administration. Its remaining 170-odd advice firms, numbering barely 350 authorised representatives (ARs), were offered the option of transferring to Openwork.

News that Tenet had called in the administrators was described in one story I read at the time as “shocking” – although quite how anyone could have been remotely surprised by what had been screamingly obvious for years is anyone’s guess. Hundreds of ARs had exited Tenet in the five years before it went under.

Even Tenet’s own review found the AR sector was subject to “significant change” from “external forces such as consolidation, increased regulation, digitisation, new technology expense and the broader inflationary environment”.

ARs themselves, meanwhile, will continue to be treated as disposable pawns on the financial advice chessboard

What these stories tell us is that providers and consolidators will always seek to buy or control product distribution or assets under management. Providers will repeatedly invest in the endlessly-failing dreams of senior executives at consolidators who tell them, yet again, things will be different this time round.

ARs themselves, meanwhile, will continue to be treated as disposable pawns on the financial advice chessboard. They either survive yet another round of takeovers or drop out, missed by no one but their clients – who receive a letter to say the business name has changed, or their adviser has left, or both.

We’re then offered an appointment with someone we didn’t choose to go to in the first place, providing a different service we didn’t ask for.

We put up with it because that’s just how it works

It happened to me 20 years ago. It’s happened to several of my friends, who are among many hundreds of thousands of clients with the same experience. And we put up with it because that’s just how it works.

For the FCA to step in now seems a spectacular example of shutting the stable door after multiple horses have bolted.

At this rate, I’m expecting the regulator to send out stern letters to chief executives saying it is determined to stamp out misselling of mortgage endowments and personal pensions. I can’t wait.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

The post Nic Cicutti: FCA consolidation review is too little too late appeared first on Money Marketing.

How is it possible for senior politicians to miss a £22bn black hole in the nation’s finances they were repeatedly told about months before the general election?

If Rachel Reeves, the new Chancellor of the Exchequer, has a satisfactory answer to this question, we have yet to hear it.

The frightening thing is that significant changes to the UK’s taxation system, probably including both CGT and IHT, are likely when Reeves makes her Budget statement as part of the Autumn spending review on 30 October. Yet they are based on politicians lying to us.

At the end of July, the Chancellor stood up in the House of Commons and, like Captain Renault in Casablanca, professed herself “shocked, shocked” at the £21.9bn financial shortfall she claimed to have discovered only after Labour’s election victory a few weeks earlier.

Yet anyone following the increasingly desperate press releases from the Institute for Fiscal Studies (IFS) in recent months, asking politicians from both sides to be more honest about the state of the UK economy, knew there was a £20bn gap between tax revenues and expected outgoings, no matter who won the election.

No one comes out of it with any credit. Jeremy Hunt, the former Chancellor, gave away £20bn in two successive rounds of National Insurance cuts, from 12% to 8% in November 2023 and March 2024, with no idea of how he was going to recoup the money.

Hunt then attacked his successor for agreeing 5.5% pay rises for teachers and NHS workers, as recommended by their independent review bodies (PRBs), knowing he had only set side 2% for any increase this year. Both PRB recommendations had been delivered to their respective ministers’ departments before the election was even called.

Hunt knew that refusing to honour the PRB recommendations would have led to many months of strikes by nurses and teachers, which would have rebounded on the government.

Labour knew this, which makes its pretence to be surprised by what they found once elected a painful charade

The former Chancellor also knew the Home Office budget was covering up an annual £6.4bn hole by paying for the accommodation of asylum seekers out of its reserves, thereby preventing the Office for Budget Responsibility from carrying out meaningful spending forecasts.

Labour knew this too, however, which makes its pretence to be completely surprised by what they found once elected a painful charade. The Home Office affairs select committee has repeatedly drawn attention to this fact.

When Labour leader Keir Starmer was asked in late June about the IFS predictions of a tax shortfall, he told Sky News: “I don’t actually agree with these forecasts, that are premised on the basis that we cannot grow the economy.”

Did he really imagine rocket boosters would power the economy forward within minutes of Labour’s victory, thereby permitting spending increases beyond Reeves’ incredibly limited promises?

To be clear, I’m not disputing the need to raise taxes: public services are broken and it will be impossible to get them back on their feet without such increases.

From the perspective of advisers, any changes to the taxation system are an opportunity to speak with their clients, so this is not entirely bad news for Money Marketing readers either.

Complex issues regarding tax policies affecting millions of people are reduced to simplistic statements by politicians

Technical Connection managing director Tony Wickenden wrote an excellent analysis of the options available to Rachel Reeves earlier in August, and I’m sure there will be acres of additional space devoted to the subject in weeks to come.

