Friday, 10 April 2009

Regulation and Coercion

Let me tell you a true story. It’s a lesson for the times we live in.

About 3 years ago all retail financial services businesses were required by the FSA (under another one of their ‘initiatives’) to issue each and every client with a ‘menu’. This was a prescribed document set out in a very specific way with specific wording. There was a separate menu for investment business and mortgage business and the mortgage business one had two sub-divisions. I had the responsibility of creating ours and automating them in order that we could store and use electronic versions.

Now, we are a fee charging consultative financial planning and advice business. We do not use commissions. We do not sell product, although clearly products are often recommended and implemented as part of our advice process. And in the case of mortgage business this means, in effect, getting people into debt or more debt.

Our approach has always been in essence “are you absolutely sure you want to borrow all this money and buy this house?”

The menu, which we are forced to use has a choice of tick boxes as to what type of service we are offering clients.

Box 1 had the descriptive text “We will offer you a range of mortgages from which you can select the one that suits your needs”

Box 2 had the descriptive text “Having assessed your needs we recommend that you take out this mortgage.”

As independent advisers we were required to tick box 2.

I object to this, strongly. Why?

Well, in all my financial advisory life I have never ever recommended that anybody should take out any mortgage. To be accurate as to how we work, Box 2 should have had the following as descriptive text:-

“Mr & Mrs Client, we have discussed at length your ambition to buy this house that you really cannot afford but despite our best advice you are persisting in proceeding with the purchase and in which case one of the small selection of mortgage deals we have found for you, after considerable research, will probably be your least worst option. However you will need to be very aware that if interest rates double all the affordability evidence that we have indicates that you could be in real trouble”

Fair enough, you may think. That sets out pretty well what we do, and means that I could not be hung by agreeing to the flawed wording in the FSA prescriptive menu.

So I telephoned the FSA and was put through to a young lady, whose name I cannot recall. This is roughly how the conversation went.

Me. “Hallo Ms X. Firstly, how good is you philosophy?”
FSA. (Giggle). “Why?”
Me. “This menu. I can’t use it. It makes no sense”
FSA. “Yes it does, but tell me what’s the problem?”
Me. Well, it’s this box 2 I have to tick. I can’t because it’s not what we do, and have never done”
FSA. “Well tick box one then”
Me. “Can’t do that either. We’re independent advisers. Box 1 covers banks and building societies”
FSA. (Slightly nettled) “Oh alright, tell me more what the problem is then?”
Me. "Look, what we do is advise….. (I then set out the bit about the way we work and how my preferred Box 2 text would be accurate for what we do but that the prescribed box 2 text just looked to provide the FSA with hanging material).

We batted this backwards and forwards for half an hour and eventually she said:

FSA “Hmmm. I see what you mean. Look, I hadn’t seen this before and I’m not senior enough to carry this forward, I’ll get Charlie to call you”
Me. “Who’s Charlie?”
FSA. “He’s the top bloke on the menu”.
Me. “OK. I’ll look forward to his call and thanks”.

About an hour later the telephone rang. Our admin passed me the call.

Admin. “It’s the FSA for you”
Me. “It’ll be Charlie”
Admin. “It is! I’ll put you through. Have fun!” (She was in earsight of all this)
Me. “Hallo”
FSA Charlie “Mr Farrall?”
Me. “Yes”
FSA Charlie. “I’ve been talking to my colleague about this and really what you have to do is what we say otherwise you’ll have to stop doing mortgage work”
Me. “What! You have to be kidding. Everything I am doing is right and proper. It is consultative transparent and fee based. We give proper advice and we never get people into positions of unaffordable debt, and you want us to stop doing it.”
FSA Charlie. “I can only repeat that you do as we say or stop doing mortgage business,”
Me. “So if we don’t do exactly as you say you’ll shut me down?”
FSA Charlie “Well, we would necessarily go that far but you could end up subject to enforcement if you persisted in mortgage work without using our menu exactly as we have written it”
Me. “…despite the fact that it is a compete nonsense?”
FSA Charlie. “It is not nonsense”
Me. Yes it bloody well is. And you know it is!”
FSA Charlie. “Nevertheless, do as we say or stop doing mortgage work”
Me. “No. This is what I am going to do. I will use your menu. I will add in a codicil explaining that it is total bollocks and referring to this conversation and you threat to shut us down. My clients will have all this explicitly explained to them. I will also change the header wording from ‘The FSA is the independent regulator..’ to ‘The FSA is the GOVERNMENT regulator…’ and quite frankly you can swivel on it.”
FSA Charlie “I cannot accept that attitude and we would consider that you were bringing the FSA into disrepute and carry out enforcement action.”
Me. “OK. Fine. But I am telling the truth about this and you aren’t – and you know it”

There was some exchanges on the nature of freedom and the grand conceit of regulation – all conducted amicably – and we hung up. We used my version of the menu and to this day I will not describe the FSA as ‘independent’.

However within a short time the whole menu fiasco was modified and is not now compulsory. And the offending boxes were removed.

The lesson from this though is the coercive culture that exists in these out of control quangos. It’s not me that suffers, it’s you the client.

And of course the FSA has failed spectacularly. And guess what? Yes, they are getting ever more coercive.


TheFatBigot said...

This episode illustrates one of my pet hates, the "there is only one way to do it" mindset.

Laying behind it, I believe, is unqualified distrust that the little people at the coalface will act fairly towards their customers.

Mark Wadsworth said...

L, could you just clarify your comment?

Ta muchly.