“The man who makes an appearance in the business world, the man who creates personal interest, is the man who gets ahead. Be liked and you will never want.”
For years, this misguided belief was enough to keep Arthur Miller’s tragic hero, Willy Loman, from facing up to reality. For years, it has also been enough – with a lot more emphasis on personal self-interest and a little less on being liked – to keep 15,000-20,000 financial advisers in work. But this week, the Financial Services Authority finally wrote its own version of Death of a Salesman. And it’s a lot less of a tragedy.
On Tuesday, the regulator published its interim report on the Retail Distribution Review – accompanied by an inevitable initial feedback statement on a discussion paper issued last year, ahead of a full feedback statement due in October. But amid all the feedback, discussion, discursion, disclaiming, disclaimers, and unintentional irony (said Amanda Bowe of the FSA: “Respondents told us to keep things simple.”), there emerged three startlingly clear principles for the future of financial advice.
First, only individuals who recommend financial products from across the whole market – rather than selling the products of one or more companies – will be allowed to call themselves “advisers”. Second, these truly independent financial advisers (IFAs) will adhere to higher minimum standards of qualifications and professionalism. Third, they will have their “remuneration determined without product provider input” – in other words, independent advisers will no longer be able to receive commissions or incentives from fund managers and insurers, but will have their pay decided by customers.
So, with the stroke of a pen, the FSA brought about not only the death of a salesman in adviser’s clothing, but also the birth of a new breed of honest salesman – who says which insurer or bank he works for, and doesn’t pass off his sales spiel as “advice”.
Miller won the Pulitzer Prize for his play in 1949, and judging by the plaudits the FSA has received from both insurers, such as Standard Life, and from advisers, such as Towry Law, it would be a shoo-in for a Tony award if it ever took a Retail Distribution Revue to the Broadway stage.
However, before we get razzle-dazzled by the regulator’s self-styled “step change”, there is still a lot for the critics to get their teeth into.
It’s worth remembering who was the author of the original regulatory farce, which saw “tied” and “multi-tied” agents masquerading as “advisers”, while shamelessly promoting inappropriate products to a bewildered audience, and trousering hefty commissions in the process. Step forward, the FSA.
It’s also worth noting that this interim report is very much a work in progress, with loose ends still to be tied up, and various characters likely to make a reappearance. Step forward the banks, who have made millions from “advising” on mediocre managed funds and expensive insurance, and the execution-only IFAs, who have taken commission, but rebated it to clients.
But it’s most important to point out that this is only half the regulatory story – as far as private investors are concerned. Step forward the FSA’s Markets Division.
On the very same day that salesmen were being cut down to size, the FSA also published its Market Watch newsletter, to fewer rave reviews. In it, the managing director of wholesale and institutional markets admitted that 28.7 per cent of takeover deals last year were preceded by possible insider trading, up from 23.7 per cent in 2005. Even using the FSA’s own estimate that 10 per cent of trades ahead of bids are probably based on legitimate hunches, that still means nearly one in five share transactions in takeover targets are crooked. As the regulator put it: “Insider dealing, market manipulation and other forms of market misconduct are, put simply, cheating and reduce investor confidence.”
Two million private shareholders in HBOS already know this. On March 19, a series of malicious rumours, reputedly spread by hedge funds that were short-selling HBOS shares, sent the price crashing by 17 per cent. With the average private investor holding 375 shares, that was a loss of £307 for anyone who believed the rumours and sold – more than anyone ever lost in charges by being sold an unsuitable unit trust.
This happened just six months after the FSA conducted a review of the anti-market abuse controls operated by hedge fund managers. So now, another investigation is underway.
However, what is needed is a real step change in the way insiders are dealt with. More evidence must be disclosed to the market – such as the borrowing of shares in order to short them – and to the criminal, rather than civil, courts.
Otherwise, a good number of former spivs will just find gainful employment in the hedge fund industry.