But what does worry me – and should concern Money Marketing readers – is the way complex issues regarding tax policies affecting tens of millions of people are reduced to simplistic statements by politicians.

Stopping the Winter Fuel Payments (WFP) for pensioners means tens of thousands of older people face a financial cliff-edge purely because they are few hundred pounds outside the pension credit threshold.

Meanwhile, an estimated 850,000 older people are also eligible for pension credit, but do not claim it. Barring them from accessing WFP isn’t just a “difficult decision”, as Reeves would have it, but a cruel one.

This isn’t how you run a modern taxation system.

Nic Cicutti can be contacted at: nic@inspiredmoney.co.uk

The post Nic Cicutti: Politicians should stop this painful charade appeared first on Money Marketing.

Opportunity is being lost to prepare the ground for change and the comedown post-election will be painful.

It’s funny, isn’t it, how we tend to pay more attention to certain subjects only when we realise their potential impact on our daily lives?

In my case, issues around retirement planning, as it becomes evident I may only have a limited amount of work time left before I start drawing some or all of my pensions.

It’s not just my own personal retirement issues that have suddenly become fascinating to me. In fact, I now find myself reading about other people’s problems far more avidly than before.

The proportion of households that own their home in retirement could fall from 78% to 63% by 2041

For example, in an intriguing Money Marketing article the other day, Pensions Policy Institute (PPI) senior policy researcher Anna Brain noted its research has identified a likely threefold rise in the number of pensioner households living in privately rented homes by 2041, of whom fewer than one in five will have the funds needed to cover their rent through retirement.

The proportion of households that own their home in retirement could fall from 78% to 63% over the same period.

Even today, news outlets such as the BBC are increasingly writing about how retired people living in privately-rented properties are being turfed out of their homes because they can’t afford the ever-escalating rents landlords are charging.

Just this small piece of information has a range of potential consequences, not only for elderly people who become homeless in old age, but others whose retirement incomes will be massively squeezed as larger and larger proportions go towards keeping a roof over their heads.

There are no easy choices any incoming government can make when it comes to ensuring older people can live in dignity after retirement

And what of their children, who may have harboured hopes of the Bank of Mum and Dad stepping in to help them with a deposit when they were ready to make their first step up the housing ladder? If Brain is right, that’s far less likely to happen.

She makes the point that while issues such as the triple lock, tax and state pension age are all important, “what matters most is not looking at them in isolation. A shift in one objective or component of the UK pension system can, through a complex web of interactions and trade-offs, lead to a catalogue of impacts in others”.

She is also correct to say there are no easy choices any incoming government can make after 4 July when it comes to ensuring older people can live in dignity after retirement, partly because so many of those decisions are not directly related to pension incomes.

The opportunity is being lost to prepare the ground for change

What worries me, however, is that elections are supposed to offer the opportunity of reflection and genuine choices, based on intelligent examination of all the options.

Yet the main parties appear to be vying with each other to pretend an increasingly decrepit retirement and social infrastructure more generally can simply be made good through “economic growth” and greater – unspecified – spending “efficiencies”.

Amid the current refusal to trust voters with any genuine discussion of alternatives, where any proposal to raise even a couple of extra quid in taxes goes down like a fart in church, the opportunity is being lost to prepare the ground for change.

If this remains the attitude of all parties, then the comedown in the aftermath of the election will be even more painful.

In the absence of any government will to do so, there is a desperate need for experts in the private and public sectors, as well as think tanks like the PPI, to come together and begin to spell out both what the needs of people in retirement are and the options to address those going forward.

It can’t happen too soon.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

The post Nic Cicutti: Why I’m losing hope of meaningful change to pensions post-election appeared first on Money Marketing.

What do political parties deliver in return for donations from the financial-services industry and business more widely?

At a time when the UK is preparing for a general election in a few months’ time, asking this question goes to the heart of what we might expect from a new government once it gets into office.

We know Conservatives have long been a party that has received millions in donations over the past 15 years, including from investment banks, asset management firms, hedge funds, insurers and other financial-services companies and high net-worth individuals linked to them.

At the same time, barring a miracle, there is no way on earth the Tories will win the next election. So, attention switches to the more likely winners from the other team.

There’s no doubt Labour is putting in a massive effort to win over institutions. The Guardian reported earlier this month that senior Labour Party figures – including leader Keir Starmer, shadow chancellor Rachel Reeves, shadow business secretary Jonathan Reynolds and shadow City minister Tulip Siddiq – journeyed up to Edinburgh in December last year for a roundtable meeting with financial providers.

Attendees at the meeting included investment managers Baillie Gifford and Aegon, as well as NatWest. Some of these companies have funded either the Labour Party directly or provided admin support to Labour shadow cabinet ministers.

The roundtable was facilitated by Sovereign Strategy, a lobbying firm that has represented Bloomberg.

Bloomberg itself has punted £150,000 into the Labour Party, since when there have been endless soft-focus audio and TV interviews with Reeves. Last year’s trip to New York offered up a Labour Party video (now next-to-impossible to find on the internet) in which Reeves was pictured admiringly next to all manner of Bloomberg promotional logos.

As for other attendees, the OpenDemocracy media platform has reported that “according to a now-deleted LinkedIn post by [a Sovereign Strategy staffer], Starmer and his ministerial team offered those in attendance an ‘exclusive dive’ into the launch of its financial-services policy”.

A few weeks later, Labour published its financial-services strategy – Financing Growth – described by the not-for-profit advocacy group Positive Money as “a love letter to Big Finance, with much in there that could have been written by the industry itself”. Perhaps because it was: staffers from City management consultancy Oliver Wyman were brought in to help to put it together.

Among its proposals is one to “cut the industry’s ‘regulatory burden’, including by streamlining some ‘excessively procedural rules’ in the Financial Conduct Authority’s 10,000-page regulatory handbook”.

They didn’t talk to people such as Mick McAteer at the Financial Inclusion Centre, a long-time campaigner with decades of experience of representing consumers at UK and EU level, who argues the real problem is that of major gaps in financial regulation, particularly with regards to financial exclusion and discrimination.

Another proposal involves Labour uncritically parroting chancellor Jeremy Hunt’s attempt to push pension funds to increase their risk profiles by investing in unlisted shares to “provide an additional £1,000 a year in pension income for the average earner”. As I wrote a few months ago, that claimed £1,000 annual boost is largely a made-up number.

After its publication in January, Reeves and Siddiq threw a lavish, no-press-allowed reception for 500 top businesspeople in the City of London to thank the industry for its contributions to the report.

Thirty-odd years ago, just before Labour’s election victory in 1997, I remember former chancellor Alistair Darling popping up at financial-services events across the country to reassure audiences that his party’s plans did not involve massive revolutionary change. Yes, it was anodyne and there were few proposals that genuinely caught the eye. But he didn’t sell his soul in the same way as the present opposition has managed to do.

When the next financial scandal hits under Labour’s watch, as it surely will, I wonder whether millions of consumers will feel its prawn-cocktail offensive while in opposition was really worth it.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

The post Nic Cicutti: Labour may regret selling its soul to financial services appeared first on Money Marketing.

News that the Financial Conduct Authority has written to 20 of the UK’s largest advice firms, asking for details of the services they deliver to clients who pay ongoing charges, reminds me of the only time Money Marketing has been forced to issue a formal apology for my writing.

Yes, I know that many advisers feel MM should be requesting its readers’ forgiveness at the start of all my columns.

But this apology was fairly unusual: it was about trail commission. And it involved MM saying sorry to everyone’s favourite financial advice boss, Andrew Fisher, back in the day when he headed John Scott & Partners, which later took over and rebadged itself under the Towry Law brand.

My guess is that most firms contacted by the FCA won’t have good answers to its questions

The saintly Fisher, older readers may recall, made a name for himself by attacking IFAs for their greedy obsession with commission — compared to his firm, which remunerated its advisers through fees only.

It subsequently turned out that a large chunk of Towry Law’s annual turnover consisted of so-called recurring income, as distinct from fee-earning income; trail commission from legacy business, in other words.

It also transpired, as The Times reported, that Towry Law was remunerating its advisers for persuading clients to place their money into its independent investment management service.

Back then, trail came directly from providers. Today, ‘service charges’ are levied by advisers on their clients’ portfolios.

The irony is that the issue around ongoing service charges, and what advice firms do to earn them, hasn’t gone away

My beef with Fisher was over the fact that — as now — too many advisers were receiving annual sums of money without doing anything to earn them.

My jibes about Fisher and trail commission clearly rankled with him. He set his lawyers on MM and, for the first and only time, in my case, an apology was published. I was duly told.

Supreme irony

The irony is that the issue around ongoing service charges, and what advice firms do to earn them, hasn’t gone away.

Almost 15 years later, the FCA is asking the industry for data on the number of their clients who are due an annual review of the ongoing suitability of the advice they have been given, how many have received that review, and how many have paid for ongoing advice but whose fee has been refunded when the suitability review did not happen.

My guess is that most firms contacted by the regulator won’t have good answers to any of those questions.

One guess would be that, having sent out a letter setting out its concern, the regulator found that nothing had changed

Even stranger is the fact the FCA is using its new Consumer Duty as the tool to extract this information. Six months ago I wrote an uncomplimentary piece about the Consumer Duty, arguing that I doubted it would “fundamentally change the regulatory landscape in financial services”.

Ordinarily, it would be hard to reconcile my comments with this initiative by the FCA over ongoing service charges. Back then, the regulator spoke of the Consumer Duty as reflecting its underlying expectation that, unlike Treating Customers Fairly (TCF), firms would effectively be self-policing their activities.

The onus was supposedly on firms to monitor themselves instead of being asked by the FCA to provide additional data as per old, outdated TCF requirements. The idea was to have ‘Consumer Duty champions’ at board level to ensure the organisation was delivering good outcomes.

My beef with Fisher was over the fact that — as now — too many advisers were receiving annual sums of money without doing anything to earn them

To all intents and purposes, it looks as if the regulator is using the Consumer Duty in exactly the same way as TCF to assess what, if any, additional regulatory work it may need to undertake in this area. Based on firms’ responses, the FCA anticipates “providing a further update”.

Why the change? One guess would be that, having sent out a letter in December 2022 setting out its concern that advisers were not adequately considering the relevance, nature and costs of these ongoing services for all their clients, the regulator found that nothing had changed.

If so, advisers should expect continued scrutiny by the FCA regardless of the name of the regime under which they come.

Meet the new boss: same as the old boss.

Nic Cicutti can be contacted at: nic@inspiredmoney.co.uk

This article featured in the April 2024 edition of MM. 

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The post Nic Cicutti: FCA won’t back down on ongoing charges appeared first on Money Marketing.

This year’s Budget will be on 6 March. If you believe the rumours, the reason for an earlier Budget this year is that chancellor Jeremy Hunt wants to clear the decks in preparation for an earlier general election.

As part of that, he hopes to be able to garner votes by adding a few populist tax giveaways to a jaded electorate who might otherwise turf the Tories out of office.

And what better way of Hunt winning over voters than bravely ditching inheritance tax (IHT), something described as “the most reviled of taxes” in a recent Sunday newspaper column.

The notion IHT is unfair as it is a ‘tax on those who have been financially responsible throughout their lives’ is intriguing

Reports suggest the chancellor is considering a cut in the top rate of IHT from 40% to 30% – or possibly even 20% – while also raising current tax-free thresholds. But this isn’t enough to satisfy the column’s author Jeff Prestridge:

“More conservative than Conservative, more pussyfooting than boldness and, frankly, profoundly disappointing. Wet politics which even the late Geoffrey Howe would disapprove of.”

Given that, as chancellor between 1979 and 1983, Howe was happy to levy capital transfer taxes (the forerunner of IHT) on assets above the equivalent of £217,500 in today’s money, this seems a bit of a stretch.

More intriguing is the notion IHT is unfair because it is a “tax on those who have been financially responsible throughout their lives and put money aside for the future”.

As for the idea this money is essential to ensure young people get their foot on the housing ladder, who are we kidding?

No it isn’t. Like the Norwegian Blue parrot in the Money Python sketch, they’re dead. They are bereft of life. They have ceased to be and no longer pay tax by definition. Any tax is paid on the estate by people whose own contribution to its accrual typically included the arduous duty of being part of the same gene pool as the person who died or being named by them in a will.

As for the notion this money is essential to ensure young people get their foot on the housing ladder, who are we kidding? According to the Institute for Fiscal Studies (IFS), if IHT were cut or abolished in 2024–25, 83% of the fiscal benefit – a cool £7bn a year as currently levied – would go to the wealthiest 5% in society. The top 1% of estates would gain £500,000 on average if the IHT rate were halved.

There would be no benefit at all to the more than 90% of individuals’ estates who would not pay IHT anyway because their wealth is below the tax-free threshold.

If the annual flow of non-spousal inheritances next year was equally shared across those aged 25, each would receive around £120,000

Moreover, again according to the IFS, “inheritances are most often received when people are in their late 50s or early 60s. Around the ages of 50–54, children of the wealthiest 20% of parents have an average of £830,000 in wealth, while children of the least wealthy fifth have on average £180,000.”

Calling for IHT to be abolished so well off 50- and 60-somethings can become even better off doesn’t have quite the same ring to it, does it?

All this talk of abolishing IHT takes place in the context of a complete collapse in younger people’s access to decent housing, whether rented or owned. In 2017, according to a different IFS report last year, just 35% of 25- to 34-year-olds were homeowners, compared with 55% only 20 years before. In 2022, just 10% of homeowners in England were aged under 35.

Let’s stop pretending the outright abolition of IHT is anything other than a goodbye present, making one last payout to those who least deserve it

Ironically, the IFS says, if the annual flow of non-spousal inheritances next year was equally shared across those aged 25, this would lead to each receiving around £120,000 – a huge leg-up to help buy their first home. Assuming this is really about leg-ups for young people.

Does that mean IHT should never be reformed? Not at all. Intriguingly, the IFS document lovingly quoted by the right-wing press has plenty of suggestions, including levying the tax based on the assets of the inheritor, not the estate itself.

Capping reliefs for agricultural and business assets, abolishing them for certain classes of shares or ending the exemption of pension pots from IHT are just some of the other ideas in the paper.

Let’s stop pretending the outright abolition of IHT is anything other than a goodbye present from an administration which knows it is done for and wants to make one last payout to those who least deserve it.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

The post Nic Cicutti: Beware ulterior motives behind potential IHT axe appeared first on Money Marketing.

“Sell them the dream.” I first heard this phrase used more than 30 years ago, during one of the many ‘get-to-know-you’ visits to advisers across the country while working at Money Marketing.

I was reminded of the need to “sell the dream” a few weeks ago after hearing chancellor Jeremy Hunt’s Autumn Statement, in which he claimed his plans to increase the amount pension funds invest in unlisted shares could “provide an additional £1,000 a year in pension income for the average earner”.

The claim originates from Hunt’s Mansion House speech in July this year, when he announced up to £75bn of people’s pension funds will be invested into higher-risk investments by 2030. Hunt has since gone on to make the same claim numerous times, the latest occasion being his Autumn Statement.

You don’t have to be a genius to realise this extra £16,000 is doing some incredibly heavy lifting as to the additional pension income it might deliver

This headline figure is now treated as gospel. It certainly sounds wonderful: who wouldn’t want an extra grand a year to spend if it cost them nothing in return?

But where does the £1,000 number come from? It is contained in a set of financial assumptions published by the Department for Work and Pensions (DWP) at the same time as Hunt’s Mansion House speech.

The DWP document looks at a pension pot built up over 30 years by someone on earnings of £30,000 a year who contributes 8% into their pension each year. It states: “Assessing gross returns (before charges) in the median case, pots could be around 5% higher after 30 years with a 5% private equity allocation to replace bonds.”

All this assumes, of course, a metronomic set of annual pension contributions over the course of someone’s working life

So, a fund with no private equity in its asset mix and median returns might grow to £273,300. A fund with a 55/40/5 mix of equities, bonds and private equities could grow to £283,000. A fund with a 60/35/5 ratio might grow to £288,200. That extra £16,000 is what buys us the additional £1,000 in annual income, apparently.

You don’t have to be a genius to realise that this extra £16,000 assumed increase in the value of a pension fund is doing some incredibly heavy lifting as to the additional pension income it might deliver, not least in terms of what annuity generates a 6.25% income from a lump sum.

Moreover, the additional median growth in the value of a fund is predicated on the assumption management charges levied on private equity investments would be the same as for listed equities or bonds.

Returns will barely change for most of us, although the risks taken with our pension pots will increase

Using a 2/20 fee structure – 2% per annum charge with a further 20% performance fee on returns above 8% (not an unusual figure) – returns on that 55/40/5 mix would actually be lower than with no private equity held in the fund.

Even assuming a 1/10 fee structure – an unusually low fee for private equity investments – returns are barely £4,500 better in a 55/40/5 mix and just £9,000 better in a fund with a 60/35/5 ratio.

All this assumes, of course, a metronomic set of annual pension contributions over the course of someone’s working life. Uninterrupted by anything such as losing one’s job, divorce, paying for kids’ education or the many other financial crises that regularly affect real life human beings.

I was reminded of the need to “sell the dream” a few weeks ago after hearing chancellor Jeremy Hunt’s Autumn Statement

Unbothered by the lack of any rigour in these calculations – and generously committing our own pension pots to Hunt’s pet project – the UK’s largest defined contribution pension schemes are now saying they will direct 5% of their default funds into unlisted equities within the next seven years.

Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer all signed a so-called Mansion House Compact to this effect in July. Other providers, including Aon and Cushon, have since climbed on board.

These companies will invest in illiquid private equity vehicles, perhaps even create a few themselves, that allow them to charge us higher fees to “manage” our money. Returns will barely change for most of us, although the risks taken with our pension pots will increase.

Still, it’s always good to follow the dream, isn’t it?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

The post Nic Cicutti: Blowing holes in Hunt’s pet project with our pensions appeared first on Money Marketing.

Among the Money Marketing reporters I’ve learned to admire in the last couple of years, Lois Vallely is top of my list. Not only is Lois an elegant writer, her use of drop intros – a teasing, suspense-generating, sideways introduction to a story – is exceptionally good.

A superb example of a Vallely drop intro, as she first took us through her skills as a Texas Hold ’Em player, was her cover story for last month’s issue on the subject of the triple lock for pensions.

In recent weeks, both Tory and Labour parties have been trying to come to terms with the fact a policy originally intended to generate small above-inflation annual increases in the value of the state pension suddenly risk landing whoever is next in office with huge bills for two years in a row: 10.1% last year and, potentially, another 8.5% in April.

The real losers, as ever, will be pensioners

Lois is right: faced with that scenario, both prime minister Rishi Sunak and leader of the opposition Keir Starmer are desperately praying the other side cracks first and announces a “review” of the triple lock that will lead to it being neutered before its costs spiral out of control.

That way, whoever blinks first can be accused of a heartless attack on pensioners’ incomes. Meanwhile, the other side will say, while their opponent is behaving brutally towards the elderly, they cannot possibly make further commitments on the triple lock until such a review is completed – at which point we can safely assume it will be ditched.

Which would be a tragedy. Because if the triple lock is dumped, as many predict, it will mark the end of a brief period when, for the first time, millions of UK pensioners have dared to hope they wouldn’t be facing abject poverty in the final years of their lives.

Scrapping it would be to treat state pensions as bargaining chips in a game between political parties determined to look ‘responsible’ on public spending

For all the talk of how today’s retirees are lording it over every other age cohort in the country, the reality is that the full state pension is worth just £203 a week at present. That’s £10,500 a year. Plus a few hundred quid extra in winter fuel payments. That’s just over 25% of the mean average salary for full-time workers in the UK.

What many better-off commentators also forget is that inflation for someone who spends a disproportionate proportion of their income on food, meant extra annual costs of 13.6% in August 2023 compared to 12 months earlier, dropping to “just” 9.9% last month.

Compared with that, a potential 8.5% increase in the state pension next April will still mean a large cut in pensioners’ living standards.

The triple lock has allowed retirees to claw back at least some of the income disparity between themselves and those still in work

Ah yes, but what about the fact pensioners mostly own their own homes and don’t pay mortgages? Sure, 75% of over-65s have paid off their home loans. Yet ironically, the value of those same homes will either be eaten up by the cost of paying for care in old age, as successive governments endlessly delay adult social care reform, or their children will expect a large slice of that money as part of their inheritance.

What of occupational pension schemes? Shouldn’t they be counted along with the state pension? Well yes, except that official government census data in 2022 shows only 39% of private sector workers contributed to defined contribution pensions. The average value was £10,300.

For public sector workers in defined benefit schemes, the average participation rate was 82%, with an average value of £65,400 – even with employers’ contributions and staff paying in 10% of their incomes. That’s worth barely £2,700 a year, assuming you take no tax-free lump sum. Hardly what dreams are made of.

Whoever blinks first can be accused of a heartless attack on pensioners’ incomes

The triple lock is a poor substitute for a formal policy where pensioners’ incomes would be pegged to something like 40%, maybe even 50%, of the average annual wage. But it has allowed retirees to claw back at least some of the income disparity between themselves and those still in work.

Scrapping it without a viable replacement would be to treat state pensions as bargaining chips in a poker game between political parties determined to look “responsible” on public spending. The real losers in this scenario, as ever, will be pensioners.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

The post Nic Cicutti: Playing games with state pensions will end in tragedy appeared first on Money Marketing.

Almost exactly 30 years ago, I wrote a piece for Money Marketing that related how Scottish Amicable, the life office eventually taken over by the Pru, had asked advisers to dob in peers they believed were misselling financial products to clients, either directly to the regulator or to Scottish Amicable itself.

Such a public stance was seen as so unusual back then it merited a splash on the front of the paper — to the disgust of many advisers, I recall. The perception among some who wrote to me was you shouldn’t snitch on a colleague, no matter how bad they were.

Still, a lot of water has flowed under the bridge since then. Whistleblowing is commonly accepted as being necessary, even positive.

Advisers and consumers deserve better from their regulator — and quickly

Reading through Money Marketing, it is possible to see advisers taking seriously their duty not only to their own clients but also with a wider moral understanding of how the industry should behave towards consumers.

Virtue signalling

As for the regulator itself, the Financial Conduct Authority now makes a virtue of how it investigates tips from various sources. Its Whistleblowing Qualitative Assessment Survey for 2022, published in May this year, shows between April 2021 and March 2022 its team received and assessed 1,041 whistleblower reports, involving 2,114 separate allegations.

The allegations related to subjects including the fitness and propriety of approved persons, treating customers fairly, breaches of the Financial Services and Markets Act 2000, cultural concerns within firms, compliance failings and fraud. At the same time, the FCA assessment found widespread dissatisfaction with both the whistleblowing process itself and the outcomes in terms of how the information was acted on.

For advisers who want to do the right thing, whistleblowing usually leads to disappointment

The regulator went back to 68 of those who had blown the whistle on things they’d observed and asked how they felt about the outcome of their action. Intriguingly, only 21 fully completed survey replies were received; a tiny 31% response rate.

Of those, two-thirds were somewhat or extremely dissatisfied with the response they had received. The prevailing view of those who responded to the survey was they did not feel there had been enough dialogue with them to ensure their concerns had been understood. They perceived the FCA as “reluctant to act and this reluctance was preventing [the regulator] from thoroughly investigating reports”.

The problem for advisers who want to do the right thing is whistleblowing usually leads to disappointment. And the evidence suggests very little has changed on that score over the past few years.

Advisers who whistleblow are the finest of their profession. Their knowledge and insights can shine a powerful light on the misdeeds of others

In the British Steel pensions scandal in 2017, many advisers were involved in trying to represent the interests of pension fund members. Yet we know almost 8,000 steelworkers had transferred out of the British Steel Pension Scheme by the time the FCA got its act together.

In the case of discretionary fund manager Beaufort Securities, which collapsed in 2018, we know an adviser alerted the FCA to allegations against it in 2016. Again, nothing was done for two years.

West Riding Personal Finance Solutions managing director Neil Liversidge wrote to the regulator in 2015, warning it about London Capital & Finance (LCF) and stating its investments were not suitable for an “unsophisticated retail market”. His warnings — and those of colleagues who also wrote in — were not heeded until it was too late. LCF went under in 2019.

They perceived the FCA as ‘reluctant to act and this reluctance was preventing [the regulator] from thoroughly investigating reports’

Advisers who whistleblow are the finest of their profession. Not only are they showing courage but their knowledge and insights can shine a powerful light on the misdeeds of others in the industry.

For the FCA to fail them is more than a wasted opportunity. It means consumers are left short and their confidence that there are genuinely ethical advisers prepared to stand up for their interests is damaged. This in turn damages market confidence, whose enhancement is a key function of the FCA.

Advisers and consumers deserve better from their regulator — and quickly.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

This article featured in the September 2023 edition of MM. 

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Does anyone seriously believe the Financial Conduct Authority’s new Consumer Duty requirements will fundamentally change the regulatory landscape in financial services?

I don’t. And I suspect that, deep down, few advisers do either.

Why such cynicism? Probably because we’ve all been here before. It is now 17 years since the FCA’s forerunner, the Financial Services Authority, launched its Treating Customers Fairly (TCF) initiative.

Embedded in the key principle of the TCF regime was an expectation a regulated firm must “pay due regard to the interests of its customers and treat them fairly”. This was subsequently distilled into six key outcomes.

Inappropriate advice has continued, with regulators seemingly unable to prevent continued misselling scandals

They were that consumers should be confident they were dealing with firms where the fair treatment of customers is central to corporate culture; that products and services met the needs of identified consumer groups; that consumers received clear information before, during and after a sale; that the advice they received was suitable for their needs; that the products they were provided with performed as they were told to expect; and finally, that there were no “unreasonable” barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

How have financial services firms measured up against these six outcomes? The verdict is mixed, if we’re honest.

While advisers and providers have inched their way forward towards delivering improved services and products in some areas, inappropriate advice and products have also continued, with regulators seemingly unable to prevent continued misselling scandals.

While TCF was not a complete failure, the facts on the ground suggests more ethical firms were never particularly affected by the principle they should treat customers fairly because they already strived to do so – while less ethical ones carried on doing what they would have done anyway. And now, they’re dressing up the same TCF outcomes as “consumer duties”.

‘Champions’ are not only powerless but risk becoming captives within their businesses

Which brings me to the next point: the underlying FCA expectation that, unlike TCF, firms will effectively self-police their activities in order to comply with Consumer Duty requirements.

Under the “old regime” the regulator was expected to review a firm’s data and decide if they had delivered fair outcomes to consumers. If there was evidence they had not met TCF, there was always the possibility of a more comprehensive review of that firm’s business by the FCA. As we know, regulatory scrutiny has consistently failed to prevent scandals from re-occurring.

Under Consumer Duty, we are being told, the onus is on the firm to police itself and ensure it is delivering good outcomes to its customers. Rather than automatically reporting potentially negative data to the FCA, a regulated business now escalates it internally to board level. A so-called “Consumer Duty Champion” will sit on each board to ensure these principles are embedded at the highest level.

That simply isn’t enough. Lots of organisations, especially in the public sector, have “champions” in place at some level within their structures. Their role is to be standard bearers for the principles that supposedly guide the organisation they are part of.

Consumers will rediscover in years to come how weak the rules meant to protect them really are

But the problem seen again and again, not least in the most recent scandal in Cheshire involving clinicians trying to whistleblow on the murderous activities of children’s nurse Lucy Letby, is that without clearly defined operational independence, as well as external backing from watchdogs able to scrutinise and intervene quickly in their support, “champions” are not only powerless but risk becoming captives within their businesses.

The central issue Consumer Duty conspicuously avoids is the need for regulators to use their powers for early detection and intervention, to nip potential risk events in the bud before they occur and to provide credible external processes where both consumers and whistleblowers can feel confident they will be listened to and their concerns will be acted on.

Sub-contracting monitoring of a set of amorphous principles to hapless internal “champions” is a recipe for disaster, both within firms and for consumers, who will rediscover in years to come how weak the rules meant to protect them really are.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Had it not been for my love of Lambrettas — and meeting Barry at a scooter rally in rural Brittany last month — I probably would have taken a lot longer to rethink my initial scepticism around the use of ChatGPT in financial services.

Since the launch of the prototype in November, there has been a multitude of voices explaining the potential impact of artificial intelligence (AI) in the world of financial planning.

I confess to having been dubious about AI when mountains of media attention began to focus on it at the start of the year. Since then, the clamour around it in financial services has grown even stronger.

Barry, my friend, sees himself as a potential user of AI financial services, despite having a real-life adviser

Sometimes, AI is presented as a threat. We are told ChatGPT — and potential competitors Google Bard and Meta’s (Facebook’s) LLaMA — will take over the space currently occupied by financial advisers within a matter of years.

In one account I read recently, “the disruption potential of ChatGPT… resembles a cyborg assassin”. The Terminator, in other words.

Rubbish in, rubbish out?

Despite these predictions, some advisers are unimpressed about the future impact of AI. They cite the negligible effect to date of robo advice on their business, after years of marketing efforts by online investment platforms here in the UK.

After all, isn’t it the case that financial planners deal with mostly older, affluent clients who prefer human contact with those advising them? What about the empathy needed to understand a client’s needs?

ChatGPT simplifies for Barry what could take hours to research. And the service is already improving

Surely the planning process for people with wealth involves finely balanced, complex decisions that a robo service simply can’t match?

And, taking the debate forward a notch, isn’t ChatGPT just a case of rubbish in, rubbish out?

In some of the initial tests of advice creation, typically focused on US investment and tax planning scenarios, what often stood out was the inaccuracy of the advice being given, with data relating to tax information being 10 years out of date or even more.

Let’s deal with robo advice first. According to the research service, Statista, assets under management of robo advisers have reached about £105bn, up from £60bn in 2021 and £25bn in 2019.

While it has taken longer to build up scale than some of us imagined four or five years ago, it feels like robo advice is coming of age.

In one account I read recently, “the disruption potential of ChatGPT… resembles a cyborg assassin

As for AI, what is critical here is the capacity of AI and machine learning to enhance the automated element of robo advice, in terms of providing a virtual service that is as personalised as ‘old school’ financial planning.

Also striking from Statista’s research are the potential age bands attracted to the use of robo-investment services: 62% of users by number — as distinct from assets under management — are in the 25-to-44 age group. A further 7.9% are aged between 45 and 54.

An improving service

Barry, my friend, certainly sees himself as a potential user of AI financial services, despite having a real-life adviser whom he has been with since his late 20s.

What is critical here is the capacity of AI and machine learning to enhance the automated element of robo advice

Although Barry doesn’t have any issues with his adviser, as a 40-something personal trainer with a small luxury gym he is experimenting with AI to help plan clients’ exercise routines, based on their age, gender and existing levels of fitness.

He also devises food plans to meet their different goals, be it weight reduction or muscle gain, as well as specific targets, such as running or bodybuilding.

Barry thinks ChatGPT is great, despite initial teething problems of the ‘rubbish in/out’ variety, including diets with inaccurate portion sizes that would have left a client starving hungry. It simplifies what would often take him hours to research. Moreover, he can already see the service is improving as more data is aggregated and learned.

Surely the planning process for people with wealth involves finely balanced, complex decisions that a robo service simply can’t match?

He’d be happy for his adviser to use ChatGPT with him too. Or to go to one who does.

Financial advisers can be tomorrow’s Barry. But it may mean adjusting to a different world, where the way clients are responded to takes into account the new opportunities opened up by AI.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

This article featured in the June 2023 edition of MM. 

If you would like to subscribe to the monthly magazine, please click here.

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